RES 3 – Rules, Ethics and Skills for Fund Management

Correct: The fund is exempt from the standard borrowing limit of 25% of the net asset value because regulations specifically waive this cap for Fund-of-Hedge-Funds that provide a capital guarantee meeting the required standards.

Incorrect: The suggestion that the limit is 10% is incorrect as the standard limit for regular FOHFs is 25%, and even that is waived for guaranteed funds. The idea that borrowing can be used for investment purposes is wrong because borrowing is strictly limited to temporary needs like meeting redemptions or bridging. The claim that the borrowing period can be six months is false because the maximum allowable period for temporary borrowing remains three months regardless of the guarantee.

Takeaway: Capital guaranteed Fund-of-Hedge-Funds are exempt from the standard 25% borrowing limit, but they must still only borrow for temporary liquidity needs for no more than three months.

Correct: The names and weightings of the top 10 largest constituents as of a date within one month of the prospectus is the right answer because the regulations require specific transparency regarding the most significant components of the index. This data must be current, specifically within one month of the prospectus date, to provide investors with an accurate view of the fund’s primary exposures and concentration at the time of the offering.

Incorrect: The option suggesting a comprehensive list of every constituent is wrong because the rules focus on the largest exposures to maintain clarity and brevity in the prospectus rather than requiring the entire index list. The option mentioning the top 5 constituents and a three-month window is incorrect as it fails to meet the specific ‘top 10’ and ‘one month’ requirements set by the Code. The option regarding the top 20 constituents and their historical performance is wrong because historical performance of individual constituents is not a mandatory disclosure requirement for the index fund prospectus.

Takeaway: To ensure transparency, index fund prospectuses must disclose the top 10 constituents and their weightings using data no older than one month from the prospectus date.

Correct: Statement III is correct because a corporation with net assets exceeding SGD 10 million meets the definition of an accredited investor, which is a valid ground for a prospectus exemption. Statement IV is correct because the law explicitly states that the expiration of a prospectus does not automatically invalidate or make void any previous sales or issues of units.

Incorrect: Statement I is incorrect because the requirement is to notify applicants on how to obtain the supplementary document within 2 business days of lodgement, not 7 days. The 7-day period refers to the timeframe for actually providing the documents to the applicants. Statement II is incorrect because the 12-month validity period of a prospectus is calculated from the date of its registration by the regulator, not from the date it was initially lodged.

Takeaway: Fund managers must strictly observe the distinction between registration and lodgement dates for validity and follow specific two-day notification windows when issuing supplementary disclosures to existing applicants. Therefore, statements III and IV are correct.

Correct: Statement I is correct because Registered Fund Management Companies (RFMCs) are subject to specific limits, including serving a maximum of 30 qualified investors, of which no more than 15 can be investment funds. Statement III is correct because the law stipulates that any person carrying out a regulated activity like fund management without the appropriate license or registration is liable for a fine of up to S$150,000, imprisonment, or both.

Incorrect: Statement II is incorrect because Licensed Accredited/Institutional Fund Management Companies (A/I LFMCs) are permitted to serve an unlimited number of qualified investors, unlike the RFMC category which has a strict cap. Statement IV is incorrect because RFMCs are only permitted to serve qualified investors; they are strictly prohibited from managing assets for retail investors regardless of their total assets under management.

Takeaway: Fund management companies must operate within the specific investor and asset limits of their regulatory category, as unlicensed activity or breaching these boundaries carries heavy financial and criminal penalties. Therefore, statements I and III are correct.

Correct: MAS is permitted to revoke the authorisation of a scheme without first offering an opportunity to be heard if the responsible person is undergoing winding up or dissolution. This exception applies regardless of whether the winding up occurs in Singapore or in a foreign jurisdiction, as the insolvency status itself triggers the exception to protect the public interest.

Incorrect: The statement that MAS must always provide an opportunity to be heard is incorrect because specific legal exceptions exist for insolvency, bankruptcy, and receivership. The claim that the exception only applies to Singapore-based liquidations is wrong, as the rules explicitly include winding up processes occurring outside Singapore. The idea that MAS must wait for the liquidation to conclude is incorrect; the authority is empowered to act while the process is ongoing to mitigate risks to participants.

Takeaway: The procedural right to be heard before a scheme’s status is revoked is waived in cases of insolvency or bankruptcy to allow for swift regulatory intervention.

Correct: The manager must enter into a new agreement with a qualified guarantor within six months or sooner if the trustee deems it necessary is the right answer because when a guarantor’s credit rating falls below the specified ‘A’ threshold, the manager is required to find a replacement that meets the original high-quality standards to ensure the capital guarantee remains valid.

Incorrect: The statement regarding no action being required for a BBB rating is wrong because the ‘no action’ allowance only applies if the rating remains at least at the ‘A’ level. The suggestion of immediate termination is wrong because the regulations provide a specific six-month grace period to secure a replacement. The idea of obtaining unanimous participant consent is wrong because the manager has a mandatory duty to maintain a qualified guarantor regardless of participant votes.

Takeaway: When a guarantor’s credit rating drops below the ‘A’ category, the manager has a six-month window to replace them with a new eligible guarantor to protect the fund’s capital guarantee.

Correct: Charging the costs for the preparation, printing, and distribution of product highlight sheets is permitted. These documents are essential disclosure requirements for investors, and the regulations specifically exclude them from the general prohibition on charging marketing or promotional expenses to the fund.

Incorrect: Media advertisements and the distribution of promotional fact sheets are classified as marketing and promotion expenses, which the manager is prohibited from paying out of the fund’s property. Additionally, no fees can be paid from the fund’s property unless they have been explicitly provided for in the trust deed; verbal agreements or side arrangements are insufficient.

Takeaway: Fund managers are prohibited from charging general marketing and promotional expenses to a collective investment scheme, but they may charge costs related to mandatory disclosure documents like prospectuses and product highlight sheets.

Correct: They must already be managing at least SGD 500 million of discretionary funds in Singapore is the right answer because the rules state that if more than 10% of an authorized scheme’s value is sub-managed abroad, the manager and its related corporations must meet this specific asset management threshold locally.

Incorrect: The suggestion regarding base capital is wrong because the regulatory threshold for delegation is based on the volume of discretionary funds managed, not the firm’s internal capital. The claim that the sub-manager must be directly licensed by the local regulator is incorrect because the authority instead considers if the sub-manager is reputable and supervised by an acceptable foreign supervisor. The requirement for ten years of experience is wrong because the rules do not specify a minimum duration of experience for this delegation, focusing instead on the scale of assets managed in Singapore.

Takeaway: Managers delegating over 10% of a scheme’s assets to foreign sub-managers must demonstrate a substantial local presence by managing at least SGD 500 million in discretionary funds in Singapore.

Correct: The statement regarding the notice period is incorrect because the regulations specify that the notice period required for an investor to cease participation in a Regular Savings Plan must be no longer than the interval between the regular subscriptions. This ensures that the exit process is not unnecessarily delayed beyond the next scheduled payment cycle.

Incorrect: The statement regarding allotment timing is wrong because the prospectus is indeed required to specify when units are allotted to the investor each month. The statement regarding penalties is wrong because it is a mandatory requirement that investors be allowed to cease participation without suffering any penalty. The statement regarding deduction timing is wrong because the prospectus must disclose when monies are deducted from the investor’s account to ensure full transparency of the payment process.

Takeaway: Prospectuses for schemes with Regular Savings Plans must ensure that investors can exit without penalty and that the exit notice period does not exceed the frequency of the subscriptions.

Correct: Statement I is correct because the guarantee must be structured as a first-demand obligation that the trustee can legally enforce within the Singapore jurisdiction to protect the interests of the fund’s participants. Statement III is correct because for funds where the guarantee is date-specific, participants require sufficient notice of at least 30 days to understand the redemption value and make informed decisions. Statement IV is correct because if a fund loses its guarantee and chooses to continue, it must not mislead investors by retaining terms like “guaranteed” or “assured” in its title or marketing materials.

Incorrect: Statement II is incorrect because not every variation requires a participant resolution. Minor changes only require the trustee’s approval; only those changes deemed material by the trustee necessitate an ordinary resolution by the participants. Additionally, variations in the guaranteed amount due to routine subscriptions or redemptions are not considered variations to the agreement.

Takeaway: Capital guaranteed funds must maintain strictly enforceable first-demand guarantees and provide timely notifications to investors, ensuring that the fund’s name accurately reflects its guaranteed status at all times. Therefore, statements I, III and IV are correct.

Correct: Facilitating the issue and redemption of units and the publishing of unit prices is the right answer because the representative acts as a local administrative point of contact. This ensures that investors in Singapore have a practical way to buy or sell units and can view current prices in the same language used in the offering documents.

Incorrect: The suggestion that the representative provides investment advice or manages asset allocation is wrong because these are duties of the fund manager, not the local representative. The claim that the representative must serve as the legal trustee is incorrect because the trustee is a separate entity responsible for asset safekeeping, whereas the representative handles local administrative access. The idea that the representative performs independent compliance reviews or audits is wrong because those functions are handled by professional auditors or the manager’s internal compliance department.

Takeaway: The representative of a recognised scheme acts as the essential local link for administrative functions, specifically ensuring investors can transact units and access pricing information easily.

Correct: The manager must restore the real estate investment level to 75% within 24 months because the holdings dropped below 50% of the total deposited property following the new unit issuance.

Incorrect: The 12-month restoration period is only applicable if the real estate holdings fall to a level between 50% and 75% of the deposited property. Immediate restoration is not required by the regulations, which provide a specific grace period to allow managers to source and acquire appropriate real estate assets. The idea that no rectification is necessary is incorrect because the exemption from divesting only applies to breaches caused by market fluctuations or redemptions, not to active corporate actions like issuing new units.

Takeaway: Property funds must restore their 75% real estate investment threshold within 12 or 24 months if a breach is caused by divestments or new unit issuances, depending on the severity of the drop.

Correct: Statement I is correct because hedge funds are distinct from other collective investment schemes in that the regulatory Code does not set specific investment guidelines for them, and this must be explicitly stated on the cover page. Statement III is correct because the prospectus must provide transparency regarding how the manager monitors risk and maintains internal controls to protect the fund’s objectives. Statement IV is correct because it is a mandatory disclosure to inform investors that their potential losses are capped at the amount they have invested in the scheme.

Incorrect: Statement II is incorrect because the regulations require the exact opposite disclosure; the prospectus must state that an investment in a hedge fund is NOT intended to be a complete investment programme for any investor. This ensures investors understand the need for portfolio diversification and do not over-concentrate their capital in a single high-risk vehicle.

Takeaway: Hedge fund prospectuses must emphasize that they are not subject to standard investment guidelines and are not meant to serve as a standalone investment solution for a client’s entire portfolio. Therefore, statements I, III and IV are correct.

Correct: The statement that redemption requests must be satisfied within 14 calendar days is NOT correct because the standard requirement is that these requests must be satisfied within 30 calendar days after the closing date of the offer. This period may be extended to 60 days only if the manager convinces the trustee it is in the fund’s best interest, or even longer if the participants themselves approve the extension.

Incorrect: The statement regarding the offer period duration is correct as the rules require the window to stay open for at least 21 days but no more than 35 days. The statement about leverage limits is correct because while depreciation beyond the manager’s control is not a formal breach, it does legally prevent the manager from taking on any new debt. The statement about redemption frequency is correct because unlisted property funds are required to offer liquidity to participants at least once every year.

Takeaway: Managers of unlisted property funds must provide annual liquidity and satisfy redemption requests within 30 days of the offer closing, while strictly halting new borrowings if leverage limits are exceeded due to falling asset values.

Correct: Statement I is correct because the standard registration window for a prospectus is between the 7th and 21st day from the date of lodgement. Statement IV is correct because amendments made without regulatory consent cause the prospectus to be deemed lodged only on the date the amendment was submitted, which effectively resets the registration timeline.

Incorrect: Statement II is incorrect because the inclusion of CPFIS information is specifically treated as an amendment made with regulatory consent, which allows the registration timetable to continue from the original lodgement date without interruption. Statement III is incorrect because it is a legal offence to accept applications or subscriptions for a scheme before the prospectus is officially registered; simply being available for public comment does not permit the firm to take orders.

Takeaway: While most unconsented amendments reset the registration clock, specific updates like CPFIS information do not, and no commercial activity can occur until the registration process is complete. Therefore, statements I and IV are correct.

Correct: The requirement for property funds to have a full valuation at least once a year and for capital guaranteed funds to redeem at the higher of the guarantee or NAV is correct. Property funds follow specific guidelines allowing for annual valuations rather than daily. Capital guaranteed schemes must ensure investors receive the better of the two values (guarantee vs NAV) at the point of maturity.

Incorrect: The assertion that property funds require daily valuation is wrong because the regulations specifically allow for a yearly frequency for these assets. The claim that capital guaranteed funds only pay the guaranteed amount is incorrect because they must pay the NAV if it has performed better. The statement that standard equity funds only need monthly valuation is false as they generally require daily valuation. The idea that property funds are exempt from all valuations is incorrect as they must still perform a full valuation annually.

Takeaway: Fund managers must apply different valuation frequencies and redemption calculations depending on whether a scheme is a standard fund, a property fund, or a capital guaranteed product.

Correct: Statement II is correct because property funds are typically less diversified than general securities funds, not more, making this statement an incorrect description of fund risk. Statement IV is correct because the regulations explicitly prohibit offering discounts to institutional investors at the time of listing to ensure fair treatment and transparency.

Incorrect: Statement I is incorrect because it is a factually true statement; the performance of listed property funds is indeed calculated based on the change in unit price on the exchange over the reporting period. Statement III is incorrect because it is a factually true statement; managers are required to provide clear disclosure of acquisition fees in either percentage or dollar terms in the prospectus.

Takeaway: Property funds are characterized by specific risks like lower diversification and are governed by strict rules that mandate fee transparency and prohibit price discounts for institutional investors at listing. Therefore, statements II and IV are correct.

Correct: Statement II is correct because collective investment schemes that function as feeder funds (investing all or substantially all of their assets into another scheme) are required to pay out redemption proceeds within seven business days. Statement III is correct because to mitigate conflicts of interest, a manager is strictly prohibited from acting as the counterparty for any over-the-counter financial derivative transaction involving the scheme they manage. Statement IV is correct because any increase in the remuneration for the manager or trustee is classified as a significant change that requires at least one month’s prior notice to participants, even if the increase does not exceed the maximum limits specified in the fund’s trust deed.

Incorrect: Statement I is incorrect because when there is a discrepancy between a manager’s internal credit assessment and an external credit rating, the manager is required to adopt the lowest rating rather than the higher one. This ensures a conservative approach to risk management and prevents the overvaluation of credit quality.

Takeaway: Fund managers must adhere to specific redemption timelines based on the fund type and provide advance notice for significant changes like fee increases, while maintaining independence in derivative transactions and credit assessments. Therefore, statements II, III and IV are correct.

Correct: Statement I is correct because the trustee is responsible for ensuring that annual accounts, the auditor’s report, and the annual report are sent to participants within three months of the financial year-end. Statement III is correct because the regulations allow for the electronic delivery of reports, such as through a website, provided that participants are notified of their availability and the specific URL via a physical letter or email.

Incorrect: Statement II is incorrect because a semi-annual or annual report does not need to be prepared or sent if the period from the initial launch date is less than three months. Statement IV is incorrect because the responsibility for maintaining and providing access to the register of participants lies with the approved trustee, not the fund manager.

Takeaway: While managers prepare the financial statements, the trustee is responsible for distributing reports within specific timelines and maintaining the participant register, with exemptions available for very short initial or final reporting periods. Therefore, statements I and III are correct.

Correct: The manager of a recognised collective investment scheme, together with its related companies, is required to manage at least SGD 500 million of discretionary funds specifically within Singapore. However, this asset management threshold is waived if the units of the scheme are approved for listing and trading on a securities exchange.

Incorrect: The suggestion that the threshold applies to global funds is incorrect because the regulation specifically measures discretionary funds managed within Singapore. The mention of a SGD 1 billion threshold is factually inaccurate as the regulatory requirement is set at SGD 500 million. The statement that the requirement applies to all schemes regardless of their listing status is wrong because the rules provide a specific exemption for schemes that are listed and traded on an exchange.

Takeaway: Managers of recognised schemes must generally meet a SGD 500 million local AUM threshold unless the scheme’s units are listed for trading on a securities exchange.