Proposed Regulatory Framework for Trustees and Custodians

October 2016
by Wong Mei Ying, Yoon Ming Sun

The information in this article is intended only to provide general information and does not constitute professional advice or legal opinion.

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.

The Securities Commission Malaysia (“SC”) issued a public consultation paper on 12 October 2016 to seek feedback on a proposed regulatory framework for trustees and custodians as capital market service providers under section 76A of the Capital Markets and Services Act 2007 (“CMSA”). The SC recognises the significant role played by trustees and custodians in maintaining investors’ trust in the capital market by safeguarding investors’ assets and interest.

Under the existing regulatory framework, the duties of trustees in respect of debentures, unit trust and prescribed investment schemes are set out in the CMSA. The CMSA also sets out the role of custodians in the context of the fund management businesses carried on by holders of Capital Markets Services Licences (“CMSLs”).

The Proposed Regulatory Framework

The SC proposes a regulatory framework for persons providing trustee or custodial services in Malaysia, which is divided into two parts:

  • Registration framework.
  • Roles and responsibilities of board of directors and key personnel.

Registration Framework

(a) Proposed categories of trustees and custodians that require registration
     The SC proposes registration requirements for any entity providing the following services

  • trustee services for a unit trust scheme, private retirement scheme, bond or sukuk;
  • custodial services appointed by a CMSL holder for assets held within or outside
  • Malaysia (foreign custodians appointed by a CMSL holder for assets held outside Malaysia are included); or
  • custodial services appointed by clients for assets held within Malaysia (foreign custodians appointed by clients to carry out custodial services in foreign jurisdictions are excluded).

(b) Shareholders’ fund and paid-up capital

In Malaysia, trustees for bond, unit trust scheme and private retirement scheme are currently required to have a minimum shareholders’ fund with a minimum issued and paid up capital as follows:

Entity

Issued and paid up capital (RM)

Shareholders’ funds (RM)

Unit trust scheme

Not less than 500,000

Not applicable

Debentures/bond

Not less than 500,000

1,000,000

Private retirement scheme

Not less than 500,000

1,000,000

Custodians

Not applicable

Not applicable


The SC proposes a minimum issued and paid up capital and shareholders’ fund of RM1 million for registered trustees and custodians, which is higher than the current issued and paid up requirements. The SC also proposes for the current requirement on shareholders’ fund, which is RM1 million for debentures/bond and private retirement scheme, to be applicable to trustees and custodians.

(c) Professional indemnity insurance

The SC proposes that trustees and custodians must maintain a professional indemnity insurance (“PII”) that commensurate with the nature, activity, complexity and risk of its business.

(d) Compliance and Internal Audit Functions and Risk Management Framework

It is proposed that:

  • Trustees and custodians seeking to register under the proposed framework should satisfy the SC that it has an effective compliance and internal audit function in place.
  • The board of the trustees and custodians has in place a robust risk management framework.
  • The compliance function should ensure that all legal and regulatory requirements are complied with.
  • Internal audit function will be responsible for providing independent assurance on the effectiveness of the internal controls.
  • The risk management framework should be able to identify, assess, monitor and respond to all material risk to the business and ensure regular reporting to the board of the trustees and custodians.

(e) Fit and proper requirements

It is proposed that entities registered under the proposed regulatory framework and their key personnel should be fit and proper persons.

Roles and Responsibilities of Board of Directors and Key Personnel

The consultation paper also sets out the proposed roles and responsibilities of the board and senior management of the trustees and custodians. In summary:

  • The board must be primarily accountable to ensure operational sustainability and financial soundness of the trustees and custodians.
  • The senior management of the trustees and custodians are primarily responsible for day to day operation and management of the business.
  • The CEO or its equivalent is proposed to be appointed as a “Responsible Person” who will be the main person to liaise with the SC and notify the SC of any material change to the information submitted to the SC within seven working days from the date of such change.

Treatment of Existing Trustees

It is proposed that existing trustees approved under sections 260 and 289 of the CMSA shall be treated as having been registered under the new framework without the need to submit a new application, subject to the payment of fees. Existing trustees will be subject to the requirements under the proposed framework when it comes into force and will have one year to comply with the requirements in relation to compliance and internal function audit and risk management framework.

The consultation paper is available on the SC’s website at https://www.sc.com.my/home/consultation-papers-response-papers/


The information in this article is intended only to provide general information and does not constitute professional advice or legal opinion.

@2018 Chooi & Company + Cheang & Ariff.
All rights reserved.