The CEO of the Hong Kong Securities and Futures Commission (SFC), Ashley Alder, gave a briefing to hedge fund managers on 3 July 2017 at an event sponsored by the Alternative Investment Management Association (AIMA) as a part of its Hong Kong Education Seminar series. In the briefing, Mr Alder identified the recent SFC initiatives of relevance to the hedge fund industry. Throughout the briefing he emphasised the SFC’s commitment to positioning HK as a leading asset management hub. He touched on various issues of local, regional and global import and we have summarised what he said on these issues in this article (with some added context where relevant).
Open-ended Fund Companies
Currently, Hong Kong open-ended investment vehicles can only be established in the form of a unit trust in the absence of a HK open-ended corporate vehicle (OFC). However, with the issuance by the SFC of the relevant rules and code on 28 June 2017 for public consultation, HK is close to ready for the creation of HK OFCs. The HK Inland Revenue Department also subsequently confirmed that a profits tax exemption for funds will apply to OFCs even if management control is in HK and Mr Alder expects the first HK OFCs to be registered by the SFC in 2018. He is very hopeful that this initiative will go a long way to promoting Hong Kong’s position as an international asset management centre but there are still concerns about how many fund managers, and especially private fund managers, will make use of the new alternative structure given the various limitations which do not apply to OFCs in other jurisdictions, without further tweaking.
The SFC’s Manager-In-Charge (MIC) regime went live on 17 July 2017. Mr Alder described the roll-out as quick and without too many problems and he expressed surprise at the number of industry players who wanted to attend the SFC’s MIC briefings. He distinguished the HK MIC regime from the UK FCA senior manager regime, which also purports to impose more responsibility on individuals, in three key ways:
- individual members of senior management have always been potentially liable under the SFO for acts of the company in HK, it was just that there had not been many cases;
- the need for the SFC to (i) stamp out the unhealthy practice of “Responsible Officers for hire” / (ii) identify clearly who controls the licensed corporation;
- the role of the Board of Directors (ie corporate governance).
MRF / Asian “Fund Passporting” Initiatives
The SFC has decided to focus on bilateral as opposed to multi-lateral arrangements for fund passporting because of the practical problems involved in implementing multi-lateral arrangements. The reason HK’s first MRF relationship was with the PRC was because of the number of potential PRC investors, PRC liquidity levels and the high savings rates in the PRC. Mr Alder said the SFC would insist on reciprocity and that there had been much interest from Europe hence the announcement of the MRF program with Switzerland (and most recently France). He expects another two or three more European countries to follow.
Mr Alder said that the SFC is changing its approach to routine inspections by making more of them thematic. The reason for this is to warn licensees generally so they have the opportunity to fix their own problems before the SFC identifies them.
Changes to SFC Fund Manager Code of Conduct
The SFC expects to be ready to roll these changes out over the next few months. Mr Alder noted that the changes would apply to private as well as retail funds and said that the main supervisory issues of relevance to hedge fund managers were valuations / pricing (and the need to reduce the reliance by fund managers on administrators in this area); trade allocations / conflicts of interest and better disclosure to investors.
He expects the SFC’s OTC licensing regime to come into effect at the end of Q3.
Suitability / Online Distribution Platforms
The discussions around suitability and online distribution platforms and changes to FMCC are however also relevant to hedge funds. He noted incidentally in this regard that since only 3% of funds in Hong Kong are independently advised, they are concerned about the loss of fund business that would follow if the SFC copied the FCA’s RDR initiative and required an advisory fee only.
Unbundling of Trade Commissions
He noted that the MiFID II Directive on the unbundling of trade commissions was an European regulatory initiative and was not part of HK regulation, commenting that the SFC had no plan to require the unbundling of research from soft dollar commissions and mentioning several times that he thinks Asian markets tend to be “under-researched” and that he didn't want to further discourage research by requiring unbundling. He did however acknowledge that global firms may choose to unbundle generally for operational consistency.
Co-operation with CSRC
The SFC’s interactions working with the CSRC on investigations continues to grow. The CSRC had been somewhat overwhelmed by the number of SFC requests concerning potential HK market manipulation enquiries but now the SFC is prioritising “high impact” cases. Also, the CSRC is now starting to have its own concerns about mainland investors trying to manipulate stock connect from HK so it is making more requests of the SFC.
Hedge Funds Standards Board
Mr Alder commented in passing on the UK self-regulating Hedge Funds Standards Board, which prescribes industry standards for hedge fund managers in the areas of disclosure, valuations, risk management, fund governance and shareholder conduct. He seems to like HFSB and noted that although it never gained much traction in the United States, it is growing in Asia.
Finally, he encouraged the buy-side to voice its opinions more publicly; and to speak directly to the SFC more, at least through industry organisations like AIMA and ASIFMA, or risk being drowned out by the sell-side.