As part of its efforts to improve industry standards, the Monetary Authority of Singapore (SAM) proposes to introduce regulatory requirements (by means of a notice (CF Notice)) on the conduct of due diligence by holders of a capital markets services license (CMSL) and banks, investment banks and finance companies exempt from holding a CMSL which carry out the regulated activity of advising on corporate finance (collectively, CF Advisors). The MAS proposal is presented in a consultation document published on December 15, 2021 (consultation document). The comment period ends on February 15, 2022.
In developing the regulatory requirements, MAS said it considered industry best practices and requirements from other major jurisdictions. In Hong Kong, we saw the Securities and Futures Commission (SFC) recognize that IPO sponsors act as key gatekeepers to ensuring market quality and central to this is the expectation that IPO sponsors will perform sufficient due diligence to correctly understand and assess companies seeking to be listed. The SFC has placed sponsor misconduct at the top of its priority list in recent years with numerous disciplinary actions against corporate sponsors as well as those responsible for them (see our recent bulletin on these enforcement actions here).
Key points to remember
On January 10, 2020, the SGX Motherboard Listing Rules were enhanced by incorporating the Banking Association of Singapore Listing Due Diligence Guidelines, among other improvements, following public consultation. In particular, new Rule 112B clearly sets out the responsibilities of issue managers, including the requirement for issue managers to perform their duties with care, diligence and skill.
The FC’s opinion also recognizes the important role played by FC’s advisers in the proper functioning of Singapore’s capital markets. CF Advisers’ unique position in the IPO process enables them to act as quality gatekeepers in the capital markets by reviewing the issuer and offering advice to the issuer throughout the process. IPO. The CF Notice will raise the minimum standards of conduct for CF Advisors.
Overview of proposals
The proposed regulatory requirements will be set out in a notice, a draft of which is attached as Appendix A to the consultation document. 1. Entities concerned
The entities subject to the proposed notice (the CF advisers) are:
(a) CMSL holders advising on business financing; and
(b) banks, investment banks and financial companies exempt from holding a CMS license which carry out the regulated activity of advising on corporate finance.
2. Raise the standards of conduct for CF advisors
The due diligence requirements proposed by MAS for FC Advisors under the FC Notice are summarized below.
Part I – General Requirements
Implement policies, procedures and controls
Act with due care, skill and diligence when advising on corporate finance
Managing material conflicts of interest between the interests of the CF Advisor’s clients and the interests of the CF Advisor or its related company
Establish a governance framework on the performance of due diligence by FC Advisor representatives and staff
Retain records of the due diligence work performed for a period of at least 5 years from the date the corporate finance transaction was completed, terminated or otherwise entered into
Part II – Additional requirements for applicants for registration1
Advise the applicant for registration on regulatory requirements
Assess and ensure that an applicant for listing is suitable for listing and ensure that there is an independent due diligence review performed by the deal team for each listing request
Where a CF Advisor relies on the work of third parties or experts, the CF Advisor must be satisfied that the third parties or experts are properly qualified to perform the work and that it is reasonable to rely on the work or opinions of these people.
Prior to the submission of the application for enrollment and prior to the admission of the applicant for enrollment in the SGX, a CF advisor must have reasonable grounds to be satisfied with, among other things, the process leading to the applicant’s admission to registration.
3. Materiality Considerations
MAS proposes to introduce materiality considerations for some of the due diligence requirements for FC advisors, for example:
(a) a CF Advisor must identify, mitigate and disclose to its clients any potential, actual or perceived material conflicts of interest between the interests of its clients and the interests of the CF Advisor or its affiliate;
(b) the FC Advisor must ensure that it has an adequate framework in place for senior management to monitor matters, including but not limited to the proposed due diligence plan for each transaction specific, and any significant deviations from this due diligence plan;
(c) a CF Advisor must assess and have reasonable grounds to be satisfied that an applicant for enrollment is suitable for enrollment, taking into account any significant issues identified as relevant to the assessment;
(d) a CF adviser must maintain records of the basis for opinions, assurances and conclusions relating to corporate finance advice that are material to the transaction, including internal discussions and any actions taken prior to such opinions and assurances are given or conclusions are reached; and
(e) a review should be conducted by persons who are independent of the transaction team and who have the appropriate seniority, knowledge, skills and experience to examine the basis for all opinions, assurances and conclusions reached the transaction team, which have an element relating to the candidate’s suitability for registration.