SFA 04-N21: Business Conduct Requirements for Corporate Finance Advisors

Winston WONG, GOH Jun Wei (11 May 2023) – On the 23^rd of February 2023, the Money Authority of Singapore (“MAS”) published SFA 04-N21 on business conduct requirements for corporate finance advisers (“Notice”). The Notice, which will come into effect on 1^st October 2023, was issued pursuant to section 101 of the Securities and Futures Act 2001 (“SFA”) and imposed various baseline standards, regulations and requirements for all corporate finance advisors (“CFAs”) to abide by. The Notice warrants the requirements of all CFAs which include all holders of a capital markets services license (“CMS License”) to advise on corporate finance, all people exempted from holding a CMS License under section 99(1)(a), (b) or (c) of the SFA in respect of advising on corporate finance and all their representatives in respect of advising on corporate finance (“CFA Representatives”) who engage with any persons and/or businesses in respect of advising on corporate finance.

The Notice targets two key requirements – General Requirements and Due Diligence Requirements. Highlights of the Notice are set out below.

Implementation

The implementation of the Notice warrants that a CFA must develop and implement policies, procedures and controls to meet all the requirements of the Notice, monitor the implementation of such policies, procedures and controls and periodically consider the need to enhance such policies, procedures and controls and, where necessary, undertake such enhancements.

Next, a CFA must also prepare and maintain records of all data documents and information that are necessary to meet all requirements of the Notice. Where the records relate to a transaction, the records must be retained by the CFA for a period of at least 5 years from the date that the transaction was completed, terminated or otherwise concluded.

Part 1 – General Requirements

Managing Conflict of Interest

The Notice warrants that a CFA must: (a) identify and mitigate any potential or actual material conflict between its interests and the interests of the customer; and (b) disclose, to the extent appropriate, any such conflict to the customer. Such interests include any interest arising from an existing relationship between its customer and any of the following: the CFA, its related corporation, its controlling shareholder, its relevant director, CFA Representatives or specified personnel and/or any other connected person.

In event that a CFA is not reasonably satisfied that it is able to mitigate any material conflict of interest, it must: (a) decline to accept the new engagement (in the case of a new engagement); or (b) cease to give advice on corporate finance (in the case of a transaction that has already been engaged).

A CFA must also identify and mitigate any potential or actual conflicts of interest arising from its involvement in activities in relation to the offering process or the capital markets products offered and any other business in advising on corporate finance.

A CFA must have in place policies, procedures and controls to safeguard the confidentiality of confidential or price sensitive information received by: (a) its relevant directors, CFA Representatives and specified personnel; and (b) experts and third-party service providers engaged by the CFA for any transaction which the CFA is advising on. Such policies, procedures and controls must cover, at minimum, the segregation of work premises between its CFA Representatives, relevant directors or specified personnel and any other persons not directly involved in any of the activities related to advising on corporate finance. There also needs to be the separation of roles involving the giving of advice on corporate finance and any other activities and the restriction of access to confidential or price sensitive information on a need-to-know basis.

A CFA must also have in place policies, procedures, and controls to restrict and monitor dealing in capital markets products by its relevant directors, CFA Representatives and specified personnel for their own account: (a) where such people possess price sensitive or other confidential information relating to such capital markets products arising from their giving of advice on corporate finance to a customer or carrying out activities connected with advising on corporate finance for a transaction; or (b) where such dealing is in conflict with the giving of advice on corporate finance by the CFA to a customer.

Governance and Supervision

The CFA must: (a) ensure adequate oversight by its senior management of its business in advising on corporate finance, including but not limited to the acceptance of an engagement to act as a CFA and the appointment of the transaction team, and any subsequent changes to such appointment; (b) ensure adequate supervision and management of its CFA Representatives; and (c) set out clear and effective reporting lines for escalation of material issues to senior management by its CFA Representatives.

The CFA must also take into consideration the nature, scale and complexity of each transaction and ensure that the CFA Representatives in the transaction team collectively possess the appropriate knowledge, skill and experience to advise on corporate finance for that transaction.

Part 2 – Due Diligence Requirements

General

The Notice states that a CFA must conduct due diligence with reasonable care, skill and diligence, in (a) determining the nature and extent of due diligence work to be performed for a transaction; (b) making an assessment of the accuracy and completeness of any information given, by its customer or other persons in connection with a transaction and conducting appropriate verification of such information; and (c) monitoring, during the transaction, other information obtained and developments in relation to the customer or transaction, that contradict or bring into question the reliability of the information.

Advising the Listing Applicant on Regulatory Requirements

A CFA must ensure that the listing applicant and its directors are informed of their duties and responsibilities under the SFA and the listing rules, relevant to its listing application and to its continuing obligations after admission to the Specified Approved Exchange.

Due Diligence and Senior Management Oversight for Listing Applications

A CFA must consider any material issues identified as relevant for assessment and have reasonable grounds to be satisfied that a listing applicant is suitable for listing. It must also ensure that there is adequate supervision by senior management on the formulation and the implementation of any due diligence plan proposed by the transaction team.

At a minimum, the CFA must, in performing due diligence:

Verify material representations, where applicable, with relevant and credible persons of appropriate authority / appropriate knowledge of the listing applicant and the trustee-manager or manager;
Conduct background checks, where applicable, on the listing applicant, its listing group entities, its controlling unitholders, its trustee-manager or manager, its key executives, and the directors and controlling shareholders of the trustee-manager or manager;
Monitor, during the course of the transaction, any material developments related to the transaction or listing applicant, and assess the impact of such information on the suitability of the listing applicant for listing;
Inspect key physical assets, and interview major business customers and other stakeholders; and
Review relevant underlying records and supporting documents. Obtaining additional information from third-party sources or appointing third parties to perform relevant check, where appropriate.

The MAS understands that there may be extenuating circumstances which prevents a CFA from performing any of the due diligence procedures. In such case, the CFA (a) must take mitigating measures to address all associated risks; and (b) document its reasons for not performing that due diligence procedure and the mitigating measures taken the address the risks.

A CFA may appoint a transaction team to advise on a listing application where such team must identify and escalate reportable matters, including but not limited to material issues relating to non-compliance with the SFA, the Notice, listing rules and other relevant legal and regulatory requirements, conflicting information from a customer or other persons, suspicious circumstances and difficult or sensitive issues that may be prejudicial to the transaction, in relation to the listing application to the senior management of the CFA.

The senior management of the CFA, having examine the bases of all opinions, assurances and conclusions arrived at by the transaction team on the suitability of the listing applicant for listing, must review and approve:

The resolution of reportable matters (if any);
The material conclusions from the due diligence performed by the transaction team for the listing application.

This is on the basis that the senior management must have the appropriate seniority, knowledge, skills, and experiences to conduct the review.

Engagement of Third-Party Service Provider

The Notice asserts that where a CFA engages a third-party service provider to perform any due diligence work, the CFA must satisfy itself that it may reasonably rely on the due diligence performed by the third-party service provider. To ensure this, the CFA must:

Assess independently whether the third-party service provider has the necessary knowledge, skills, experience and resources for the work to be performed;
Clearly set out and assess the scope and extent of the work to be performed by the third-party service provider;
Assess independently the results of the due diligence performed by the third-party service provider to determine whether further due diligence is required; and
Assess independently whether there are material issues, disclosed in the results of the due diligence work, which should be set out in the listing application.

Allegations or Complaint made against a Listing Applicant

The Notice states that where a CFA receives or is made aware of any allegation or complaint against a listing applicant, the CFA must assess whether the allegation or complaint has a material bearing on the accuracy or adequacy of information provided by the trustee-manager, the manager or the listing applicant (as the case may be) or affect the suitability of the listing applicant for listing and, where it does, independently investigate such allegation or complaint.

Relying on Experts

Where any expert is appointed by the listing applicant for the purposes of providing an expert’s opinion in connection with the listing application, the CFA must have reasonable grounds to be satisfied with his/her knowledge, skills, experiences, qualifications and independence. The CFA must: (a) consider the scope of the work to be undertaken by an expert and the resources to be applied by the expert to the engagement are appropriate to achieve the objective of the expert’s engagement; and (b) propose to the customer additional services or due diligence where the CFA is of the view that it is necessary.

The Notice asserts that the CFA must, whenever applicable: (a) review the report critically and compare the information in the report against the entirety of all other information known to the CFA obtained through due diligence and its own knowledge of and experience with; (b) where there are any material discrepancies arising from the report, conduct follow-up investigations to assess whether the information in the expert report can be relied upon and should be incorporated in the listing application; and (c) assess whether material bases, assumptions and qualifications in the report are fair, reasonable and complete.

Admission of the Listing Applicant

The Notice states that a CFA must satisfy himself prior to the submission of the listing application and before the listing applicant’s admission to the Specified Approved Exchange that:

All material issues identified by the due diligence performed have been, or will prior to the listing of the applicant’s admission to the Specified Approved Exchange be, satisfactorily resolved or clearly disclosed in the listing application or the prospectus;
The completeness of information in the listing application;
The compliance of the listing applicant with all the listing rules;
That the listing applicant has established adequate procedures, systems and controls at the point of the listing application and on an ongoing basis thereafter that allows them to comply with the listing rules and other relevant legal and regulatory requirements and provide a reasonable basis for the directors of the listing applicant to make a proper assessment of the financial position and prospects of the listing applicant;
That the directors of the listing applicant collectively have the experience and qualifications to manage the listing applicant’s business and ensure the listing applicant complies with its obligations under the listing rules and other relevant legal and regulatory requirements applicable to the activities of the listing applicant; and
That each director of the listing applicant understands and is competent to discharge his director’s obligations under the listing rules.

Moving Forward

We are confident that the new CFA regulations implemented through this Notice will foster a more accountable relationship between CFAs and businesses aiming to list on SGX. It is felt that time will bolster our view that the regulations are not proportionate to and further Singapore’s position as a highly regarded legal jurisdiction for commerce.

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