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SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Module 2B Business Challenges and Regulatory Expectations – What Directors Need to Know (Fund Management)
V2
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
2
Notice
• The views expressed here are solely those of the speaker in his private capacity and do not in any way represent the views of the Securities Industry Development Corporation (SIDC) or the Securities Commission Malaysia (SC).
• The cases mentioned in this presentation have been prepared, cited or described on the basis for discussion rather than to illustrate either effective or ineffective handling of a business situation.
• No part of this presentation may be reproduced, stored in a retrieval system
or transmitted in any form or by any means without the permission of the SIDC.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Page|3
What we will touch today…..
History
Elements of Regulation
Core Principles
Key responsibilities of a Director
Industry Landscape
Latest changes to Guidelines
Investment
Types of Investments
Performance measurements
Risk management
Key Internal Controls-BCP
Structure
Duties to Clients
Client relationship
Safeguarding of Assets
Segregation of Function/Recordkeeping
Governance
Compliance
Disclosure of Interest/Conflicts
Sales Practice Guidelines
Market Misconduct
Insider Trading/Price Sensitive Information/STR
Others
Outsourcing
Training/Education
Experiences Sharing
FAQ/References
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
1959 First Malayan Fund was launched by Malayan Unit Trust Ltd.
1966 With the breakaway of Singapore, Asia Unit Trust took over operations, naming it Malaysian Investment Fund
1967 Amanah Saham Mara Berhad launched the first Mara Bumiputra Fund
1974 Amanah Saham Pahang, the first state-owned UTMC was established
1975 Kuala Lumpur Mutual Fund Berhad (Now known as Public Mutual Berhad) was established
1977 MIC Unit Trusts Berhad (Now known KL City Unit Trust Berhad) was established
1979 Through UTS, the government intended to achieve the New Economic Policy objective of increasing Bumiputra’s shareholding in public and private limited companies to 30% of total equity ownership
Page|4
1950s
1960s
1970s
1980s
1990s
2000s
2010s
1950s
1960s
1970s
Just A Little Background & History…. (Cont’d)
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Just A Little Background & History…. (Cont’d)
Year Event
1981 PNB launched the first national Bumiputra unit trust fund – ASN at $1.00.
1989 Malaysia’s first listed REIT launched by Arab-Malaysian Property Trust Management Berhad (Now known as AmProperty Trust Management Berhad)
1990 2nd national Bumiputra fund was ASB was launched. Stamp duty on transfer of units in UTS was waived
1991 SC introduced The Guidelines on Unit Trust Funds
1993 SC is responsible to regulate all matters relating to the unit trust industry (The Securities Commission Act)
Establishment of FMUTM to represent UTMC Arab-Malaysian Unit Trust Berhad (Now known as
AmInvestment Services Bhd) launched the first Syariah UTS
Page|5
1950s
1960s
1970s
1980s
1990s
2000s
2010s
1980s
1990s
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
1994 SC revised The Guidelines on Unit Trust Funds
1995 Dana Johor, the first state UTS opened to both Bumiputra and non-Bumiputra investors
1996 The Securities Commission (UTS) Regulations, 1996 Stockbroking houses with Min. RM100 million paid-up capital
were allowed to set up UTMC Foreign fund management companies were allowed to set up
operations under new Guidelines issued by the SC EPF contributors allowed to withdraw money from A/C 1 to
invest in UTS
1997 The SC issued revised Guidelines on Unit Trust Funds The FMUTM Secretariat began registration of PDUT (Now
known as UTC) Funds under management affected by financial crisis
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1950s
1960s
1970s
1980s
1990s
2000s
2010s
1990s
Just A Little Background & History…. (Cont’d)
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
1998 The FMUTM published Understanding Malaysian Unit Trusts The SC commenced issue of Practice Notes to Guidelines on
Unit Trust Funds Lipper was endorsed by the FMUTM
1999 The FMUTM hosted the XVII International Investment Funds Conference in 2003
The Unit Trust Examination was introduced
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1950s
1960s
1970s
1980s
1990s
2000s
2010s
1990s
Just A Little Background & History…. (Cont’d)
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
2000 The industry preparations for the Y2K “bug” proved successful Issued first Guidelines for the registration of IUTA for Marketing
and Distribution or UTS Issued By-Laws covering its Disciplinary Proceedings against
members First UTS with a single selling and repurchase unit price with no
entry fee is launched, i.e. RHB Bond Fund First Islamic bond fund is launched, i.e. RHB Islamic Bond Fund Issued Practice Note 15 on Distribution of Returns from Unit
Trust Funds The first Malaysia Unit Trust Week was launched jointly by the
FMUTM and PNB The Securities Commission (Amendment) Act replaced the
Securities Commission (Unit Trust Scheme) Regulations. The regulation of UTS is now in a single Act
Page|8
Just A Little Background & History…. (Cont’d)
1950s
1960s
1970s
1980s
1990s
2000s
2010s
2000s
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
2001 - 2005
The Malaysian Capital Market Master plan announced by SC highlighted significant opportunities for growth in the unit trust industry over the next 10 years, including;
Online trading of units in UTS Encouragement for further development of the financial
planning industry Development of private pensions as an alternative of EPF Improved eligibility for EPF transfers to approved UTS Review of
restrictions on overseas-invested UTS Streamlined UTS approval procedures through the SC
Page|9
Just A Little Background & History…. (Cont’d)
1950s
1960s
1970s
1980s
1990s
2000s
2010s
2000s
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
2001 - 2005
Introduction of ETF Introduction of venture capital trusts
Host FMUTM hosted the XVII Annual Assembly of the International Investment Funds Associations
Introduced computerized UTE and registration of UTC SC issued Guidelines on Real Estate Investment Trust SC issued Guidelines on Exchange Traded Funds First exchange traded fund was launched by Aminvestment
Services Bhd i.e. ABF Malaysia Bond Index Fund First foreign UTS was launched by MAAKL Mutual Bhd, i.e.
MAAKL Pacific Fund Issued the first Standard and Practice Note on Standard Cut-off
Time for Unit Purchases and Redemptions
Page|10
Just A Little Background & History…. (Cont’d)
1950s
1960s
1970s
1980s
1990s
2000s
2010s
2000s
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Year Event
2005 - now
FMUTM was accorded SRO status and rebranded as FIMM CMSA was introduced to replace SIA in 2007 Global Financial Crisis (GFC) resulted in initiatives established
for investor protection- Disclosure requirements enhanced 2nd Capital Markets Master Plan was launched in 2011 Private Retirement Schemes (PRS) was established and
launched Liberalization of market participants shareholdings Continued progress on market innovation-equity crowd funding LOLA
Page|11
Just A Little Background & History…. (Cont’d)
1950s
1960s
1970s
1980s
1990s
2000s
2010s
2000s
2010s
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Page|12
Major Elements Of Regulation In Any Financial System
The protection of
Investor’s interest
Proper disclosure to
investors
Prevention of improper market practice
Control over market
participants
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Core Principles
The SC promotes a culture of compliance, professionalism, ethical standards and responsible conduct amongst fund management companies , its representatives and its employees…..with that the following core principles is to be complied to:
INTEGRITY CLIENT ASSET PROTECTION
SKILL, CARE & DILIGENCE COMMUNICATION WITH INVESTORS
ACTING IN CLIENT’S INTEREST COMMUNICATION WITH CLIENTS
SUPERVISION & CONTROL CONFLICT OF INTEREST
ADEQUATE RESOURCES COMPLIANCE CULTURE
BUSINESS CONDUCT DEALING WITH SC
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Securities Commission
The primary regulator of the securities/derivatives
industry
Govern the operations and administration of the
UTS
Has powers to prosecute and impose penalties
Its powers are wide ranging, covering UTMC,
UTS, IUTA, CUTA, UTC and fund managers
responsible for investing the assets of the UTS /portfolios managed
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Regulatory Structure
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Functions Of The Securities Commission
• To advise the Minister of Finance on all matters relating to the securities and derivatives industries
• To regulate all matters relating to securities and derivatives contracts
• To ensure that the provisions of the securities laws are complied with
• To regulate the take-over's and mergers of companies
• To regulate all matters relating to unit trust industry
• To be responsible for supervising and monitoring the activities of any exchange, clearing house and central depository
• To take all reasonable measures to maintain the confidence of investors in the securities and derivatives markets by ensuring adequate protection for such investors
• To promote and encourage proper conduct amongst members of the exchanges, clearing houses, central depository and all licensed and registered persons (including UTC)
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Functions Of The Securities Commission (Cont’d)
To suppress illegal, dishonorable and improper practices in dealings in securities and dealings in derivatives, and the provision of investment advice or other services relating to securities or derivatives contracts
To consider and make recommendations for the reform of the law relating to securities and derivatives contracts
To encourage and promote the development of securities and derivatives markets in Malaysia including research and training in connection thereto
To encourage and promote self-regulation by professional associations or market bodies in the securities and derivatives industries
To license and supervise all licensed persons as may be provided for under any securities law
To promote and maintain the integrity of all licensed and registered persons in the securities and derivatives industries
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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What Is Fund Management?
Management of a portfolio of securities or derivatives for investment
In Malaysia- FM companies licensed to carry out the regulated activity of fund management are holders of a Capital Markets Services License ( CMSL)- save for the relevant provisions of the CMSA.
The most significant player in managing investment portfolios are the fund management companies
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Investment Management Business
Asset Management Business or Investment Management Business in its current form is an amalgamation of different industries pursuant to the enactment of the CMSA 2007.
Companies undertaking investment management businesses can be loosely classified as:
a) Asset Management Companies
b) Unit Trust Management Companies
c) Asset Management Company (“AMC”) – means a company that can offer fund management services to institutions, corporations, individuals and may also include unit trust management companies. An AMC cannot manufacture, sell and manage retail unit trust but can offer wholesale funds. The regulated activity under the CMSA is Fund Management activity.
d) Unit Trust Management Company ("UTMC") - means a company that is authorized to issue or offer for purchase of units of a Unit Trust scheme. The regulated activity under the CMSA is Dealing in securities – restricted to unit trust activity.
e) Malaysia is a pioneer in the region with the establishment of the first unit trust fund in 1959. In the 1990s, the investment management industry experienced real growth with the liberalisation of guidelines that govern unit trust and asset management companies in Malaysia.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
ASSET
MANAGEMENT COMPANIES
UNIT TRUST MANAGEMENT
COMPANIES
CMSL – Fund Management
CMSL – Dealing in Securities (restricted to
Unit Trust)
Page|19
AMC & UTMC
Dual Licensed Holder
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Asset Management Companies (“AMC”)
As at 31 December 2014, there are 77 licensed asset / fund management companies of which 20 are also Islamic fund management companies. (Source: Securities Commission’s website)
On 6 November 1996, the Malaysian Association of Asset Managers (MAAM) was formally established under the Societies Act, 1966 with the invitation of four established asset management companies to become founding members, along with the merchant banks who were involved in asset management operations. (Source : MAAM website)
Historically, fund management services were offered by merchant banks. In 1989 RHB Investment Management Sdn Bhd was one of the 1st few private asset management companies to be set up.
Typical services provided by an asset management company are professional fund management services including portfolio administration.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Unit Trust Management Companies (“UTMC”)
As at 31 December 2014, there are 36 licensed unit trust management companies. (Source: Securities Commission’s website)
UTMC are members of the Federation of Investment Managers Malaysia (“FIMM”).
As of 28 February 2011, FIMM has been awarded the status of a Self Regulatory Organisation (“SRO”) by the Securities Commission.
FIMM also oversees the registration of unit trust funds for sale by UTMCs.
As an SRO, FIMM also overseas the distribution channels for unit trust funds. These channels can include the following:
"Unit Trust Consultant" or "UTC“, an individual who is duly registered with the FIMM to market and distribute unit trust funds.
“Institutional Unit Trust Adviser" or "IUTA“, an institution or organisation or a corporation that is licensed by the SC for the purpose of carrying out dealing in securities restricted to unit trusts and is duly registered with the FIMM to market and distribute unit trust funds.
"Corporate Unit Trust Adviser" or "CUTA“, an institution or organisation or a corporation that is licensed by the Securities Commission for the purpose of carrying out the regulated activities of financial planning and dealing in securities restricted to unit trusts and is duly registered with the FIMM to market and distribute unit trust funds.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Legal And Regulatory Requirements
Both AMCs and UTMCs are governed by the Capital Markets Services Act 2007 (CMSA) which is regulated by the Securities Commission Malaysia.
An AMC carries a Capital Market Services License (CMSL) to conduct fund management while a UTMC carries a CMSL in dealing in securities (restricted to unit trust business).
Individuals that are carrying out the regulated activities on behalf of the company are required to have the Capital Markets Service Representative’s Licence (CMSRL).
Both licences are issued by the Securities Commission Malaysia.
At least one (1) director of the company is required to be a CMSRL holder.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Legal And Regulatory Requirements (Cont’d)
Dealing in securities
Dealing in Derivatives
Advice on corporate finance
Fund management Investment advice
Financial planning
Dealing in securities (restricted to unit
trusts)
Regulated Activities
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Page|24
Regulated Activities
Regulated Activities Asset Management Company
Unit Trust Management Company
Dealing in Securities - -
Dealing in Securities (Restricted to Unit Trust)
Dealing in Derivatives - -
Advice on Corporate Finance
- -
Fund Management
Investment Advice -
Financial Planning - -
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Legal And Regulatory Requirements (Cont’d)
Establishment Requirements
Specific Requirements Asset Management Company
Unit Trust Management Company
Investment Advisory Company
Minimum Paid Up Capital RM5.0 mil RM5.0 mil RM500,000
Minimum Share Holders Fund
RM2.0 mil (maintained at all times)
RM10.0 mil (maintained at all times)
N/A
Minimum Net Tangible Asset
N/A N/A RM50,000 (maintained at all times)
Minimum Licensed Director
One (1) CMSRL holder with 10 years experience in the
regulated activity
Registered with FIMM with minimum 10 years of relevant experience
One (1) CMSRL holder with 10 years experience in the
regulated activity
Composition of Board of Directors
The board of directors should comprise at least two (2) independent members, while maintaining at least one-third
(1/3) independent members at all times.
N/A
CMSRL Holders
At least two (2) CMSRL holders for each regulated
activity.
At least two (2) individuals registered with FiMM
At least two (2) CMSRL holders for each regulated
activity.
Investment Committee N/A Comprise of at least two (2) independent members, while
maintaining at least one-third (1/3) independent
members at all times.
N/A
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
AMC & UTMC / Investment Management
Page|26
Typical Organization Structure
Board of Directors Investment Committee
Shariah Adviser *
MD / CEO
Compliance Department
Investment Department
Fund Managers
Analysts
Central Dealers
Marketing / Client Servicing
Department
Fund & Portfolio Administration
Department
Operations / Finance
Department
Product Development Department
Internal Audit Department
Marketing
Client Servicing
Customer Service
Distribution (UTC, IUTA & CUTA)
Portfolio Administration
Fund Operations
Fund Accounting
Unit Holder Services
General Operations
Finance
Risk Management
Information Technology
Human Resource Applicable for AMC and UTMC Applicable for UTMC only Applicable for AMC only
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Duties & Responsibilities Of The Board
The Board is responsible for governing the administration of the Company and for exercising all such powers pursuant to the Articles of Association of the Company. In general, the Board is responsible for :
Providing strategic leadership to the Company;
Reviewing, approving and monitoring the implementation of the Company’s strategic business plans and policies;
Ensuring the Company maintains an effective system of internal controls and is able to identify and manage principal risks resulting in efficiency in operations and a stable financial environment;
Acting as a guardian of the Company’s corporate values and ethical principles in parallel with the goal to enhance shareholders’ value;
Monitoring as well as evaluating the performance of the Company to ensure that the performance criteria remains dynamic; and
Ensuring the formulation of a succession plan for the Company for long-term business continuity.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Key Responsibilities of a Director of a CMSL
• A director is responsible for compliance with all laws, regulations & guideline. therefore at all times must ensure that
Regulated activities are only carried out by licensed persons
At least 1 director is a CMSRL holder= Executive Director
Compliance with the 11 principles , securities law, regulations and relevant guidelines
The company has an established, maintained and effective internal control framework- it must be able to detect abusive investment practice, conflict of interest if any in proprietary trades, and all other transactions ( employee & client)
The company conduct at least an annual review in internal controls
The company reports to the shareholder any findings from reviews
Written policies and procedure are in place
There is a written BCP plan
Policies and procedure on staff responsibility
Management is competent and supervised by Board
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Key Responsibilities of a Director (Cont’d)
• A director is responsible for compliance with all laws, regulations & guidelines, therefore at all times must ensure that
There is adequate financial, human and other resources suitable for business needs
Proper record system
At least 1 compliance officer in place
Matters raised by compliance officer raised and addressed
Safe guarding of clients assets
Timely disclosure of information to clients
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Investment Committee
The Investment Committee is responsible for the formulation of the Investment Objective, the Investment Policies and the Investment Strategy for the Fund. For UTMC, it has broad discretionary authority over the investments of the Fund. The Investment Committee also overseas the activities of the Manager which is responsible for research, securities recommendation and asset allocation.
The Investment Committee has the responsibility to decide and approve the following:-
Asset allocation;
Schedule of securities for purchase and disposal;
Risk exposure, e.g. country and specific market risks; and
Schedule of income distribution to Unitholders.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Islamic Fund Management Company – Shariah Adviser
The Shariah Adviser functions independently of the Manager and has responsibility only to the Fund’s Unitholders.
The Shariah Adviser will review the investments of the Shariah Funds and advise the Manager on the conformance of the investments, operations and marketing aspects of all the Funds with the Shariah principles.
The duties and responsibilities of the Shariah Adviser are as follows:-
Ensure that the Fund is managed and administered in accordance with Shariah principles;
Consult with the Securities Commission where there is any ambiguity or uncertainty as to an investment, instrument, system, procedure and/or process;
Provide expertise and guidance in all matters relating to Shariah principles;
Act with due care, skill and diligence in carrying out its duties and responsibilities; and
Scrutinize the Fund’s compliance report and investment transaction reports to ensure that the Fund’s investments are in line with Shariah principles.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Competitive Landscape
Competitive Landscape
Client Profile versus Risk Appetite
Optimizing Government
Incentive
Human Capital
Product Innovation
versus Time to Market
Tightening of Margin
Shifting Trends & Competitive Changes In Landscape
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Opportunities Abound
Product Innovation – Sophistication/ Technology
Diversification of Asset Classes
Strategic Alliances
Geographic Expansion – ASEAN Passport / MRA Initiative
Distribution & Market Reach Innovation
Market Segmentation – PRS / HNW
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Page|35
Latest Changes Regulations / Guidelines - 1
GUIDELINE UPDATE CHANGE
Licensing Handbook
June 30, 2014 Introduction of the new
outsourcing guidelines
under Chapter 10 of the
Licensing Handbook
replacing the Guidelines on
Outsourcing for Capital
Market Intermediaries
Material outsourcing
arrangement no longer requires
approval from SC. Instead, CMSL
holder must notify SC within 2
weeks upon signing service level
agreement.
December 4, 2014
Amendment of Section 6.05 – Submission of Anniversary Reporting for Authorisation of Activity
CMSL holders are now required to
submit a semi-annual Fit and
Proper Compliance Report (Form
6A) on the fit and proper standing
of its licensed representatives
whose anniversary date fall due
within the reporting period within
7 days of reporting period
This replaces the previous
practice where Form 6 has to
submitted on each individual’s
licence anniversary date.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 2
GUIDELINE UPDATE CHANGE
Licensing Handbook
February 2015 Changes in minimum
qualification requirements
for CMSRL in financial
planning under Table 3, 4
and 7.
Review of the minimum
qualification requirements for
the purpose of obtaining a
Capital Markets Services
Representative’s Licence (CMSRL)
for Financial Planning by Financial
Planning Association of Malaysia
(FPAM)
The approved modules are no
known as:
Module 1 – Foundation in
Financial Planning;
Module 3 – Investment Planning
and Retirement Planning; and
Module 4 – Financial Plan
Construction and Professional
Responsibilities (Familiarisation
Programme).
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 3
GUIDELINE UPDATE CHANGE
Licensing Handbook April 1, 2015
Added the requirement for
Capital Market Director
Programme (CMDP) in
Licensing Handbook and the
FAQ for CMDP.
4.02 Requirement for director to
attend Capital Market Director
Programme (CMDP)
- Effective from 1st May 2015,
directors of CMSL holders for
dealing in securities, dealing in
derivatives and fund management
in relation to portfolio
management must complete the
CMDP.
- Newly appointed directors must
complete CMDP within 6 months
from thedate of their
appointment. Directors who were
appointed prior to 1st May 2015
must complete the CMDP within
the timeline specified by the SC.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 4
GUIDELINE UPDATE CHANGE
Guidelines on Compliance Function for Fund Management Companies
25 April 2014 Addition of new section 1.04
under Chapter 1
Introduction
New clause stating the Guidelines
are in addition to and not in
derogation of any other guidelines
issued by the SC or any
requirements as provided for
under the securities laws and
must be read with:
Guidelines on Islamic Fund
Management; AML/CFT
guidelines; and
Licensing Handbook
Removal of Chapter 13 –
Anti Money Laundering
AML/CFT guidelines are provided
under the new Guidelines on
Prevention of Money Laundering
& Terrorism Financing for Capital
Market Intermediaries issued on
15 January 2014
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
Page|39
GUIDELINE UPDATE CHANGE
Guidelines on
Prevention of
Money
Laundering &
Terrorism
Financing for
Capital Market
Intermediaries
15 January 2014 This is a new guidelines
on AML/CFT issued on
15 January 2014
replacing the the
Guidelines on
Prevention of Money
Laundering & Terrorism
Financing for Capital
Market Intermediaries
issued on 31 March
2004.
The new Guidelines provide for a more enhanced framework for the purpose of complying with the updated international standards.The significant enhancements can be found in the following provisions:-
Paragraph 7 : Risk Based Approach Application
Paragraph 8 : Customer Due Diligence Paragraph 8.5 : Politically Exposed Person - Requirement for a risk management
system to identify PEP (Commonly used: World Check, AML Solution)
Paragraph 8.6 : High Risk Countries - Enhanced CDD measures for business
relationship from identified high risk countries
Paragraph 8.7 : Third Party Reliance - A reporting institution may rely on a third
party to conduct CDD at the point of establishing a business relationship. However, the ultimate responsibility and accountability of such CDD measures shall remain with the reporting institution
Latest Changes Regulations / Guidelines - 5
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 6
GUIDELINE UPDATE CHANGE
Guidelines on Unit
Trust Funds
25 August 2014
Chapter 1 –
Introduction
Section 1.04
Section 1.08
Amended to state the basis where the SC may grant an
exemption or variation to any requirement under the
GUTF.
Inserted a new requirement to require any person
intending to offer a unit trust fund under the ACMF
Retail MoU framework to observe and ensure
compliance with the Standards of Qualifying CIS.
ACMF – ASEAN Capital Markets Forum
Qualifying CIS - means a unit trust fund–
(a)constituted or established in Malaysia, which has
been authorised by the SC for offer to the public in
Malaysia; and
(b) has been assessed by the SC as suitable, pursuant
to the Standards of Qualifying CIS, to apply to a host
regulator for cross-border offering to the public in a
host jurisdiction pursuant to the ACMF Retail MoU.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 7
GUIDELINE UPDATE CHANGE
Chapter 2 - Definitions
2.01 Amended due to the following
reasons:
(a) To insert new terms
associated with the ACMF Retail
MoU framework;
(b) To provide clarity on certain
terms used in GUTF; and
(c) Consequential amendments
due to the amendments to the
law (e.g. CMSA, Financial Services
Act 2013, Islamic Financial
Services Act 2013, etc).
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 8
GUIDELINE UPDATE CHANGE
Chapter 3 –
The
Management
Company
Amended to reflect the current liberalisation as announced by the Prime
Minister on 9 June 2014 at the 2014 Invest Malaysia conference.
3.03 Previous provision Revised provision
3.04 A management company must–
a) be an entity incorporated in
Malaysia;
b) have a minimum of 30%
Bumiputera equity;
c) not have more than 49% foreign
equity; and
d) have a minimum shareholders’
funds of RM10 million at all
times.
3.05 Clauses 3.04(b) and (c) do not
apply to an Islamic fund management
company under the Special Scheme.
3.03 A management company must–
a) be an entity incorporated in
Malaysia; and
b) (b) have a minimum shareholders’
funds of RM10 million at all times.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 9
GUIDELINE UPDATE CHANGE
Chapter 4 –
The Trustee
Amended to clarify and enhance the requirement relating to the
registration of a fund’s property.
Section
4.07(c) Previous provision Revised provision
4.08 A trustee should ensure
that a fund’s property is–
a) clearly identified as the
fund’s property;
b) held separately from any
other asset/property held
by or entrusted to the
trustee; and
c) registered in the name of,
or to the order, of the
fund.
4.07 A trustee must ensure that a fund’s
property is–
a) clearly identified as the fund’s
property;
b) held separately from any other
asset/property held by or
entrusted to the trustee; and
c) registered–
(i) in the name of the trustee;
or
(ii) where the custodial
function is delegated, in the
name of the custodian to the
order of the trustee.
SECURITIES INDUSTRY DEVELOPMENT CORPORATION © Copyright SIDC
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Latest Changes Regulations / Guidelines - 10
GUIDELINE UPDATE CHANGE
Chapter 5- Delegation and
Outsourcing
Section 5.06 Amended to provide clarity as the
SC approves the delegation of
fund management function of a
management company.
(previously is states any
delegation of fund management
company’s function requires SC
approval, now only restricted
fund management function)
Section 5.12A Inserted a new requirement to
provide clarity that where the
trustee delegates the custodial
function of assets outside
Malaysia, this fee may be charged
to the fund.
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Latest Changes Regulations / Guidelines - 11
GUIDELINE UPDATE CHANGE
Chapter 8:
Investments of the
Fund
Removal of section
8.08 in previous
guidelines
Removed as the term “transferable securities” is now defined under clause
2.01 of the revised guidelines
Section 8.10 Amended to provide clarity as funds are only allowed to invest in foreign
countries where the regulators are ordinary and associate members of the
IOSCO.
Section 8.15(d) Amended to provide clarity on investment in real estate investment trusts or
property funds.
Previous provision Revised provision
8.16 The target fund must–
(d) operate on the principle of
prudent spread of risk and its
investments do not diverge from
the general investment
principles of these guidelines.
8.15 The target fund must–
(d) where the target fund is a fund other
than a real estate
investment trust or property fund, operate
on the principle of
prudent spread of risk and its investments
must not diverge
from the general investment principles of
these Guidelines.
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Latest Changes Regulations / Guidelines - 12
GUIDELINE UPDATE CHANGE
Chapter 9: Charges, Fees,
and Expenses
9.10(c) Amended to ensure existing unit
holders will be notified of the
increase in fees at least 90 days
in advance of such increase in
fees.
(previously no specified timeline
to notify unit holders)
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Latest Changes Regulations / Guidelines - 13
GUIDELINE UPDATE CHANGE
Chapter 13:
Applications, Notifications
and Reporting to the
Securities Commission
Malaysia
Section 13.02 Replaced with a new paragraph
13.02 to reflect ACMF Retail MoU
framework. (for cross border
selling)
Removal of sections 13.09(f)
and 13.09(i) in previous
guidelines
Removed the original sub-
paragraphs 13.09(f) and (i) that
requires the notification to the SC
on investment in foreign market
and unit split exercise.
Section 13.10(a) Amended for clarity and removed
the reference to “management
company” in light of the issuance
of Technical Note No. 1/2014 on
19 August 2014.
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Latest Changes Regulations / Guidelines - 14
GUIDELINE UPDATE CHANGE
Schedule E –
Submission of
Applications,
Notifications and
Documents
(1)(c): Application to
Act as
Management
Company of a Fund –
new Appendix IV
Replaced with a new paragraph (8)
to clarify that the SC may consider
varying the terms and conditions of
approval provided that justifiable
grounds are submitted to the SC.
(1)(c): Application to
Act as Trustee to a
Fund – new Appendix
III
Amended to include the
requirement for application to be
assessed as suitable to be a
Qualifying CIS, pursuant to the
Standards of Qualifying CIS.
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Latest Changes Regulations / Guidelines - 15
GUIDELINE UPDATE CHANGE
Schedule E: Appendix I(a) –
Submission of Applications for
Approval/Registration
(1)(c): Application to Act as
Management Company of a Fund –
new Appendix IV
Inserted a new item under the Appendix to
incorporate a new requirement for
management company of a Qualifying CIS.
(1)(c): Application to Act as Trustee
to a Fund – new Appendix III
Inserted a new item under the Appendix to
incorporate a new requirement for trustee
of a Qualifying CIS.
(2)(b): Application to Register or
Renew Registration for a Trustee –
Appendix II
Amended due to the following:
(a) To provide clarity that the requirement
to submit an undertaking by the trustee
should not be limited to before the
commencement of unit trust fund-related
business only; and
(b) To require, an undertaking by a trustee
of a Qualifying CIS that it will comply with
the Standards of Qualifying CIS.
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Latest Changes Regulations / Guidelines - 16
GUIDELINE UPDATE CHANGE
Schedule E: Appendix I(b) –
Notification and Submission
of Documents
Removal of table under (1):
Notification of New
Class(es) of Units
Removed as such notification is
no longer required.
(a)(ii): DECLARATION BY THE
APPLICANT IN RELATION TO
THE
ESTABLISHMENT OF A FUND
TO BE
DEEMED AS A QUALIFYING
CIS
Inserted a new declaration letter
for applicant in relation to the
establishment of a fund to be
deemed as a Qualifying CIS.
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RELATIONSHIPS BETWEEN FM/UTMC AND CLIENTS
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Manager –UTMC/FM
UTMC
• Make reports to the trustee regarding the purchase, sale and management of the investments .
• Promote and distribute or sell units in UTS
• Buy back units from those unit holders who wish to dispose of units
• Execution of investment decisions to raise liquidity for fund//portfolio
• Keep the accounting records of portfolio/UTS
• Calculate unit selling and repurchase prices, and to determine the amount of distributions payable to unit holders if UTS
• Maintain a register of unit holders in each UTS showing the units held by each unit holder
FM
• Pitching of investment management services to clients wishing to embark on a discretionary mandate relationship
• Keep the accounting records of portfolio/UTS
• Execution of investment decisions including to raise liquidity for fund//portfolio
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Trustee- UTMC/FM
• Maintains custody of the assets of the fund /portfolio.
• Ensures funds are invested in accordance with Trust Deed if UTS.
• Supervises the operations of UTS to ensure that its objectives are followed by UTMC
and that the interests of the unit holders are protected.
• Can remove one that fails to manage effectively and in accordance with the deed.
• Approves, monitors all financial transactions if UTS.
• Collects all income entitlements on investments held on behalf of investors.
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Unitholder-UTMC
• Responsible for the fees earned by UTMC and the trustee.
• Hold units.
• The value of a unit is determined by using a formula set out in the deed, which is
based on dividing the market value of the net assets of the UTS by the number of
units currently in circulation.
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Deed-UTMC
• It is a legal document that governs the operation of the Unit Trust.
• The Unit holders, Fund Managers and Trustees are legally bound by it.
• It spells out :
Rights and duties of the UTMC, Trustee and Unit holder
Maximum fees payable
Describe the investments in which UTS can be invested
Collection and distribution of income
Valuation of units
Determine price of units to be sold to investors, and bought from them, by
UTMC to be calculated
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Prospectus-UTMC
• It is required by law to provide potential and existing investors with all
necessary information to make an informed decision.
• Must be registered with the Securities Commission.
• Prospectus to be updated every 12 months.
• No sale of units can be made without a prospectus.
• Agent should go thru’ the prospectus with investor and explain fees and
charges, unit holder's rights, etc. (best way is through the Key Data).
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Agents of UTMC & Trustee
• A trustee may appoint a sub-custodian to hold UTS assets on its behalf.
• UTMC may appoint fund managers, asset consultants, managers of real estate,
and other specialists to assist in its role.
• The trustee and UTMC are responsible for the actions of any agent they appoint.
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Duties To Client
Responsibilities of a FM to a Client • Fees, charges and all remuneration must be fair, reasonable & transparent
• Valuations provided on agreed upon basis
• Statements & scheduled duly provided
• Confidentiality of information is in place governed by policies and procedure
• Establishment of a complaints register
• Prudent Investor Rule
• Conflicts of interest Disclosures
• Personal Account trading Policies
• Trade Crossings between clients portfolios
• Fair allocation of Trade
• Soft dollar dealings Policies
• Dealing Polices when through Related Party Stockbrokers
DUTY OF LOYALTY
DUTY TO ACT IN
GOOD FAITH
DUTY TO AVOID
CONFLICT OF INTEREST
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Client Relationship
• Client relationships are typically through funds invested or portfolios directly
managed.
• If funds, FM’s observe governance and oversight through documents such as
Prospectuses or Information memorandum- depending if the client is retail or
wholesale.
• If portfolios- governance and oversight will be guided by documents such as
Investment Management Agreements.
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Client Relationship - Prospectuses
• Typically prospectuses should incorporate the following to comply with all regulatory and legal requirements.
• Prospectuses should include, at a minimum:- a) clients’ risk profiles and investment objectives including any investment limitations,
restrictions or instructions; b) notification of any significant changes to the investment policy or investment
recommendation; c) clear authorisation from the clients for discretionary mandate; d) scope of services that will be provided by the fund management company
including frequency of written statements and reports relating to the clients’ portfolios;
e) fees and charges to be paid by the clients or any other remuneration received by the fund management company from any other person in relation to services provided to the clients;
f) details of custodial arrangement; g) basis of valuation to be used for any type of investments products; h) terms and conditions relating to soft commission, where applicable; i) liability of fund management company where there is a breach of the IMA
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Client Relationship – Investment Management Agreement
• For each portfolio, FM shall have an Investment Management Agreement (“IMA”) in place, which complies, with all regulatory and legal requirements.
• IMAs should include, at a minimum:-
a) clients’ risk profiles and investment objectives including any investment limitations, restrictions or instructions;
b) notification of any significant changes to the investment policy or investment recommendation;
c) clear authorisation from the clients when for discretionary mandate;
d) scope of services that will be provided by the fund management company including frequency of written statements and reports relating to the clients’ portfolios;
e) fees and charges to be paid by the clients or any other remuneration received by the fund management company from any other person in relation to services provided to the clients;
f) details of custodial arrangement;
g) basis of valuation to be used for any type of investments products;
h) terms and conditions relating to soft commission, where applicable;
i) liability of fund management company where there is a breach of the IMA
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Client Relationship – Investment Management Agreement (Cont’d)
• Sets out clients instructions of the IMA with regards to e.g. asset allocation, limits and
benchmark
• Can include investment style and approach
• Type of mandate e.g. balanced or an asset class
• Ranges for asset allocation
• Authorised investments with constraints
• Counterparty details
• Other relevant policies
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Investments
Generally, a UT may invest in
• Equities, debentures and warrants
• Cash, deposits and money market instruments
• Units/shares in collective investment schemes
• Derivatives.
• Unlisted securities (exclude approved to be listed shares, debentures & structured products) <=10% of NAV
• Foreign investments - limited to markets where the regulatory authority is a member of IOSCO
Discretionary portfolios are managed based on client sanctions
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Investments – Risk vs. Return
Low
er
Lower
Hig
her
Higher
Ret
urn
Risk
Money market funds
Sukuk funds
Balanced funds
Equity funds
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Investments – Portfolio Management
A suitable investment policy must be established :
• Be fair & equitable in allocation of orders
• Not to misuse information/participate in insider’s trading
-churning/front running is prohibited
• Client’s interest take precedence in transaction
• Disclose conflict of interest
• Provide sufficient research
• Take all effort in identifying, managing & mitigating risks
• Execute Investment Management Agreement (IMA) with clients when applicable
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INVESTMENTS – Trading PRACTICES
• Ensure “best execution” of trades for clients
• < 50% of trades with any broker annually
• “Arm’s length” transactions with related parties
• The transaction are within client’s mandate and limits
• Ensure sufficient monies or properties to meet the obligations of the transaction.
• Cross trades prohibited for staff/proprietary and client’s accounts; unless consented to.
• No ‘soft’ commission allowable for trades, unless declared
• Trade execution and confirmation checks are normally employed through an integrated system.
• Preferably, a straight-through process should be employed for front (dealing/ keying of orders by fund managers), middle (compliance, trade confirmation, settlements) and back office operations (back office support & report generation).
• This process should be independent of each other and executed by different group of people.
• A pre and post trade compliance monitoring should also be in place.
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Investments – Cross Trades
• Only in the best interests of both clients
• Transactions are executed on an arm’s length and fair value basis
• Document reason's prior to execution
• Activity is identified to both clients in their respective periodic in transaction reports or statements
• Transaction is executed through a dealer/financial institution
• Written prior authorization obtained in advance from clients
Authorization can be incorporated in the IMA
For UT, authorization from unit holders is not required but the policy on soft commission must be disclosed in prospectus.
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Performance Benchmarking And Evaluation
• An aspect of the Code Of Ethics
• Ensures funds can be compared on an apples-to-apples basis with and among each other.
To minimize “jazz-up” a report
e.g. :Global Investment Performance Standards (GIPS)
• Ethical standards that apply to the way investment performance is presented to potential and existing clients
• Covers calculation of returns, presentations & disclosures
• Voluntary and are not forced-upon the companies by the regulators
• Must be independently verified for purposes of marketing or reporting
• In Malaysia, Morningstar Research Pte Ltd and Lipper provide independent sources for comparative fund data and analysis.
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KEY INTERNAL CONTROLS
Risk Management
Internal Audit
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Key Internal Controls
A Risk Management Framework must include and be :
• Robust enough for continuous identification, assessment and monitoring of company risk
• Capable of monitoring and managing risks assumed on behalf of client
• Mitigating actions
• Established for functions outsourced: to perform due diligence on key risk areas and mitigation strategies
• Reviews of outsourced functions
• Have ability to identify new risks that arise
• Cultivate risk awareness culture in the Company and empowers Employee with the ability to identify and manage risks whenever they arise.
FM must conduct at least an annual review of the Risk Management Framework
What You Must Have, What You Must Know
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Board of Directors
Internal Audit Department
Executive Director
Risk Agent
Risk Management
Department
• BOD is responsible, inter alia, for ensuring establishment of Risk Management Framework as well as an effective internal audit function.
• Internal Audit Department provides
independent assurance regarding effectiveness of implementation of Risk Management Framework.
• RMD provides central resource for
developing tools and methodologies for identification, assessment, quantification, aggregation, monitoring and control of risks. RMD can be a separate function independent of business and support units of FM
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Key Internal Controls
Eg: Structure For The Implementation Of Risk Management Framework
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Business Continuity Plan
• FM must ensure that critical operations can continue in the event of
interruptions.
• Must include Annual Review to test effectiveness.
• The plan must be capable of dealing with interruptions in outsourced functions
also
PLAN MUST INCLUDE ANNUAL REVIEW AND REPORT TO BOD
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Internal Audit
• The BOD is encouraged to establish an internal audit function alongside a
framework.
• The scope can be outsourced, subject to Outsourcing Guidelines.
• Albeit, BOD must ensure that the Framework incorporates
Planning, control and recording of all work is done;
Recording of all findings and recommendations; and
All concluded work is to be accompanied with a report.
• Reports must be reviewed and acted upon in the interest of client at all times
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Safeguarding Of Client’s Assets
• Governed by section 120 to 125 of the CMSA- “Treatment of Client’s Assets in Respect of Fund Management”.
• FM is responsible for ensuring compliance with the relevant provisions of the CMSA and other regulations, regardless of whether the monies or property belonging to clients is received in or outside Malaysia.
• All clients’ monies and properties shall be placed in trust account or CDS account that is maintained by the custodian (as defined by Sec 121 of CMSA) and duly appointed by the client. All properties shall be registered in the name of the client (or in custodian name, with the express approval of the client) and are separately identifiable from FM’s account.
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Safeguarding Of Client’s Assets – Segregation of Functions
• It is key that assets of an FM and its clients are maintained and recorded
separately.
• Managing of proprietary assets must also be managed by a separate CMSRL.
• Any co-mingling is prohibited.
• Transactions – instructions for any movement of assets CANNOT be via a third
party.
• Client assets must be kept separate via a custodian/trust account , as approved
by the client.
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Safeguarding of Client’s Assets – Recordkeeping
• Accurate & Comprehensive.
• Reconciliation must be consistent.
• Access to external parties e.g. auditors.
• Aligned to approved standards.
• Retention as per Law and Guidelines- at least 7 years for documents/2 years for
phone recordings.
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Safeguarding Of Client’s Assets – Recordkeeping
• FM shall ensure that any investments which it buys or holds for a client in the course of its business are properly registered in the client’s name or with the consent of the client or, in the name of an eligible nominee or in the name of a Fund that has been registered with the SC and that such assets are kept in a segregated account and could not be viewed as part of its corporate assets .
• FM shall arrange for the safe-keeping of any documents of title relating to those investments.
• A Custodian appointed with client’s consent should be either:-
Trust Companies incorporated under the Trust Company Act 1949
Amanah Raya Berhad
Subsidiary companies providing nominee services that are 100% directly owned by licensed banks, finance companies, merchant banks or stock broking companies.
Stock broking companies.
Any other person as approved by the SC.
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• Compliance
• Disclosure Of Interest
• Conflicts
• Sales Practices
GOVERNANCE - OVERSIGHT
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Compliance
• Definition of compliance:
“Systems or departments at companies and public agencies to ensure that personnel are aware of and take steps to comply with relevant laws and regulations”
Examples: Legal compliance, due diligence & risk management
• Guidelines on Compliance Function for Fund Managers – assist FMs in their efforts to substantially strengthen the internal controls and elevate the overall standards of ethical and prudential conduct in the investment management industry.
• Contribute towards enhancing investor protection and promoting the levels of market integrity.
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Compliance Officer – Responsibilities
• A Compliance Officer (CO) is key liaison to SC & reports to the BOD
• Establishes Compliance programme, Plans and Manuals
• Establish, Maintain & implement procedures to adhere to laws, regulations and Guidelines
• Detects breaches; reporting to the BOD and relevant Committees at least quarterly
• Communicates and disseminates to Board, employees
• Monitoring of licensed activities and licensed persons
• Training and education of employees
• Coordinating Compliance efforts
• Oversight on investment and operations administrations matters e.g. client account opening
• Submission of reports to SC
• For IFMC’s- the CO also must ensure adherence to Guidelines on Islamic Fund management
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Compliance Officer – Other Responsibilities
• As part of best practice and to be in compliance with the Anti-Money Laundering Act and Counter Financing of Terrorism (“AMLA CFT”) in the capital market, a FM must implement the recommendations of the FATF which include policies on “know your client” (“KYC”) and procedures on client due diligence (“CDD”).
• In addition, KYC would provide a guide to FM on the risk profile of each investor that is needed to be taken into account when recommending a suitable investment product to the respective investors.
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Compliance Committee
• Setting scope of investigation
• Review results of investigation
• Securing Board’s approval to proposed compliance system
• Approve final form compliance system and allocating responsibilities and authorities
• Devise supervisory programme
• Monitor installation and implementation of compliance system
• Coordinate all parties
• Review reports of each compliance failure, resulting action and discipline imposes
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Compliance Tools
• Board’s commitment and CEO’s endorsement
• Proper documents of compliance programme and up-to-date manuals and procedures
• Education and training of all directors and employees on compliance
• Legal audit
• Identification and controls of high risk areas
• An effective system for complaints monitoring and resolution
• Prompt changes
• Maintenance of detailed and complete records relating to compliance
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Compliance Officer – Summary of Scheduled Reporting Tasks
• Reporting to the Securities Commission – monthly, half yearly, annual
• Compliance Report to BOD – at all BOD meetings, at least on quarterly basis
• Compliance Report to Investment Committee
• IFMC - Compliance Report to Shariah Adviser
• IFMC - Reporting to Shariah Risk – monthly attestation of Shariah compliance
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Disclosure of Interest / Conflict of Interest
• FM must have Policies & Procedure for for company, BOD, investment committee member, employees to disclose all holdings of shares, securities and alternative products in the capital market space.
• Timeliness- upon joining and annually after
• FM must ensure that client interest is not superseded
• Records of disclosure must be kept.
• Proprietary holdings must be disclosed
• BOD/ICM members/Employees must also declare holdings held by nominees or related parties
• Transactions of any ED must be sanctioned by another Director or the CO
• Transactions of any employee must be sanctioned by a Director or the CO
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Disclosure of Interest / Conflict of Interest
• A FM must establish and maintain a Policy and Procedure on receipt of Gift/Benefits.
• A FM must also maintain a Gift Register.
• A FM must establish and maintain a Policy and Procedure on receipt of soft
commission/rebates, allowable only if sanctioned by client and for the use of in the
interest of the client.
• A FM must also maintain a similar Register and disclose details to clients in scheduled
reporting's/communication.
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Sales Practice Guidelines
This Guideline applies to all unlisted capital market products. except shares, debentures and Sukuk.
Scope of coverage is for both Product issuer and distributor
Fair treatment of investors
Product Highlight Sheet
Suitability Assessment
If issuer is a foreign entity and distributed by local entity, the BOD of the local entity is responsible.
The applicability is guided by category of investors ( see next slide)
Responsibilities of Directors
To ensure that the product distributor/issuer is responsible for ensuring that FM and its employees comply with Guidelines
Any breaches , may result in not only action under the law but recall or cessation of product and will affect the assessment of the licesed person
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Applicability of Categories
CATEGORY OF INVESTOR PRODUCT HIGHLIGHT SHEET
SUITABILITY ASSESSMENT
Accredited Investor
High Net Worth Entity (unless opt out) (unless opt out)
High Net Worth Individual
Retail Investor
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Fair Treatment by Product Issuer
Responsibilities of the Issuer BOD
• Product development incorporates investor related issues
• Suitability of product vis-à-vis the target investor group
• Fees to be charged reasonable and fair/where applicable Shariah Compliant
• Information to be provided will be reasonable and sufficient for informed decision
• Changes are kept informed
• Responsible to ensure that P & P is there for promotion,marketing and sale/distribution will not misrepresent/false/contain material omission
• Channel for investor complaints are well stated/adequately informed
• Online sales are adequately represented that it is without recommendation
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Fair Treatment by Product Distributor
Responsibilities of the Distributor’s Board Of Directors
• Ensure that the distributor has Policies & Procedures (P&P) in the interest of investors for promotion/marketing/sale/distribution of products
P&P must outline criteria for employees to act in honest/professional manner
P&P must ensure proper record keeping of Suitability assessment and Product Highlight Sheet .
Remuneration of sales personnel must not result in product pushing
Continued Up skilling of sales personnel/agents
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Product Highlight Sheet by Product Distributor
• Must be clear and concise for investor to make informed decision
• Must contain minimum salient features and fair comparison
• Must contain key risks associated
• Must contain all relevant costs involved e.g. fees/charges
• Must contain valuations basis/exit basis
• Must contain contact information
• Must be clear and simple language
• Must be clearly communicated to a potential investor of the availability of the PHS
• All PHS must have Responsibility Statements / Statement of Disclaimer
PHS is prepared by the Product Issuer
• If issuer is a foreign entity and distributed by local entity, the BOD of the local entity is responsible.
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Suitability Assessment by Product Distributor
• An exercise to gather information to form reasonable basis before recommending product
• Undertaken at point of assessment
• Subject to the relevant guidelines on persons exempted (Schedule 1 of Guidelines)
• Areas of focus is
Know your Investor
Investor Risk profile and Needs
Investors Investment knowledge
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Insider Trading/Price Sensitive Information
Insider Information and Other Regulations
• FM must have a very strict rule with regards to the usage of insider information. All employees are governed by the Code of Ethics and Chinese Wall & Insider Trading policies, where applicable The Code of Ethics prohibits the employee for any misuse of material non- public and price sensitive information relating to securities or other financial instruments. In accordance with the Code, the employee is expected to undertake all necessary precautions to protect the confidentiality of records when processing material non-public and price sensitive information.
• The Insider Trading Policy prohibits trading, either personally or on behalf of others, on material non-public information (including any price sensitive information), or communication such information to others who trade in violation of law (known as “insider trading” or “tipping”). The insider trading and tipping restrictions also goes beyond employees’ immediate families to prohibit employees from illegal profiting (or avoiding losses), or funneling illegal profits or losses avoided to any person. This also prohibits FM from insider trading and tipping in client accounts.
• General Prohibition
• Only licensed employees are allowed to provide investment advice to a client or manage client’s portfolio on a discretionary and non-discretionary basis.
Market Misconduct
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BNM will review STR and contact the CO for further information/documents, if required.
If required, the CO shall submit an STR directly to the FIED of Bank Negara
Report such transaction to the Compliance Officer
Employee
Compliance Officer
Financial Intelligence and Enforcement
Department, Bank Negara Malaysia
Compliance Officer (CO) shall conduct further investigation. CO will conduct a thorough review of accounts and transaction with the Executive Director/MD/CEO and ascertain if there is a need to submit an STR
Any employee who has a suspicion of money laundering or terrorism financing
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Market Misconduct
Suspicious Transaction Report
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Outsourcing
• FM’s may outsource any function subject to OUTSOURCING GUIDELINES
• FM responsible to assess and monitor and conduct regular scheduled assessment, reported
to the BOD
• Notification to the SC or the Exchange is not required for outsourced functions that are
determined as non-material.
• A CMSL holder should refer to paragraph 10.02 of Chapter 10 of the Licensing Handbook;
in determining whether the outsourced function is a material or a non-material function.
This assessment process should be documented.
• A CMSL is also responsible for reporting to the SC on all assessment and conditions
precedent for such outsourcing activities
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Training And Education
• FM must ensure all Executive Directors and employees ( licensed and non) to be adequately trained.
• There is the need to foster a culture of continuous learning amongst individuals who carry on any capital market activities regulated under the Capital Markets and Services Act 2007 (CMSA).
• Through the CPE programme, it is hoped that investors will gain assurance that these capital market professionals do not only satisfy the fit and proper criteria but are also capable to perform their functions effectively, efficiently and fairly. In addition, the confidence of the international community will be enhanced as higher standards are being practised by them..
What is CPE ( Continuing Professional Education)?
• The CPE is a mandatory programme for capital market professionals to consistently update and/or refresh their technical knowledge, skills and ethical standards as has been collectively prescribed under the Securities Commission Malaysia’s (SC) Licensing Handbook and the Guidelines on Investor Protection (IP Guidelines) jointly issued by the SC and Bank Negara Malaysia.
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Training And Education (Cont’d)
Who falls under the CPE requirements?
• The CPE applies to all individual licensed persons and employees of registered persons who conduct capital market activities as regulated under the CMSA.
• FM must ensure a Training register is kept for all training attended by its licensed persons.
How much should I do?
• As a CMSRL holder, the minimum requirement would be for you to accumulate 20 points
• CPE points is required in a year on or before the anniversary date of their licence by carrying out any of the CPE-recognised activities.
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An investment management company (that conducts both asset management business and the unit trust business) is governed by the following Acts and guidelines issued by the regulators:
Capital Market Services Act 2007
Guidelines on Unit Trust Funds
Guidelines on Wholesale Funds
Guidelines on Compliance Function for Fund Management Companies
Guidelines on Marketing and Distribution of Unit Trust Funds
Guidelines on Unit Trust Advertisement and Promotional Materials
Prospectus Guidelines on Collective Investment Scheme
Licensing Handbook
Guidelines on Online Transactions and Activities in Relation to Unit Trust
Guidelines on Outsourcing For Capital Market Intermediaries
Guidelines on Prevention of Money Laundering and Terrorism Financing for Capital Market Intermediaries
Guidelines on Islamic Fund Management (for companies that carry Islamic fund management businesses
Guidelines on Real Estate Investment Trust
Guidelines for the Appointment of a Related-Party Trustee
Guidelines on Islamic Real Estate Investment Trusts
Guidelines for the Offering, Marketing and Distribution of Foreign Funds
Guidelines on Exchange Traded Funds
Guidelines on Due Diligence Conduct for Corporate Proposals
Guidelines
Securities Commission Malaysia
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Guidelines (Cont’d)
For an Islamic investment management company (i.e. investment management company that operates in line with the Shariah principles), it is also governed by the following additional guidelines:
Guidelines on Islamic Fund Management
Registration of Shariah Advisers Guidelines
Federation of Investment Managers Malaysia (FIMM)
• Additional guidelines which would apply to UTMCs
• Self-regulatory organization for the unit trust management industry in Malaysia
Guidelines for Registration of Institutional Unit Trust Advisers (IUTA) for the Marketing and Distribution of Unit Trust
Guidelines for Registration of Corporate Unit Trust Advisers (CUTA) for the Marketing and Distribution of Unit Trust
Code of Ethics and Standards of Professional Conduct for The Unit Trust Industry
Investment Management Standards (IMS)
By-Laws Relating to the Procedures for Disciplinary Proceedings
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Case 1
Scenario
An investor banks in a third party cheque for RM3 million into his unit trust.
• Last investment made more than 6 months
• Previous transactions never amounted more than RM50k
• Investment made into a cash management fund
Q: What kind of due diligence should have been made and under what guidelines should the UTMC have made its decision?
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Case 2
Scenario
An institutional investor invests RM1 million into an equity UT. The transaction was carried out by an agent of the UTMC.
• The agent did not get the necessary sign of PHS and Suitability Assessment
• No performance reports was received
• Scheduled statements was received and signed off by the agent, not company
Q: What should have the investor been asked to do and should have received
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Case 3
Scenario
For the year 2014, FM ABC had conducted considerable large number trades with a brokerage firm, XYZ Securities Sdn. Bhd. who received brokerage commission of RM2 million as a result. In view of the good business it has with ABC, XYZ Securities Sdn. Bhd. decided to give a cash rebate amounting to RM150, 000.00 from the brokerage fee they received. ABC then used that cash to pay for its subscription fee for Bloomberg and FTSE indices because it views that the services are of demonstrable benefit to its client and would assist in the decision making process relating to client’s investments.
Which statements below describe correctly the above scenario?
• Allowed. The cash is received by ABC it is being used to pay for services that are of demonstrable benefit to client.
• Allowed. This is a soft commission arrangement that is allowed under SC’s Guidelines on Compliance Function for Fund Management Companies
• Not allowed. Any rebates received must be directed to the account of relevant clients.
• Not allowed. The services described above do not fall under the scope of soft commission arrangement.
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Case 4
Scenario
A client of ABC has signed two Investment Management Agreement (“IMA”). One IMA is a discretionary mandate to invest in equities only. The other IMA is a discretionary mandate to invest in sukuk and equities. In both IMAs there is no clause on the conduct of cross trades.
The fund manager now wants to conduct a cross trade between the two accounts. He has obtained client’s consent for the trade via a written letter. The trades will executed on fair value and an arm’s length basis. It will also be in the best interest of both accounts. However, the proposed trades were rejected by the compliance officer. Why?
• The compliance officer does not feel comfortable with the proposed cross trades.
• The IMA of the client does not allow fund manager to execute cross trades.
• The trades won’t result in a change of beneficial ownership
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Case 5
Scenario
Nora is a portfolio manager who invests significantly in the shares Good Star Bhd, a public listed finance company. Nora’s husband is works in the finance department of Good Star Bhd. She was informed by her husband that Good Star’s accounts is showing loss in the 3rd quarter of the year. The company will announce its quarterly result in a week’s time. With that information Nora proceeded to sell all of shares of Good Star from her portfolio.
Please select a statement which BEST describes the scenario above:
• Nora has committed the insider trading offense
• Nora can be seen trying to manipulate the market
• Both Nora and her husband can be charged for insider trading
• Both Nora and her husband are manipulating the share price of Good Star Bhd.
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Acknowledgements
• SIDC COURSE MATERIALS - MODULES 9/10
• RELEVANT GUIDELINES OF SC
• PERSONAL MATERIALS
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