RESP 10 – Rules, Ethics, Skills and Product Knowledge for REIT Management

Under the guidelines on criteria for the granting of CMS license, the MAS may grant an applicant (who did not satisfy all the requirements et-out in paragraphs 3.1 to 3.20) a CMS license given that another license conditions will be imposed. The applicant will need to procure a banker’s guarantee, PII, or Letter of Undertaking at the time of application as per with the SFA section 88.

As regulated on the SFA under the Disclosure of Interests, the listed issuer defines as:
a. a company any or all of the shares that are listed for quotation on the official list of a securities exchange
b. a corporation (which is not a company, or a corporation constituted as CIS) any or all of the shares that are listed for quotation on the official list of a securities exchange
c. a registered business trust any or all of the units in which are listed for quotation on the official list of a securities exchange
d. a recognized business trust any or all of the units in which are listed for quotation on the official list of a securities exchange
e. a real estate investment trust

In the proposed amendment of the REITs’ requirements, the REITs are currently given a 45% leverage limit to ensure of not over-extending themselves of acquiring highly geared property. The REITs practice of maintaining a 5% buffer from the regulated 45% limit in order to have a better response on the changing market conditions like declining property prices.

MAS requires REIT managers to obtain PII. According to guidelines, the amount of PII deductible of the applicant should not exceed 20% of its base capital. Under paragraph 2 in Annex 2, when an applicant carries out the regulated activities of fund management and advising on corporate finance and advising on corporate finance, the minimum PII coverage is cumulative. Also, MAS may consider alternative forms of PII provided that the applicant has assessed the PII without compromising the investors’ interests.

Under 285 section of the SFA, the offer of units in Collective Investment Schemes(CIS) must be authorized or recognized. Also, the offer must be lodged with MAS (the Authority).
As regulated in section 296 (Prescribed Period and Prescribed Day for Registration of Prospectus and Profile Statement), the registration of the prospectus (from the date of its lodgement) will be on any inclusive day between the 7th and 21st day. When an extension is given, the Authority may register a prospectus until the 28th day.
A simultaneous application for authorization or recognition and lodgement registration is not permitted by the SFA. The offerors will be advised to obtain approval of authorization before the prospectus is lodged in case of longer processing time.

Traditionally, in the Collective Investment Scheme (CIS), the participants’ contributions are pooled. Investors hand over the property management to the scheme operator, and it will collectively manage the property with the assets of other participants. The only thing is in the Collectively-Managed Investment Scheme, the participants’ contributions are not pooled.
Both traditional CIS and Collectively-Managed Investment Scheme face the same risks.

As proposed by MAS, to lessen or avoid conflict of interests possibilities to unitholders with Sponsors and REIT managers, the following shall be prohibited:
(a) payment in the form of shares or interests in the Sponsor or its related entities, or (b) linked in any way to the performance of any entities other than the REIT.

Please take note that it is the REIT manager, not the Sponsor, who proposes an appointment to have a review of whether the director had previously worked on the Board of Sponsor. Also, the REIT managers are not listed as entities.

MAS proposed that choosing the members of the Audit Committee (AC) should meet the following requirements:
The AC must comprise only non-executive directors, the majority of whom, including the AC Chairman, should be independent.
Despite no minimum requirement for the number of directors, MAS proposed to have at least three directors on the AC.

According to account feedback from market participants, the MAS made options with underlying conditions on how to enhance the independence requirements wherein the REIT managers should ensure that the majority of the board or at least half or one-third are independent directors.

Second Schedule, particulars included as additional information required for the offer REIT bonds by way of the rights issue, information are as follows:
(a) the particulars of the rights issue
(b-d) the last day and time for the splitting of the provisional allotment, acceptance of and payment, renunciation of and payment by the renouncee for the REIT Bonds to be issued under the rights issue
(e) the terms and conditions of the offer of REIT Bonds to be issued under the rights issue
(f) the particulars of any undertaking from the substantial participants of the Scheme to subscribe for their entitlements
(g) if the rights issue is or will not be underwritten, the reason for not underwriting the issue

Second Schedule, particulars included as additional information required for the offer REIT bonds by way of the rights issue, information are as follows:
(a) the particulars of the rights issue
(b-d) the last day and time for the splitting of the provisional allotment, acceptance of and payment, renunciation of and payment by the renouncee for the REIT Bonds to be issued under the rights issue
(e) the terms and conditions of the offer of REIT Bonds to be issued under the rights issue
(f) the particulars of any undertaking from the substantial participants of the Scheme to subscribe for their entitlements
(g) if the rights issue is or will not be underwritten, the reason for not underwriting the issue

The REIT manager needs to explain clearly the reason why he did not set a committee for both remuneration and nominating. For the non-establishment of nominating and remuneration committee, the REIT manager’s annual report should show (a) the criteria and process for selecting and appointing new directors and for reviewing the performance of and re-electing existing directors, and (b) the process for developing policies on remuneration and determining remuneration packages for directors and executive officers.

The holder of a license for product financing must impose a margin from customers not equal or lesser than 110% and don’t exceed 300% of the debit balance of the margin account. In case that the customer’s margin account is 110% of the debit balance, the customer will be given two business days to increase its equity in the margin’s account.

As regulated by SFA, the holder of a license should not cause or permit to go beyond the limit of its aggregate resources. Failure to comply with the requirement, the holder must notify both the Authority and the approved exchange or approved clearinghouse.
When the aggregate indebtedness exceeds 600% of aggregate resources for five or more consecutive business days, the licensee must submit the following statements: assets and liabilities, financial resources, total risk requirements, and aggregate indebtedness, weekly or at other intervals until the aggregate indebtedness would equal or less than the aggregate resources for eight consecutive weeks.
The holder must notify the Authority about the transfer of all or part of any customer’s positions, margins, collateral, assets, and accounts to one or more other holders of licenses.

From the Securities and Futures (Licensing and Conduct of Business) Regulations, a lodgment fee is payable for the notification of intent to appoint a representative wherein; each representative pays a lodgement fee only once. A single annual payment is payable by an appointed representative, regardless of the number of different activities that he or she conducts, and the capital markets products or services he or she provides under the same principal. For appointed representative that acts for two related principal, he or she will pay the set-out lodgment and annual fees for his or her appointment under each principal.

On the Notice is issued under section 101 of the Securities and Futures Act (Cap. 289) [the “Act”] and applies to all holders of a capital markets services licence for real estate investment trust management (REIT managers), a REIT manager should diclose the following:
– remuneration policies and its remuneration setting procedures of directors and executive officers in the annual report of the REIT
– the remuneration of directors and executive officers are: (a) paid in the form of shares or interests in the controlling shareholder or its related companies; or (b) linked (directly or indirectly) to the performance of any entity other than the REIT
– include in the annual report: (a) the remuneration of its chief executive officer and each director on a named basis; (b) the remuneration of at least its top five executive officers (which shall not include the chief executive officer and executive officers who are directors), on a named basis, in bands of S$250,000.

If a REIT manager does not wish to or is unable to comply with providing the necessary information, the REIT manager explain its non-compliance in the annual report of the REIT.

If the representative remains with the same principal, no lodgment fee will be charged to the representative for the notification of intent to add regulated activities or additional types of capital markets products under the SFA or to provide additional type(s) of financial advisory service or investment product under the FAA.
Additional annual fees would depend on the principal of the appointed representatives whether to add or not for the addition of any regulated activity.

Based on the guidelines set out in the disclosures related to remuneration of directors and executive officers, wherein any directors or executive officers are paid n the form of shares or interests in the controlling shareholder or its related entities or linked (directly or indirectly) to the performance of any entity other than the REIT, the disclosures should comprise:
(a) explanation of the basis of the compensation and its long-term interests of the REIT and its unitholders, and why this will not result in the directors or the executive officers prioritising the interests of such controlling shareholder or such related or other entities over that of the REIT and its unitholders
(b) set out the mitigating measures put in place to address potential conflicts of interest arising from such form of compensation
(c) factors taken into consideration in determining the mix of different forms of remuneration for directors and executive officers respectively and the relative importance of such factors

Failure not to contain false or misleading statements for the offer information statement means that a person made the statement without having reasonable grounds for making the statement.
On the other hand, a person should not be taken not to have complied with false or misleading statements if:
– the false or misleading statement, or the omission to state any information or new circumstance, is not materially adverse from the investor’s point of view
– the person proves that he publicly withdrew his consent to being named in the offer information statement in that way
– the person proves that he (a) made all inquiries (if any) that were reasonable in the circumstances; and (b) after doing so, believed on reasonable grounds that the statement was not false or misleading
– the person proves that he placed reasonable reliance on the information given to him by an entity, a director, or equivalent person or an employee or agent, of the entity or (b) an individual, someone other than an employee or agent of the individual
– the person proves that he was not aware of the matter

Please take note that loss control is also known as loss prevention. It means that a firm or company need to lessen or reduce any possible or particular risk. The loss control technique applies to risk that can retain and involve in upfront investment and or ongoing cost. An example of the loss control is when a company dealing with hazardous material may lessen the chances of worker injuries through a comprehensive safety program.

Without proper and active management of risks, it will cause financial uncertainty to companies or firms. Actively managing the risks will prevent any financial distress or weakness that might include a higher cost of capital, poorer supplier terms, lower liquidity, and departure of key personnel. Also, it helps to lower inconsistent cash flow and minimize the disruption of investment plans. Underinvestment possibilities are lesser in the firm, and it will stabilize revenue streams and create more stable earnings.

Please note that the absence of active risk management might cause affliction of shareholders, creditors, and other stakeholders who might economically be impacted.

Risk pooling or the practical implementation of diversification, which seeks to lower risk by combining correlated exposures. It is a fundamental mechanism of the risk management markets that could reduce the overall level of risk. Risk pooling may reduce risks if expected losses are not correlated, but there will be a standard deviation reduction. Risk pooling and risk transfer are mutually dependent, but the former is a risk reduction method for uncorrelated events.

There is no specific or exact time to determine when ART has started. It has agreed that the ART market flourished between the late 1960s and early 1970s, and the world’s largest corporate risk managers had established retention and captive programs, new techniques of risk transfer and risk financing began to appear. But the ART has been developing slowly and phase-by-phase. And its core has developed in over 30 years. The face of the ART market will continue to change further in the coming years. ART products and solutions characterize by a high degree of customization and are generally not “commoditized” for a long time. The success of ART depends on a healthy risk management process.

Proportional agreements include reinsurance risks, returns, and losses that are divided or shared between the reinsurer and primary insurer. Also, the premiums, exposures, losses, and loss adjustment expenses based on predefined formula are shared. The benefits of this contract are the following: recovery on small losses, protection of net retentions on a “first dollar lost” basis, and protection against frequent and severe events.

The XOL gives the primary insurer function to write large lines. It protects against high-severity/low-frequency events, which are typically associated with protection against catastrophic exposures. There are variations of XOL cover that exist such as a catastrophic per occurrence, which provides the primary insurer with cover for adverse loss experience from an accumulation of catastrophic events that have incremental deductible and coinsurance. Another is property per risk that gives the primary insurer with cover for any excess of loss of the specified retention on each type of risk. Then the stop loss which designed to protect overall underwriting results after accounting for other forms of reinsurance, and provide indemnification for incurred excess losses of a specified loss ratio or dollar amount. An aggregate agreement is providing a cover for a large number of small losses arising from multiple policies, which all occurring in the same year, to a primary insurer.

Please remember that such buffers are crucial, for instance, declining property prices. The need to maintain such a buffer means that REITs would generally keep their leverage to within 40%. Given this, it is strongly indicated that REITs be afforded a higher leverage limit so that they have more flexibility to optimize their capital structure as debt tends to be a cheaper source of capital compared to equity and takes less time to raise.

Bear in mind that the tenant profile of the property fund’s real estate assets should also include the top 10 tenants and the percentage of total gross rental income attributable to each of these top 10 tenants. As well as the trade sector mix of tenants, in terms of the percentage of total gross rental income attributable to major trade sectors.

Bear in mind that aside from the answer in the question above, some of the factors that can facilitate or hamper risk regulation are funding and balance-sheet structure, types of investments and assets, sources of funding, duration of assets and liabilities. As well as ability to participate directly or indirectly in reinsurance (some may argue that loan trading is a form of reinsurance). And finally, the nature of the entity’s asset-liability management and investment management.

Don’t lose track of the insightful detail that the tenure cost differential is conjectured to vary drastically when calculated on a monthly and yearly basis. This is because of the frequency/amount of income, disposable income, the timing of required payments, applicable penalties for breach of lease or mortgage, and so on. The tenure cost differential is positive if it costs more to rent than to own, and vice versa.