1. Background
Corporate finance (CF) advisers, in particular issue managers, have an important role as gatekeepers of quality for the Singapore capital markets. CF advisers are responsible for conducting due diligence on the issuer and providing guidance to the issuer to ensure disclosures are accurate and complete in all material aspects.
As part of the ongoing efforts of the Monetary Authority of Singapore (MAS) to improve industry standards, the MAS has issued a consultation paper proposing to enact a new notice (New Notice), essentially codifying regulatory requirements on the conduct of due diligence by CF advisers. The consultation will close on 15 February 2022.
It is proposed that the New Notice will apply to CF advisers who are holders of a capital markets services (CMS) licence and banks, merchant banks and/or finance companies that undertake the regulated activity of advising on corporate finance but are exempt from holding a CMS licence.
2. Overview of New Notice
Under the New Notice, CF advisers are required to:
(i) develop and implement a governance framework for the performance of due diligence, monitor its implementation and enhance it, as necessary from time to time;
(ii) act with due care, skill and diligence when performing due diligence; and
(iii) keep records of the due diligence work performed
Since IPOs involve public fund-raising, CF advisers acting as issue managers for IPOs are subject to additional requirements. They must:
(i) advise and guide listing applicants on regulatory requirements;
(ii) assess whether, and be satisfied that, listing applicants are suitable for listing;
(iii) ensure that there is an independent review of the due diligence performed; and
(iv) be satisfied that third parties or experts involved in the IPOs are suitably qualified to perform the work and that the CF advisers’ reliance on the work or opinions of these persons is reasonable.
These requirements would also be applicable to CF advisers advising on reverse takeovers (RTOs) and very substantial acquisitions (VSAs), as these transactions result in significant changes to the business of the publicly listed entity.
It is proposed that the requirements will be calibrated, with materiality thresholds for key requirements:
(i) Governance and supervision
An adequate framework must be in place for senior management to have oversight of matters including a proposed due diligence plan for each specific transaction, and any material departures from such due diligence plan.
CF advisers are subject to an obligation to report to senior management material issues relating to the matter at hand, encompassing any material non-compliance with the legal and regulatory requirements, conflicting information, suspicious circumstances, or difficult or sensitive issues that arise.
(ii) Identifying and managing conflicts of interest
CF advisers are required to identify, disclose to their customers and mitigate potential, actual or perceived material conflicts between the interests of their customers, and their own interests or those of the relevant corporate entity.
(iii) Record-keeping
Records of the grounds for the opinions, assurances and conclusions that form the basis of any transaction have to be kept and properly maintained to the extent that these are material to the transaction, including internal discussions and any actions taken prior to these opinions and assurances being given or conclusions being reached.
(iv) Assessment of suitability for listing
CF advisers must assess whether, and have reasonable grounds to be satisfied that, listing applicants are suitable for listing, taking into account any material issues identified as relevant to the assessment.
3. Our thoughts
Requirements on the conduct of due diligence by CF advisers are presently found in the listing manual published by the Singapore Exchange, which requires CF advisers to take into account the due diligence guidelines issued by the Association of Banks in Singapore (ABS Due Diligence Guidelines). The ABS Due Diligence Guidelines do not, however, have the force of law, nor are they otherwise legally binding on CF advisers. Notices published by MAS, on the other hand, have the force of law, and penalties and sanctions meted out for any non-compliance can range from warnings or reprimands (private or public), to suspension or even revocation of licences, and so have greater bite and deterrent effect.
The proposal to refine the regulatory framework for CF advisers is in line with other leading jurisdictions. In Hong Kong, for instance, the Securities and Futures Commission has published a “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” which has broadly similar requirements on sponsors (i.e., issue managers), among other licensed persons. The Securities and Futures Commission also publishes, from time to time, examples of due diligence failures as a reminder and guide to market practitioners. CF advisers and other market practitioners are expected to monitor developments in relation to the consultation of the New Notice, and update and/or refine their internal governance frameworks and policies, procedures and practices to keep them in line with the requirements of the New Notice (when published).
Regulatory frameworks are updated and refined from time to time to keep up with and even pre-empt market developments. It is timely that such measures are proposed with the suite of new listing initiatives put forward by the Singapore Exchange recently, such as the new framework for the listing of special purpose acquisition companies (SPACs) and the possibility of listing variable interest entities (VIEs) with appropriate safeguards.
Reed Smith is a dynamic international law firm dedicated to helping clients move their businesses forward. We are equipped with a global capital markets practice spanning leading jurisdictions. In Singapore, our financial regulatory practice, and capital markets and corporate M&A teams work seamlessly to advise financial institutions and other capital markets participants on regulatory compliance and transactional requirements.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2022-001
