Thematic Review of Variable Capital Companies

Following its thematic review of Variable Capital Companies (VCCs) and their managers based on their filings, the Monetary Authority of Singapore (MAS) issued a circular (IID 04/2025) on the key regulatory observations and supervisory expectations of the governance and management of VCCs. 

Core Regulatory Requirements

With respect to the governance and management of VCCs, the core regulatory requirements that have been underlined by the MAS are:

1. VCCs are to be used as collective investment schemes (CIS);
    
2. A VCC must have a MAS-regulated manager to manage its property or operate the CIS that comprise the VCC;
    
3. A VCC must have at least one director that is a qualified representative of the VCC manager;
    
4. A VCC must engage an eligible financial institution (EFI) to ensure that it is compliant with the relevant Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) requirements; and 
    
5. VCC managers must segregate VCC assets and maintain them with independent custodians, and ensure that any individual conducting fund management activity is an appointed representative of the VCC manager. 

Gaps in Compliance

While there has been broad compliance with these requirements, MAS has highlighted some areas where they observed gaps in compliance and reiterated the expectations that VCCs and their managers must meet. 

Custody Arrangements

Some VCCs did not maintain their assets with independent custodians. Apart from private equity or venture capital investments offered only to accredited investors, assets under the management of a VCC must have independent custody arrangements.

Appointment of Licensed Representatives as Directors 

Some VCCs appointed additional directors that were not appointed representatives of the VCC manager. It is emphasised that any VCC director that engages in regulated activities - such as deal-sourcing, investment research, portfolio management, trade execution, account servicing, business development or marketing – must be appointed as licensed representatives of the VCC manager. 

Substantive Fund Management Activity 

There were some VCC managers managing VCCs that held no assets or had no investors, despite the VCCs being incorporated for over a year. It is reminded that VCC managers must assess the VCCs they manage periodically, and wind down those that are dormant. 

There were cases of VCCs holding illiquid assets, on behalf of a single investor or a few related investors, that previously belonged to these investors. VCC managers should not use the VCC as a passive conduit by merely re-packaging existing investments into VCCs without investment input or active management. MAS stresses that VCC managers must have substantive input in managing VCCs and their assets. VCC managers should be actively involved in portfolio construction, investment due diligence and analysis, and all other aspects of VCC investment and risk management. 

AML/CFT Requirements

Some VCCs were not compliant with AML/CFT requirements. MAS emphasises that VCCs are responsible for complying with their AML/CFT requirements and must maintain adequate supervision over the EFIs they appoint. Some AML/CFT requirements include keeping an updated register of beneficial owners, conducting screening and enhanced due diligence for customers that are higher risk, providing information requested by MAS or the relevant authorities upon request, and ensuring EFIs and directors receive regular AML/CTF training. 

Need for Review 

While VCCs have been generally compliant with the key requirements, the MAS circular shows that there are areas where VCCs and their managers may have fallen short of expectations in VCC management. It is imperative that VCC managers robustly review their governance of VCCs, especially in light of increased regulatory scrutiny.  

For any further queries regarding VCC set up and governance, please contact Marcus Chow at marcus.chow@twobirds.com.

This article is written with the assistance of Bird & Bird trainee, Ashley Chong