Proposed Rules for: (1) Independent Oversight Entity; (2) Qualifications of Key Officers of Fund Managers; and (3) Winding Up of Investment Companies

September 10, 2018 SEC NOTICE TO : All Investment Companies Investment Company Advisers (Fund Managers) Other Entities Dealing with the Investment Company SUBJECT : Proposed Rules for: (1) Independent Oversight Entity; (2) Qualifications of Key Officers of Fund Managers; and (3) Winding Up of Investment Companies All concerned parties are invited to submit their comments and inputs 1 on the abovementioned proposed rules to cgfd(@sec.gov.ph or fax at 818-5990 not later than 17 September 2018 . Issued on September 10, 2018. ATTACHMENT SEC Memorandum Circular No. ___ Series of 2018 TO : ALL INVESTMENT COMPANIES INVESTMENT COMPANY ADVISERS (FUND MANAGERS) OTHER ENTITIES DEALING WITH THE INVESTMENT COMPANY SUBJECT : PROPOSED RULES FOR: (1) INDEPENDENT OVERSIGHT ENTITY; (2) QUALIFICATIONS OF KEY OFFICERS OF FUND MANAGERS; AND (3) WINDING UP OF INVESTMENT COMPANIES DATE : Section 35 (a) of the Investment Company Act (ICA) and Section 72 of the Securities Regulation Code (SRC) vests upon the Commission the authority to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the powers conferred upon it in the ICA and the SRC. For purposes of its rules and regulations, the Commission may classify persons, securities and other matters within its jurisdiction and prescribe different requirements for different classes of persons, securities or matters. CAIHTE To enhance the regulatory compliance of Investment Companies and their Fund Managers and to ensure adequate protection to shareholders and unitholders, the following rules are hereby adopted: I. Independent Oversight Entity (IOE) A. Constitution or Engagement of an IOE An Investment Company may constitute its Audit Committee as its Independent Oversight Entity or may engage the services of a custodian bank, trust entity or an external auditor to serve as such. 1. Audit Committee of the Investment Company as IOE The Audit Committee shall consist of at least three (3) directors of the Investment Company, the majority of whom shall be independent directors. The chair of the committee shall also be an independent director. There should be no interlocking directors between the members of the committee and the directors of its Fund Manager or other parties involved in the operation of the Investment Company. The qualifications of the members of the committee should be such that they are able to fulfill their roles and responsibilities under this Circular. Members of the Audit Committee must have the relevant background, knowledge, skills, and/or experience in accounting, auditing, finance, capital markets and such other related field. Upon the election of directors, the board shall constitute its Audit Committee. The names of those composing the committee shall be reported to the Commission, through a Current Report (SEC Form 17-C) and reflected in the General Information Sheet (GIS), along with the results of the elections. The term of the members of the Audit Committee shall be co-terminus with their term as directors, and shall serve a maximum cumulative term of nine (9) years. No member of the Audit Committee may be removed as such for carrying out his roles and responsibilities under this Circular. All Investment Companies shall perform full oversight over the Fund Manager. Thus, at least fifty percent (50%) of the members of the board of all Investment Companies are required to be independent directors in accordance with Rule 5.1.7 of the Implementing Rules and Regulations of the ICA (ICA IRR). In this regard, the oversight functions of the Investment Company shall be performed by its Board of Directors through its Audit Committee. The Audit Committee shall act as an independent oversight entity. The constitution of the Audit Committee, as well as their roles and responsibilities, should also be reflected in the By-laws of the Investment Company. 2. In lieu of the Audit Committee, an Investment Company may opt to engage the services of a custodian bank or a trust entity as its IOE, provided that the said bank is not affiliated with the Fund Manager or Investment Company. The custodian bank or trust entity shall be duly licensed by the Bangko Sentral ng Pilipinas. 3. As an alternative, the Investment Company may engage an external auditor to act as its IOE. The external auditor, however, should not be the same as the one auditing the Investment Company. B. Roles and Responsibilities The IOE shall exercise its oversight functions which include the following: a. Work with the Compliance Officer and independent accountant or auditors of the Investment Company to monitor if it is being operated in compliance with the laws, rules and regulations, its Articles of Incorporation and By-laws and orders of the Commission. Thus, the IOE should ensure that the Fund Manager, as well as the other parties involved in the operation of the Investment Company, strictly comply with their duties in accordance with what is stated under the law, rules, regulations, Articles of Incorporation, By-laws, disclosures in the Registration Statement and contracts with other parties. DETACa If the securities of the Investment Company are being offered in other economies, the IOE shall, in addition to ensuring the Investment Company's compliance with the Home economy's laws, also ensure compliance with the laws of the Host economy and the mutual/multilateral agreement allowing the cross-border offering. It should, among others, be able to do the following: a. Determine the valuations of investments of the Investment Company; b. Calculate or cross-check the net asset value (NAV), every dealing day; c. Perform oversight functions to ensure that the fund manager, distributor and transfer agent facilitate the subscription and redemption of shares or units; and d. Perform oversight functions to ensure compliance with the rules on investment restrictions/limitations, liquidity requirements and other regulations involving the operationalization of the investment objectives, investment policy or strategy of the Investment Company; b. Ensure that, when the functions of the Fund Manager or custodian are delegated, the fund manager or custodian delegating or outsourcing their functions do not become mere letter-box entities. The Audit Committee shall also ensure that the delegation of functions will not result to unnecessary fees to be paid by the Investment Company; c. Ensure that, during the winding up of the Investment Company, the Fund Manager, together with the custodian, transfer agent and other parties, expeditiously carry out the liquidation of the assets and redemption of the shares and units of the Investment Company. It shall ensure that no stakeholder of the Investment Company is unfairly disadvantaged during the winding up of affairs of the company; d. If, in the reasonable opinion of the IOE, the Fund Manager has not complied with any of the laws, rules or regulations applicable to the Investment Company and/or it failed to report to the Commission the said non-compliance, it shall notify the Commission of its opinion, including particulars of the non-compliance, as soon as practicable, but no later than five (5) days after forming the opinion or upon knowledge of the non-compliance. The notification shall be done by filing a SEC Form 17-C. It shall also notify, without delay, the members of the Board of Directors of the Investment Company of its opinion so that the Board can instruct the Fund Manager of the said non-compliance and remedy any resulting breach; e. The IOE shall report to the Commission, as soon as practicable, but no later than five (5) days from knowledge, any act of the Fund Manager which may be detrimental to the interests of the shareholders or unitholders even if the said act is not in violation of any law, rule or regulation. f. The failure of the IOE to comply with the foregoing shall subject it to a fine of Fifty Thousand Pesos (P50,000.00) for each violation. A fourth (4th) violation of the member shall cause the disqualification of the said member as a director of an Investment Company, Fund Manager, Fund Distributor, and such other related company of the Fund Manager. In employing the necessary people or making such arrangements to enable the IOE to exercise its oversight functions, the personnel must have at least knowledge, skills, and/or experience in accounting, auditing, and finance. The qualifications of the personnel employed by the Audit Committee shall be validated by the Commission. If the Audit Committee makes arrangements with a third party, the assigned personnel will also be validated by the Commission whether the said person meets the minimum requirements enumerated above. C. The IOE has the right to conduct investigations to determine if there are any non-compliance with the laws, rules, regulations, contracts, and other disclosures of the Investment Company and Fund Manager. In this regard, the Fund Manager and other parties involved in the operations of the Investment Company must provide any assistance required by the Audit Committee to enable it to perform its functions. Any person who violates this rule shall be subjected to the payment of a fine of One Hundred Thousand Pesos (P100,000.00). This is without prejudice to other administrative sanctions which may be imposed by the Commission. D. The IOE may recommend to the Board of Directors of the Investment Company that the Fund Manager or any party involved in the operation of the company be removed due to their inability to fulfil their functions. II. Professional Qualifications of Key Officers Responsible for Making Investment Decisions Rule 5.1.1 (i) of the ICA IRR is hereby amended to read: i. Key officers, who are responsible for making investment decisions shall have: aDSIHc i. At least a Bachelor's degree, or its equivalent; passed such licensure exam as may be prescribed by the Commission; and, at least three (3) years experience (in the past 5 years) in fund management and/or related functions; or ii. At least five (5) years experience (in the past 7 years) in fund management and/or related functions. In addition to the experience requirement for each key officer of the Fund Manager responsible for making investment decisions, at least one of them should have completed a certification or professionalization program on fund management and/or other relevant subjects. The program should be recognized globally or locally and acceptable to the Commission. The engagement of such qualified professional, if on a non-permanent basis, shall be subject to prior approval by the Commission. In lieu of these professional qualifications, the key officer/s may also pass the applicable exams. The Commission shall be notified of the appointment or official engagement of the said key officer, through SEC Form ICA-IA, within five (5) days from appointment or official engagement, whichever is earlier. The same procedure and form shall also be applied in cases of disengagement/resignation of the said key officer. III. Winding up of the Investment Company The Fund Manager shall carry out the winding up and liquidation of assets on behalf of the Investment Company. Regardless of whether the effectivity of the Registration Statement and Certificate of Permit to Offer Securities for Sale was voluntarily revoked or not, the Fund Manager must wind up and liquidate the assets within a maximum period of six (6) months from the receipt of the Investment Company of the Order revoking the Registration Statement and its Certificate. In addition to the requirement of Rule 13.1.8 of the ICA IRR, the Fund Manager shall file a monthly report with the Commission, within ten (10) days after the end of every month, on the redemption of securities of the previous month. The report shall include the following: 1. Number of shares redeemed; 2. Names of the shareholders or unitholders whose securities were redeemed; 3. Number of shares to be redeemed; 4. Names and addresses of the shareholders or unitholders whose securities are yet to be redeemed; and 5. The reasons why their securities are not yet redeemed. In cases specified under Rules 5.1.10 and 13.1.2 of the ICA IRR, where the Commission appoints a liquidator to facilitate the liquidation of assets, the liquidator shall be the one to file the report as specified above. The failure of the Fund Manager or the liquidator to comply with any of the foregoing requirements shall result to a fine in the amount of Twenty Thousand Pesos (P20,000.00) for each violation and a monthly penalty of Five Thousand Pesos (P5,000.00) until the report is completed. IV. Transitory Provision All Investment Companies must comply with the foregoing within two (2) years from the effectivity of this Circular . However, all Investment Companies who will offer their securities in foreign economies must comply with the same immediately to qualify for cross-border trading of securities. V. Effectivity This Circular shall take effect within fifteen (15) days after its publication in two (2) newspapers of general circulation. Pasay City, Philippines, _______ 2018. ETHIDa For the Commission: EMILIO B. AQUINO Chairperson Comments and Inputs Sheet PROPOSED RULES FOR: (1) INDEPENDENT OVERSIGHT ENTITY; (2) QUALIFICATIONS OF KEY OFFICERS OF FUND MANAGERS; AND (3) WINDING UP OF INVESTMENT COMPANIES. Proposed Rule Comment Inputs Footnotes 1. Attached format for comments and inputs sheet.