Client Restrictions for Fund Management Companies

Fund management companies in Singapore are managed by a framework set by the Monetary Authority of Singapore (MAS). The framework sets specific rules for the clients a FMC can serve, based on the company’s license. They are introduced so that investors can be protected adequately and the fund manager meets their responsibilities.

This article examines the client types, different FMC licenses and the restrictions placed on fund managers for choosing their clients.

Understanding Client Classifications Under MAS

It’s important to figure out how MAS sorts clients before getting into the restrictions. Under MAS regulations, clients fall into one of three main groups.

1. Retail Investors

Such investors are individuals or entities outside the groups of accredited or institutional investors. Regulators typically give these clients the highest level of safety, since they are thought to be less knowledgeable about finance than others.

2. Accredited Investors (AIs)

Generally, an accredited investor is a person or group that owns a certain wealth or income level. According to MAS, an individual accredited investor is someone who:

• Individual assets not including debts, that reach SGD 2 million,
• Income of at least 300,000 Singapore dollars in the year before.
• An amount greater than SGD 1 million of financial assets excluding liabilities.

Organizations need to fulfill certain requirements related to their net assets.

3. Institutional Investors

The term institutional investors describes banks, insurance companies, pension funds and government agencies. Such companies are expected to be able to monitor investment risk based on their capacity and expertise.

Types of Fund Management Licenses in Singapore

MAS regulates FMCs through different licensing regimes, which in turn influence the types of clients they are permitted to serve.

1. Licensed Fund Management Companies (LFMCs)

There are two types of LFMCs:

• Two types of LFMCs are recognized in aviation. They are open to all types of investors such as retail clients.
• A/I LFMCs only deal with investments from accredited and institutional investors.

2. Registered Fund Management Companies (RFMCs)

Only up to 30 qualified investors (accredited and institutional) can invest in an RFMC which must keep its level of assets under management (AUM) below SGD 250 million and comply with lighter regulations. This structure is suitable for firms that meet the requirements for setting up an RFMC in Singapore, such as having qualified directors, a proper compliance framework, and sufficient capital and resources.

3. Venture Capital Fund Managers (VCFMs)

A VCFM may manage only VC funds and can only work with accredited and institutional investors. Brokers cannot assist customers who buy and sell securities for personal use. Understanding how to set up a Variable Capital Company Singapore is essential for VCFMs seeking to structure VC funds efficiently under MAS regulations.

Client Restrictions Based on Licensing Status

The rules under MAS allow a fund manager to serve only certain clients. I have explained the types of restrictions imposed on different fund management companies below.

A. Retail LFMCs – Broadest Client Base

Retail LFMCs are authorized to handle money from retail, accredited and institutional investors. That said, being responsible for retail clients, Retail LFMCs face increased regulations.

• More need for following rules
• New rules for sharing information and promoting products
• Regular updates to MAS
• The starting capital for this kind of trust must be at least SGD 1 million.

B. A/I LFMCs – Limited to Accredited and Institutional Investors

A/I LFMCs are allowed to work with only those investors who hold official accreditation. They never have permission to engage with retail clients. Because investors in these markets are likely to understand the risks, the regulation is weak since it’s assumed they don’t need as much protection.

If retail services are desired by an A/I LFMC, it is obliged to apply for an upgrade to a Retail LFMC and fulfill the greater restrictions, disclosure rules and capital conditions.

C. RFMCs – Restricted by Client Type and Number

RFMCs only have permission to look after assets that are:

• There will be no more than 30 qualified investors including::
  • Those who qualify are only legitimate institutional investors.
  • Not more than 15 is allowed to be funds or limited partnerships.

Retail clients are not part of the business activities for RFMCs. They must close down or convert their operation status if they exceed SGD 250 million in total client funds.

D. VCFMs – Highly Restricted

Of all these experts, VCFMs have the most restricted audience they can treat. They can:

• You can provide information only to approved and official financial investors.
• You can only work with venture capital funds and not with traditional investment funds or mandates.
• Do not market to retail investors in connection with your offers

Having just one main set of rules motivates companies to innovate and helps startups with funding, even while it lowers risks for investors.

MAS Compliance and Penalties for Violations

At MAS, complying with client restrictions is a serious matter. If a fund management company serves clients in ways that go beyond the rules, it could face certain consequences.

• Fines or censures are the most commonly used types of enforcement by regulatory agencies.
• Having a driving license taken away
• Problems with reputation can make it challenging to accomplish future fundraising.
• Investor disputes may go to lawsuits or undergo arbitration

Suppose an A/I LFMC promotes services to retail investors without meeting licensing requirements, it might be punished for doing something not allowed by the Securities and Futures Act (SFA).

Managing Client Onboarding and Classification

Fund management companies need to have effective onboarding processes that comply with all necessary clients’ requirements.

1. Client Suitability Assessments

Before managing or making agreements with a client in the private equity market, FMCs must review whether they qualify as an accredited or institutional investor.

2. Declaration and Opt-In Process

Through MAS, people can apply to be accredited investors, but the FMC must inform them and seek their permission on paper.

3. Record Keeping

You have to keep all your client records, including classifications and supporting documentation, for the inspectors.

4. Ongoing Monitoring

Client status is sometimes different each time a call occurs. FMCs should often review their clients to confirm their compliance with licensing regulations.

Opting In and Out of Accredited Investor Status

Those using MAS have the option to become accredited investors or not. FMCs must:

• Alert clients about the reduced protections and what they will face if they decide to opt-in
• Give clients the ability to remove their consent whenever they like
• Make sure users see only true information as they opt-in.

If opt-in procedures are not followed, the client’s class might be incorrectly matched which could create legal problems.

Best Practices for Fund Management Companies

Fund management companies should use the following strategies to comply with MAS client restrictions.

• Create and maintain a list split by categories of clients
• Make sure staff know the rules and why it’s important to verify client eligibility.
• Adopt and use the same onboarding documents and checklists for everyone.
• Ensure that your organization’s processes are examined by legal or compliance consultants.
• Update your company’s policies on a regular basis after reviewing new MAS circulars and notices.

Conclusion of Client Restrictions for Fund Management Companies

Certain rules on clients do apply to fund management companies in Singapore and which ones depend on the license the company possesses. They have been implemented to connect regulatory rules to how advanced the client is, guaranteeing that investors get suitable protection.

Key Takeaways:

• All kinds of investors can use retail LFMCs, though these funds must follow the highest regulatory standards.
• Accredited and institutional clients are the only type allowed for A/I LFMCs, RFMCs and VCFMs.
• There are strong rules from MAS that penalize firms operating beyond client acceptability limits.
• It is necessary to properly handle client classification, document all interactions and keep an eye on them to follow regulations.

It is important for fund management companies to comply, since otherwise they might face regulatory problems and jeopardize the honesty of Singapore’s financial sector.