The Securities and Exchange Commission (SEC) issued comprehensive amendments to the Implementing Rules and Regulations (IRR) of the Investment Company Act (ICA) and the Securities Regulation Code (SRC) through SEC Memorandum Circular No. 33 Series of 2020 to recognize new classifications of investment funds.
A Collective Investment Scheme (CIS) refers to an arrangement where public funds are solicited for investing in securities or other assets. A CIS in the Philippines may adopt a corporate structure, such as an Investment Company, or a contractual structure, like a Unit Investment Trust Fund (UITF) or variable unit linked life insurance policy, as determined by regulatory agencies including the SEC, Bangko Sentral ng Pilipinas (BSP), and Insurance Commission (IC). New classification definitions include a Feeder Fund, which invests at least ninety percent (90%) of its net assets in a single CIS, and a Fund-of-Funds, which invests at least fifty percent (50%) of its net assets in more than one CIS. A Multi-asset/Asset Allocation Fund is defined as an investment company that invests in a fixed or variable mix of equity and fixed income instruments, cash, and cash-equivalents.
A cornerstone of the Circular is the requirement for strong, independent oversight, mandating that investment companies must have an Independent Oversight Entity (IOE). The IOE, which is defined as an impartial committee or entity, is tasked with monitoring the functions and transactions of the Fund Manager to ensure compliance with the Registration Statement, prospectus, ICA, SRC, and their IRR. The IOE may be the investment company’s Audit Committee, a custodian bank, a trust entity, or an external auditor. The IOE must specifically oversee activities to ensure that the Fund Manager does not excessively delegate functions to the extent that it becomes a "letter box" (meaning it retains no power to make investment decisions or monitor the delegatee). If the IOE reasonably believes the Fund Manager failed to comply with applicable laws or engaged in acts detrimental to shareholders/unitholders, it must notify the Commission within five (5) business days.
The Circular also tightens financial requirements and operational controls for Fund Managers. Fund Managers must maintain an unimpaired paid-up capital of at least Fifty Million Pesos (₱50,000,000.00). Furthermore, they must meet an additional unimpaired capital requirement of 0.02% of the total assets under management (AUM) exceeding P100 billion, with this additional requirement capped at P1 billion. To ensure pricing accuracy, an investment company must appoint an Independent Net Asset Value (NAV) Calculator to compute or cross-check the NAV every dealing day. To qualify as independent, the external auditor serving as the NAV Calculator cannot be the same entity auditing the investment company and the fund manager.
Regarding asset custody, a Custodian must be independent and cannot hold directly or indirectly ten percent (10%) or more of the issued shares in the investment company or the fund manager, or vice versa. Custodians are responsible for safe-keeping assets that can be held in custody, either by physical delivery or book-entry registration. However, certain assets, such as investments in deposits, approved foreign/domestic CIS, and OTC Derivatives, are exempt from this custody requirement. These non-custody assets remain subject to the Fund Manager’s record-keeping obligations and the oversight function of the IOE, who must be informed of the records of those assets.
For money market funds (MMFs), the rules are strict: Constant net asset value money market funds (C-NAV MMFs) are explicitly prohibited. MMFs must maintain a cash reserve, or assets with high liquidity and low market risk that can be cashed within T+1 day, of at least ten percent (10%) of its net assets. MMFs may only utilize financial derivatives for hedging arrangements. Such hedging arrangements must not be aimed at generating a return, must result in a verifiable overall reduction of risk, and must offset the risks linked to the underlying asset being hedged.
