SEC Memorandum Circular No. 33 series of 2020

This Accounting Alert is issued to circulate the new circular by the Securities and Exchange Commission (SEC) on the amendments to the implementing rules and regulations of the Invesment Company Act, as amended, under SEC Memorandum Circular (MC) No. 33-2020.

Overview

The SEC amended the implementing rules and regulation of the Investment issued on December 19, 2017 to align with global standards and practice in order to develop the Philippine capital markets and help prepare investment companies qualify and compete in international cross-border transactions. The amendments below were also issued to update for relevance, clarity, and ease of use by regulated entities, and on account of some procedural matters to ensure adequate protection to shareholders and unitholders.

Amendments

The following rules are hereby amended and promulgated:

Minimum requirements for incorporation with the SEC (Rule 3.4) - An additional affidavit stating that the track record of the fund manager is of at least five years is now required when the investment company is one or part of a group of investment companies.

Qualification of a Fund Manager (Rule 5.1.1) - The minimum paid-up capital of a fund manager of an investment company is now required to be unimpaired at all times and required to have additional unimpaired capital requirement of 0.02% of the excess of P100,000,000,000 of the total asset under management (AUM), which additional capital infusion shall be made within 30 days after the end of the fiscal year of AUM increase. The amount of addition capital requirement is capped at P1,000,000,000.

Responsibilities of a Fund Manager (Rule 5.1.2) - The MC provided additional provisions on funds that cannot be deposited by the fund manager with an independent custodian which includes the following:

a.Investments in deposits

b. Investment in other foreign/domestic collective investment schemes provided that the custodian and transfer agent (if applicable) of the Collective Investment Scheme (CIS) is approved by local regulations or registered/authorized/approved, as the case may be, by a regulatory authority that is an ordinary or associate member of the International Organization of Securities Commissions (IOSCO)

c. Over-the-counter (OTC) derivatives

d. Such other assets as may be allowed by the SEC.

Withdrawal of license as Fund Manager (Rule 5.1.9), and Suspension, Revocation, or Liquidation (Rule 13) - The MC provided new liquidation rules for the withdrawal of a license as a fund manager and procedures for the suspension, revocation, or liquidation of assets of an Investment Company which are reiterated under Rule 5.1.9, and rule 13, respectively. 

Independent Custodian (Rule 5.3.2) - To be considered as independent, the MC provided a threshold of 10% to custodian for owning directly or indirectly number of issued shares in either the investment company and fund manager or vice versa.

Independent Oversight Entity (IOE) (Rule 5.9) - To perform oversight over the fund manager, amendment on rule 5.9 of the MC discusses the requirement to have an Independent Oversight Entity (IOE) which shall function as an impartial committee or entity tasked to monitor the transactions and functions carried out by the fund manager. The rule also discusses the requirement of consititution and engagement of an IOE, and its roles and responsibilities.

Independent Net Asset Value Calculator (Rule 5.10) - Appointment of an independent entity by the investment company that will calculate or cross-check its net asset value (NAV) every dealing day which may be the custodian bank, trust entity, external auditor, audit committee or other service providers capable of calculating the NAV is now required. Rule 5.10 also discusses two requirements for the NAV calculator to be considered independent. An investment company may engage for this purpose its Audit Committee acting as IOE, provided that it is capable of calculating the NAV, and other service providers capable of calculating the NAV, provided that they are not affiliated with the investment company and fund manager.

Additional Rules on Money Market Funds (Rule 6.9) - Amendment on Rule 6.9 emphasizes high quality market instruments for an investment option. The amendment also provided guidance and criteria for a money market instrument to be considered high quality instrument. Further, the amendment added financial derivatives for hedging arrangements as an investment option for fund managers. Rule 6.9 further reiterates that the hedging arrangement should:

• not be aimed at generating a return;
• result in an overall verifiable reduction of the risk of the qualifying CIS;
• offset the general and specific risks linked to the underlying being hedged;
• relate to the same asset class being hedged; and
• be able to meet its hedging objective in all market conditions.

Liquidity requirements (Rule 6.10) - The investment company may implement a decreased investment of less than ten 10% of its assets in liquid/semi-liquid assets, provided, however, that it shall submit a notarized liquidity contingency plan, signed by the president of the fund and its fund manager.

Computation and expense ratio of the investment company (Rule 6.11.1) - The computation and expense ratio of the investment company must be disclosed in the quarterly and annual report.

Investment of funds from feeder fund, fund-of-funds, or co-managed funds by the Fund Manager (Rule 7.9) - Rule 7.9 discusses the three requirements for fund manager to invest the funds of the feeder fund, fund-of-funds or co-managed funds to a target fund that is adminstered by the fund manager or its related party/company.

Daily computation and publication of the NAVps/NAVpu (Rule 8.2) - Aside from the publication in atleast two national paper of general circulation, the amendments on Rule 8.2 provided option to publish the net asset value per share/unit of the investment company though its website or industry association, through digital portals such as its website or social media accounts; or post them daily in a conspicuous place at the principal office of the investment company as well as its brnaches or correspondent offices which are designated redemption centers.

Separate booking and recording of shares and units (Rule 11.3) - Under rule 11.3, an investment company offering units of participation may make periodic distribution of income to investors of the fund on a pro-rata basis; provided, that the distribution of income shall be made only from cash received from interest income and/or cash dividends earned after deduction of applicable taxes and expenses. Investment companies issuing units of participation shall also be exempt from SEC MC No.11, series of 2008 or any amendment thereto.

A few other provisions were amended, including revised definitions, classification of investment companies, responsibilities of a custodian, dissemination of prospectus and offering materials, among others. Please refer to the attached memorandum circular for the complete details