Legal Updates

1. Introduction

Families with significant wealth would naturally wish to have the means to manage their financial affairs which align with the family’s interests, goals and values. It has gradually become the norm for such affluent families to set up single family offices (“SFO(s)”), which essentially refers to a legal entity created to exclusively manage the assets, investments and long-term interests of a single ultra-high net worth (“UHNW”) family. Unlike a multiple family office which manages the wealth of multiple families, a SFO focuses solely on one family’s needs.

2. Regulatory requirements of a SFO in Malaysia

Generally, it is provided under the Capital Markets and Services Act 2007 (“CMSA”) that a person carrying out any of the following regulated activities is required to obtain a capital markets services licence from the Securities Commission Malaysia (“SC”):

• Dealing in securities;
• Dealing in derivatives;
• Fund management;
• Advising on corporate finance;
• Investment advice;
• Financial planning;
• Dealing in private retirement schemes; and
• Clearing for securities or derivatives.

The nature of a SFO typically involves the carrying out of certain regulated activities such as fund management or financial planning. Notwithstanding, the SC had on 23 September 2024 clarified via its media release and FAQ that a SFO may be exempted from such licensing requirements if the SFO can demonstrate that the regulated activities undertaken are for the benefit of a single family office vehicle (“SFOV”), which is a related corporation of the SFO.

To constitute a SFOV, it must be established solely for the purposes of holding the assets, investments and long-term interests of members of a single family, and must be wholly-owned or controlled by that single family. A “single family” is clarified by the SC in the FAQ to mean individuals who are lineal descendants from a single ancestor, including the close relative of the individual.

The diagram below is an illustration of the relationship between an SFO and an SFOV:

In Malaysia, persons who intend to operate recognized markets such as digital asset exchanges, equity crowdfunding platforms or peer-to-peer financing platforms, must apply to the Securities Commission Malaysia (“SC”) to be registered as a recognized market operator (“RMO”) and comply with the relevant requirements under the Guidelines on Recognized Markets first issued on 11 December 2015 (“RM Guidelines”).

As a recap of the revisions made to the RM Guidelines thus far this year, this article highlights the following key amendments introduced by the SC on 6 February 2024 and 19 August 2024 respectively:

Key Amendments to the RM Guidelines introduced on 6 February 2024

1. Definition of “Sophisticated Investors”. The definition of “sophisticated investors” has been amended to refer to the SC’s Guidelines on Categories of Sophisticated Investors (“SI Guidelines”) in place of Part 1 of Schedules 6 and 7 of the Capital Markets and Services Act 2007. The SI Guidelines were revised on 5 February 2024 to expand the criteria for sophisticated investors. Key features of the expansion include a new category that takes into account the knowledge and experience of sophisticated investors. This new category is set to benefit those who may not meet financial tests, but have the financial knowledge to participate in relevant market offerings.

2. Pre-consultation with the SC. A new Paragraph 2.04A has been introduced to impose a mandatory requirement on an applicant to consult the SC before submitting an application and to provide the SC with sufficient information and documentation to ensure a meaningful discussion.

3. Validation by a third-party validator. A new Paragraph 3.01(p) has been introduced requiring an applicant to submit a validation by a third-party validator as to whether the operational policies and procedures of the RMO are in compliance with the relevant SC’s guidelines. Appendix 3 of the RM Guidelines sets out the requirements for engaging a third-party validator, one of which being that the appointed third-party validator must be an auditor registered under the Audit Oversight Board. As of 31 August 2024, there are 386 auditors registered under the Audit Oversight Board.

4. Mandatory submission of documents for full operationalisation. The submission of the documents set out in Paragraphs 3.04(a) and 3.04(b) which was previously a discretionary requirement by the SC is now a mandatory requirement. In essence, the documents required to be submitted to the SC before the RMO is allowed to fully operationalize the recognized market are as follows:

• a written declaration by the RMO’s board and responsible person in the format set out in Schedule 1 confirming the matters set out in Paragraph 3.04 (a); and

• a copy of the finalised rulebook which complies with the relevant SC’s guidelines.

5. Key Persons. The SC has introduced new and additional obligations relating to directors, responsible person, senior management and compliance officer of a RMO, as follows:

• in addition to notifying the SC of the appointment and reappointment of a director, a RMO must also notify the SC of the redesignation or vacancy of a director;

• the appointment of a responsible person must be on a full-time basis and a RMO must ensure that its responsible persons are fit and proper;

• a RMO must ensure that an individual appointed to fulfill any position within its senior management is fit and proper and has the necessary professional skills; and

• a RMO is now required to appoint a dedicated compliance officer on a full-time basis and such compliance officer must be fit and proper.

Any notification in respect of the appointment, reappointment, redesignation or vacancy of the key persons as required under Chapter 4 of the RM Guidelines shall be on an immediate basis, followed by submission of the relevant forms within 14 days of the relevant event.

6. Terms and conditions and directions by the SC. The terms and conditions imposed by the SC in registering a RMO may now include terms and conditions prior to the operationalisation of a RMO’s platform or on-going terms and conditions.

7. RMO’s obligations. Obligations of a RMO in Paragraph 6.01 have been expanded. In summary, the RM Guidelines further require a RMO to:

• establish, implement and maintain processes to protect clients’ funds in the event it is unable to carry out its operations;
• conduct an audit at least once every 3 years;
• establish controls and approval processes in relation to changes made to the RMO’s operating systems;
• deal with clients’ complaints and disputes in a fair and timely manner;
• communicate with the SC and other regulators in an open and professional manner;
• provide the SC with the documents when requested;
• carry on its activities with proper safeguards in place;
• establish, maintain and review the effectiveness of the controls, policies and procedures to ensure compliance with the RM Guidelines.

8. Cessation of Business Operations. The SC has clarified that the cessation of business operations of a RMO shall not take effect until the SC is satisfied that adequate arrangements have been made to meet all outstanding liabilities and obligations of the RMO.

9. Minimum financial requirement for a RMO operating an equity crowdfunding platform (“RMO-ECF”). The SC has introduced a new financial requirement for RMO-ECF applicants, mandating a minimum paid up capital of RM5 million. Previously, no minimum financial threshold was imposed on RMO-ECF applicants.   

10. Digital asset exchange (“DAX”) operator offering separate trading models. To further safeguard client’s assets, a DAX operator offering separate trading models is now required to maintain separate digital asset wallets for its client’s asset under each of the respective models.

11. New Appendices and Schedule. The following appendices and schedule have been added to the RM Guidelines:

• Appendix 1 – List of Forms and Documents to be submitted to the SC by an applicant or a RMO
• Appendix 2 – Fit and Proper Criteria
• Appendix 3 – Categories of Persons Eligible to be a Third-Party Validator
• Schedule 1 – Template for the declaration on system and operational readiness

Key amendments to the RM Guidelines introduced on 19 August 2024

The RM Guidelines were further revised to ensure alignment of requirements and terminology with the revised Guidelines on Technology Risk Management (“TRM Guidelines”). For instance, in the event of any technology incident, cyber incident or near miss event, a recognized market operator (“RMO”) must immediately notify and submit a report to the SC in accordance with the applicable provisions of the TRM Guidelines.

Perspective

The amendments to the RM Guidelines mark a pivotal development in the regulatory landscape for RMOs, primarily through the introduction of a requirement for applicants to obtain validation from a third-party validator, ensuring that their proposed operational policies and procedures meet the relevant SC’s guidelines. This validation process is intended to streamline and expedite the application process for RMO registration.

Undoubtedly, the revised RM Guidelines have imposed higher standards on both existing RMOs and new applicants. For existing RMOs, the amendments necessitate a thorough review and realignment of their current operational framework to ensure that the amendments are complied with.