SEC issues rules on cross-border investments

The Securities and Exchange Commission (SEC) has issued new rules to enable qualified local investment firms to offer shares of mutual funds and other collective investment schemes (CIS) to retail investors in Malaysia, Singapore and Thailand.

The same rules apply to fund managers from these Southeast Asian neighbors who intend to offer CIS to the domestic market under the streamlined authorization process mapped out by the Association of Southeast Asian Nations (Asean) CIS Framework, one of the initiatives of the Asean Capital Markets Forum (ACMF).

The Philippines is the fourth signatory to the Asean CIS, which seeks to ease the flow of cross-border investments across participating jurisdictions.

The SEC issued on Aug. 16 Memorandum Circular No. 9, Series of 2021 which governs the authorization of an investment company as a qualifying CIS and recognition of a foreign CIS under the Asean CIS Framework.

An investment company and its fund manager may be authorized as a qualifying CIS only if they are duly incorporated in the Philippines and authorized under the Investment Company Act (ICA) and the Securities Regulation Code (SRC) to issue shares to the public.

Only shares will be allowed to be issued by qualified investment companies from the Philippines. Those offering both shares and units are eligible to participate in the framework, but only shares can be offered cross-border, the SEC said in a statement.

Since companies like mutual funds are governed by its own board of directors compared to a unit investment trust fund (UITF), which is a product and not a company, separately incorporated funds are perceived to offer an additional layer of accountability safeguard to investors.

The investment company must be assessed by the SEC to be a qualifying CIS within 21 days from submission of complete documents. The parties involved such as the fund manager and the proposed cross-border offering must be fully compliant with the SRC, ICA, and their respective implementing rules and regulations, as well as provisions of the Standards of Qualifying CIS.

The applicant must demonstrate compliance with both domestic regulations and Standards of Qualifying CIS. In instances where two sets of requirements differ on a particular provision, the stricter requirement must be followed and highlighted as such in the prospectus of the fund.

A foreign CIS may be offered in the Philippines if it is constituted in a member-jurisdiction and is authorized to be offered to the general public of that jurisdiction. The entity must have been vetted by its home regulator as a qualifying CIS and permitted to offer investments in the Philippines.

The operator of the foreign CIS will be required to appoint a Philippine representative in relation to each foreign CIS to be offered, marketed, and distributed in the country. The representative could be a mutual fund distributor, fund manager, or securities broker/dealer with corresponding licenses from the Commission.

The CIS operator is also required to appoint one or more local distributors for the purpose of offering, marketing, or distributing a foreign fund that will be offered in the Philippines. The distributor could be a mutual fund distributor, fund manager, or securities broker/dealer, provided they have at least one certified investment solicitor.

A single entity can act as both local representative and distributor if it possesses all licenses required by the SEC’s memorandum circular.

The SEC may refuse to recognize or approve a foreign qualifying CIS for public offer in the Philippines if said entity had submitted false or misleading information to either the home regulator or the commission, if they were found to be misrepresenting or defrauding investors, or if they had been violating pertinent laws.

Existing provisions under the implementing rules of the ICA and applicable provisions of the SRC will apply to the reportorial requirements of any investment company that will participate in the framework.