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SEC tightens rules on investment firms

By Angelica Y. Yang

THE SECURITIES and Exchange Commission (SEC) has tightened the rules covering investment companies and fund managers, in order to align with global best practices and to better protect shareholders.

SEC Memorandum Circular No. 33 amended the implementing rules and regulations of Republic Act No. 2629 or the Investment Company Act. The circular was published in two newspapers on Dec. 5, and will take effect after 15 days.

Under the new rules, an investment company that is part of an existing group of investment companies under the same fund manager must comply with the minimum subscribed and paid-up capital, which is not less than P1 million.

Investment companies are required to appoint a fund manager with an investment company adviser, but under the revised rules, the additional capital requirement for the licensing of the adviser is now capped at P1 billion. The investment company adviser should also have a paid-up capital of at least P50 million which should be “unimpaired at all times.”

The previous rules required the firm to have a minimum paid-up capital of P50 million and a minimum unimpaired net worth of P50 million, but should infuse an additional unimpaired capital of 0.02% of the excess of P100 billion of its total assets under management.

The SEC also amended the process that companies have to undertake in the event that they failed to hire a new fund manager. If the investment company liquidates its assets due to its failure to hire a new fund manager, its unclaimed assets “shall be placed by the liquidator and/or fund manager in an escrow account for 10 years” or until a time when investors have claimed their investments.

The new rules also focused on the creation of an independent oversight entity (IOE), which would be an impartial committee that would monitor the transactions and functions of fund managers.

“An investment company may constitute its Audit Committee as its IOE or may engage the services of a custodian bank, trust entity or an external auditor to serve as such,” the SEC said.

The SEC also gave more details on hedging arrangements, which must not be aimed at generating returns, meet its objective in all market conditions, and relate to the same asset class being hedged, among others.

An investment company should have at least 10% of its assets invested in liquid/semi-liquid assets, but the new rules allow it to invest less than 10% “provided it shall submit a notarized liquidity contingency plan.”

Chief Economist of the Rizal Commercial Banking Corp. Michael L. Ricafort said that the approved measures are meant to protect the investing public, and realign the country’s regulations with best global practices.

“The amendments to the Investment Company Act are meant to give greater protection to the investment public more than anything else, especially in terms of promoting greater controls or checks, transparency, liquidity, financial capability or professionalism of fund managers or investment companies, and prudent allocation of funds or investments,” he told BusinessWorld in an e-mail interview.

He added that they are also meant to “better align the country’s regulations with the rest of the Asian region as well as with global best practices.”

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