INTRODUCTION
The Capital Markets and Services Act 2007 (CMSA) introduces a licensing regime for capital market intermediaries. Under this regime, a capital market intermediary will need a licence to carry on the business in fund management activities.
Licensing ensures an adequate level of investor protection, including the provision of sufficient safeguards to protect investors from default by market intermediaries or problems arising from the insolvency of such intermediaries. More importantly, it instills confidence among investors that the organisations and people they deal with, will treat them fairly and are efficient, honest and financially sound.
Through its authority to issue licences, the Securities Commission Malaysia (SC) regulates the market by ascertaining the fitness and propriety of companies and individuals applying for licences. In considering whether an applicant is fit and proper to hold a licence, the SC takes into account the following factors:
Probity
Ability to perform such functions efficiently, honestly and fairly
Financial status
Reputation, character, financial integrity and reliability
LICENCES UNDER THE CMSA
What is a CMSL and a CMSRL?
The CMSA provides for two types of licences:
CMSL, which entitles an institution to carry on the business in any one or more regulated activities; and
CMSRL, which entitles an individual to carry on any one or more regulated activities on behalf of his principal.
Only a holder of a CMSL or a CMSRL can carry on any of the regulated activities that the CMSL or CMSRL permits.
Obligations on anniversary of licence
Both CMSL and CMSRL are valid in perpetuity. However, licensed persons will continue to have obligations on the anniversary of their licences.
Licences for fund management in relation to portfolio management
Portfolio management
If you carry on the business of fund management in relation to portfolio management, a licence for fund management in relation to portfolio management will be granted to manage a portfolio of securities or derivatives or a combination of both.
Portfolio management – digital investment management
If you carry on the business of fund management incorporating innovative technologies into your automated discretionary portfolio management services offered to your clients, you will be granted a licence for fund management in relation to portfolio management as a digital investment manager.
Portfolio management – boutique portfolio management
If you carry on the business of fund management in relation to portfolio management that–
(a) manage assets of not more than RM750 million;
(b) only deal with sophisticated investors; and
(c) has total number of clients which does not exceed 50, and where such clients are funds or collective investment schemes, the maximum number of such funds or collective investment schemes is 15,
you will be granted a licence for fund management in relation to portfolio management as a boutique portfolio manager.
Guidance on portfolio management
A holder of a CMSL for fund management in relation to portfolio management including digital investment management company and boutique portfolio management company may provide investment advisory services to its clients, pursuant to an advisory mandate.
LICENSING CRITERIA
Fit and proper
Persons who apply to be licensed under the CMSA must be fit and proper. In assessing if you are fit and proper, we refer to the following criteria:
Your organisational requirements;
Your shareholding composition;
The adequacy of your financial resources; and
Requirements relating to representatives' competencies.
Every CMSL applicant will be required to submit its business model and scope of activities that it plans to carry on.
What are the requirements for a CMSL?
Organisational requirements
Incorporation
If you want to carry on fund management activities, you must be a company incorporated in Malaysia.
Member of an alternative dispute resolution body
CMSL holders are required to be a member of an alternative dispute resolution body (ADR body) that is approved by the SC.
A CMSL holder that is a member of an alternative dispute resolution body must comply with the rules of the ADR body.
Audit Oversight Board
As a public interest entity, CMSL holders are required to engage auditors that are registered with the Audit Oversight Board.
Capital Market Compensation Fund
Holders of a CMSL are required to contribute to the Capital Market Compensation Fund in accordance with the Capital Markets and Services (Capital Market Compensation Fund) (Contribution) Order 2012.
Organisational competence
As a CMSL applicant, you must ensure that your business is properly established, which includes the following:
An organisational structure with clear lines of responsibility and authority;
Necessary IT systems and infrastructure including policies and procedures for IT audit as well as plans for continuous investment in systems development and security system;
Adequate internal control systems;
Risk management policies and procedures, including having in place a business continuity plan and processes;
Policies and procedures on conflict management, anti-corruption, whistleblowing, and the monitoring of unethical conduct and market abuse that are appropriate to the nature, scale and complexity of its business; and
Policies and procedures to ensure compliance with applicable laws and regulations.
Guidance to subparagraph 4.02(3)
The policies and procedures on anti-corruption should be guided by the Guidelines on Adequate Procedures issued pursuant to subsection 17A(5) of the Malaysian Anti-Corruption Commission Act 2009.
If you are applying for a CMSL to carry out digital investment management activities, you must ensure that you have technology capabilities and support to undertake the digital investment management business. You must–
(a) have sufficient understanding of the rationale, risks and rules behind the algorithm underpinning the digital investment management business;
(b) ensure at all times the outcomes produced by the algorithm are-
(i) consistent with the digital investment management company’s investment strategies;
(ii) commensurate with the risk profile of the investor; and
(iii) compliant with securities laws and relevant guidelines;
(c) have the system to support the digital investment management business which includes maintaining a secure environment pursuant to the Guidelines on Management of Cyber Risk and other relevant guidelines.
In situations where you want to carry on more than one regulated activity, you must demonstrate that you have–
(a) the requisite system and procedures to monitor all relevant activities within your organisation; and
(b) control procedures in place to monitor any conflict of interest, unethical conduct and market abuse.
As part of the business model and scope of activities to support the application for a CMSL, the following may also be required:
(a) Value proposition of the business model;
(b) Investments in creating investor awareness, product understanding and development of the industry; and
(c) An independent report on operational and systems readiness.
Digital value proposition
In addition to the above, if you carry on the activity of digital investment management, you must also comply with the digital value proposition, which includes, but is not limited to, the following:
(a) Digital business model
The business model must have a clear value proposition that demonstrates how digital innovations can deliver positive outcomes to its target investors and any other target beneficiaries.
(b) User-centric delivery
Delivery of services to target investors and any other target beneficiaries must include user-centric interface and experience, integrated investor education on the services offered to create greater confidence, trust and engagement, and transparent fee structure.
(c) Automated investment proposition
Automated proposition must involve core components of portfolio management services including risk profiling, suitability assessment, asset allocation and rebalancing. Applicants may not be eligible if only limited parts or only non-core parts of the investment service are automated.
Fit and proper requirements for directors, chief executive, managers and controllers of a CMSL applicant
General requirements
Your directors, chief executive, managers and controllers must be fit and proper.
Requirement for director to attend the Capital Market Director Programme (CMDP)
Directors of CMSL holders for dealing in fund management in relation to portfolio management must complete the CMDP.
Newly appointed directors must complete CMDP within six months from the date of their appointment.
Requirement for licensed director
You must have at least one director who–
(a) has a minimum of 10 years of relevant experience in the licensed regulated activity;
(b) holds a CMSRL for the regulated activity; and
(c) must be approved by the SC prior to undertaking the function as a licensed director.
The requirement in subparagraph 4.02(17) is not mandatory if you are a boutique portfolio management company.
If you are licensed for digital investment management, your director is required to have a minimum of five years of relevant experience in fund management and holds a CMSRL for portfolio management.
Requirement for head of regulated activity
If you are licensed to carry on more than one type of regulated activity, then in addition to the requirement of a licensed director, you must also have a person with a minimum of eight years of relevant experience to head each additional regulated activity. The requirement for appointing a head for each regulated activity is to ensure that a person with the necessary skills and expertise will provide guidance and supervision to the representatives carrying on that particular regulated activity.
An individual can be appointed to be the head of more than one regulated activity, provided he is fit and proper, and there is no conflict in him performing such functions. The head must–
(a) hold a CMSRL;
(b) have sufficient authority to supervise the business of the licensed regulated activity; and
(c) be approved by the SC prior to undertaking the function as a head of regulated activity.
Guidance to subparagraph 4.02
If you are licensed to carry on the activity of fund management in relation to digital investment management or boutique portfolio management, you may have a responsible person for compliance instead of a dedicated compliance officer.
Requirement for minimum number of CMSRL holders
You must have at least two CMSRL holders for each regulated activity. If the number of CMSRL holders falls below the minimum requirement of two, you must take immediate steps to recruit a new candidate.
If you are licensed as a boutique portfolio management company and if the assets under management are RM300 million or less, you must have at least one CMSRL holder and that CMSRL holder must be a substantial shareholder and/or director of the boutique portfolio management company.
A CMSRL holder may be licensed for more than one regulated activity, provided he is fit and proper, and there is no conflict in him performing such activities.
Director
You must at all times have a Bumiputera director on your board. However, this requirement does not apply if you are a digital investment management company, boutique portfolio management company or an asset management company.
Representative
You must at all times maintain at least 30% Bumiputera composition of your representatives for your licensed activities. This requirement is not applicable if you are a digital investment management company or a boutique portfolio management company.
Employee
You must at all times maintain a Bumiputera composition of at least 30% of your employees. However, this requirement does not apply if you are a digital investment management company or a boutique portfolio management company.
Readiness assessment
A CMSL applicant is required to undertake a readiness assessment by completing and submitting a readiness checklist to the SC, as the case may be, when applying to be licensed for a regulated activity or to add on another regulated activity.
The readiness assessment may include the applicant's risk management system, capital adequacy, system security, organisational structure, operational manuals, information technology, policies and procedures, internal controls and systems, and procedures for compliance with applicable laws and regulations.
Shareholder composition
There are no specific shareholding requirements for the regulated activities.
If you carry on the regulated activity of fund management in relation to portfolio management, you must also satisfy the following:
(a) You must be a "related corporation" of an entity regulated by the SC or BNM or such other entities as may be approved by SC; or
(b) If you are a company owned by individuals, two of your shareholders whose total shareholding forms the majority (51% or more) in the company must have the requisite track record, as follows:
(i) Each of the two shareholders must have at least 10 years of relevant experience in the capital market; and
(ii) At least one of the two shareholders must have five years of direct experience in fund management in relation to portfolio management activities.
Guidance to subparagraph 4.03(2)
This requirement is a continuing obligation and must be maintained even if there are changes to your shareholders and/or your shareholding composition.
Subparagraph 4.03(2) is not applicable if you carry on the regulated activity of fund management in relation to portfolio management as a digital investment management company.
Adequacy of financial resources
(1) You must satisfy the minimum financial requirements for a regulated activity and any other requirements specified by the SC.
(2) A CMSL holder, regardless of the type of regulated activity that it carries out, must maintain at all times the applicable minimum financial thresholds set out in Table 1.
Table 1: Minimum Financial Requirements for a CMSL Holder
Regulated Activity
Fund management
Minimum Financial Requirement
Portfolio management company
Paid-up capital of RM2 million; and
Shareholders’ funds of RM2 million.
Digital investment management company
Paid-up capital of RM2 million; and
Shareholders' funds of RM2 million.
Boutique portfolio management company
Paid-up capital of RM500,000; and
Shareholders' funds of RM500,000.
Illustration
If you apply for a CMSL to carry on the regulated activities of fund management, the following minimum financial requirements are relevant:
For fund management in relation to portfolio management
Paid-up capital of RM2 million; and
Shareholders' funds of RM2 million.
Clearance on loans and credit facilities
If you intend to carry on the regulated activity of fund management and are a company owned by individuals, you are required to ensure that your shareholders, directors and licensed representatives provide the SC with a declaration that they have satisfactorily maintained their accounts, loans and other credit facilities extended by banks and financial institutions within or outside Malaysia.
The declaration is to be in a format specified by the SC. The SC reserves the right to verify the information provided.
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