Happy birthday to us

Tonight in Singapore we are hosting our first of two anniversary parties.  ComplianceAsia is now 10.  Thanks to all of our clients, staff and partners who have supported us over the last decade.

10 years ago we set up the first regional compliance consultantcy in financial services.  A decade later we act for over 200 great clients every year.

Thanks to everyone involved (and there have been lots of you).

Special thanks to James Shipton who along with Philippa Allen, were the original two partners and the brains behind the concept.

Enjoy drinks at SCC.

HK party invites going out soon!!

More from the ICAC

Today the HK ICAC announced a jail sentence for two insurance agents convicted of falsifying commissions.  The full ICAC is below:

Ex-insurance agents jailed for accepting $563,000 bribes and deceiving commissions 16 May 2013

Two former insurance agents of an insurance company, charged by the ICAC, were today (Thursday) sent to jail at the Eastern Magistracy for accepting over $563,000 in bribes and using bogus insurance policies to deceive commissions totalling over $124,000 from the company. Wong Yin-ping, 46, a senior unit manager formerly employed by Dah Sing Insurance Services Limited (Dah Sing Insurance), received a jail term 16 months. Co-defendant Tang Wing-kwong, 53, a former insurance agent of Dah Sing Insurance, was sentenced to four months' imprisonment, and ordered to pay Dah Sing Insurance over $32,800 as restitution. In sentencing, Principal Magistrate Ms Bina Chainrai remarked that the defendants deserved immediate custodial sentences as the offences committed by them were serious in nature. Wong earlier admitted 10 charges - three of agent conspiring to accept advantages, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance (POBO) and Section 159A of the Crimes Ordinance; and seven of agents conspiring to use documents with intent to deceive their principal, contrary to Section 9(3) of the POBO and Section 159A of the Crimes Ordinance. Tang pleaded guilty to one count of agent using documents with intent to deceive his principal, contrary to Section 9(3) of the POBO. The court heard that at the material time, Wong was employed by Dah Sing Insurance as senior unit manager. She was the direct supervisor of Tang and three other insurance agents - Lau Kwok-kei, Monita Cheng Woon-ho and Cheng Chong (the trio). As a senior unit manager, Wong was required to reach the required production targets and/or maintain certain number of productive down-line agents. If Wong failed to do so, she might have her allowances and bonuses withheld and might even be demoted or terminated. The court heard that as the trio was unable to procure any insurance policy, Wong proposed she could source clients for them. Wong asked the trio to sign, as the handling agent, on a number of insurance policy application forms. But the trio had never met with the policy applicants or proposed insured. Between July 2008 and October 2009, Wong conspired with the trio to submit 41 bogus insurance policy application forms to Dah Sing Insurance. Upon Wong's request, the trio paid her a total of over $563,000 being the monthly allowances and commissions they received from the company. In January 2009, Tang also submitted two other bogus insurance policy applications to Dah Sing Insurance for the same purpose. Pursuant to the above bogus insurance policy applications, Dah Sing Insurance issued commissions of more than $92,000 and over $32,800 to Wong and Tang respectively, the court was told. The trio was also charged by the ICAC for their respective roles in the case. Lau Kwok-kei, 52, and Monita Cheng Woon-ho, 56, who earlier pleaded guilty to their respective charges, will be sentenced at the Kwun Tong Magistracy on May 20 and the Eastern Magistracy on August 2 respectively; while Cheng Chong, 25, was earlier convicted of his charges after trial, and will be sentenced at the Eastern Magistracy on August 6. Dah Sing Insurance rendered full assistance to the ICAC during its investigation.

HK ICAC secures conviction of ex securities firm staff member

Every now and then the HK Independent Commission Against Corruption secures a conviction against a licensed person for a breach which can be fashioned into a corruption case.  The latest announcement from the ICAC sets out one such case:

Ex-staff of securities firm ordered to serve three years in jail for accepting $1.1m bribes 10 May 2013

A former investment representative of a securities firm, charged by the ICAC, was today (Friday) ordered by the Court of Appeal (CA) to serve three years in jail for accepting over $1.1 million in bribes from a businessman after the Department of Justice (DoJ) sought a review of his sentence. Andy Pau Chin-hung, 37, formerly employed by KGI Hong Kong Limited (KGI Hong Kong), was earlier found guilty at the District Court of two counts of agent accepting an advantage, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance, and sentenced to perform 220 hours of community service and pay over $1.1 million as restitution to KGI Hong Kong. The DoJ subsequently made an application for a review of Pau's sentence. In allowing the DoJ's application, Mr Justice Peter Cheung Chak-yau of the CA remarked that meting out a non-custodial sentence to Pau convicted of bribery offences was wrong in principle. Meanwhile, the CA also dismissed Pau's application for leave to appeal against his conviction. The applications of the DoJ and Pau were today heard by Mr Justice Cheung of the CA, and Madam Justice Barnes and Mr Justice Derek Pang Wai-cheong, both judges of the Court of First Instance. The court heard that at the material times, Pau was employed by KGI Hong Kong as an investment representative working for KGI Asia Limited (KGI Asia). He was responsible for opening securities accounts and conducting stock trading for clients of KGI Asia. In early 2007, Pau came to know Derrick Luu Hung-viet, a businessman, through the introduction of Johnny Tang Ka-siu, with whom Pau had become acquainted when he worked in the insurance sector five or six years earlier. Tang told Pau that Luu wanted to sell his shares of Warderly International Holdings Limited (Warderly) through the securities accounts of other persons in KGI Hong Kong. Pau then helped his mother-in-law, a mainlander and a company associated with Luu open securities accounts with KGI Asia. The court heard that between April 3 and 4, 2007, Pau sold 30 million shares of Warderly for Luu through the securities accounts of the mainlander and the company. After receiving $13 million from the sale of the shares, Tang caused over $650,000 to be given to Pau. In mid April 2007, Pau used the securities account of his mother-in-law to sell another 20 million shares of Warderly on behalf of Luu for over $9.3 million. Out of the sales proceeds, five per cent or over $460,000 was given to Pau, the court was told. The prosecution was today represented by Deputy Director of Public Prosecutions William Tam and Senior Public Prosecutor Sheroy Tam, assisted by ICAC officer Ten Cheng.

Tiger Asia judgement link

The Court of Final Appeal Reasons for Judgement can be found here.

SFC bans trader for faking phone calls

The SFC has taken action against a trader in Hong Kong for faking calls.  Full details from the SFC website are below:

SFC bans Ma Tin Luk for three years

The Securities and Futures Commission (SFC) has banned Mr Ma Tin Luk from re-entering the industry for three years from 24 April 2013 to 23 April 2016 for fabricating telephone order recordings and providing false and misleading information to the SFC to conceal the lack of records on a short selling order he executed for a client in November 2009 (Note 1).

An SFC investigation found that:

• Ma had requested his wife to pretend to be his client and created two false telephone order recordings; and
• Ma informed the SFC that the telephone order recordings recorded the telephone conversations between him and his client, even though he knew that the conversations were in fact between himself and his wife.

In deciding the sanction, the SFC took into account all relevant circumstances, including:

• Ma’s misconduct was seriously dishonest;
• providing false and misleading information to the SFC could jeopardise the efficiency of its investigation and a deterrent message needs to be sent to the market that such conduct is not acceptable; and
• Ma has no previous disciplinary record.

End

Notes:

1. Ma was licensed as a representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 4 (advising on securities) regulated activities and was accredited to Phillip Securities (Hong Kong) Limited and Phillip Commodities (HK) Limited between 26 March 2007 and 1 January 2011. He is currently not a licensed person.
2. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

SFC suspends another broker who did not disclose a personal share dealing account

The HK SFC has suspended a broker who had failed to disclose a personal share dealing account in the name of his wife and was involved in publishing stock tips that the SFC advises he traded in advance of those published remarks.

The link to the SFC notification is here.

This is the second recent suspension relating to this issue and a timely reminder to all licensed firms to ensure that their staff understand the rules regarding disclosure of accounts of connected persons.

SFC publishes new FAQ on disclosure of inside information by HK public companies

The SFC has published a new FAQ on the disclosure of inside information by HK public companies.  It also noted an increase in the number of disclosures made by those firms (up 43% on the same time period from last year) following roll out of the new rules regarding this topic on 1 January this year.

The full SFC notice is below:

New statutory regime for inside information drives increase in disclosures

The new statutory regime on disclosure of inside information, which aims to cultivate and encourage an enduring culture of disclosure by listed companies, has spurred a significant increase in corporate announcements on inside information, according to the Securities and Futures Commission (SFC). The total number of corporate announcements on inside information in the first three months of 2013 was up 43% compared to that of the corresponding period last year (Note 1).

The SFC has been working closely with Hong Kong Exchanges and Clearing Limited in monitoring the compliance of listed companies with the new statutory regime, including reviewing companies’ disclosures, raising pertinent issues with companies, and giving guidance where disclosure appears to be inadequate or anomalies are detected.

Most enquiries handled by the SFC’s consultation service have been general in nature and they are generally processed within the same day. The questions covered a broad range of issues such as the interpretation of inside information, the application of safe harbours and confidentiality requirements, the liability provisions and other general administrative matters (Note 2).

As part of the SFC’s continued effort to help listed companies better understand the provisions of the new statutory regime, Frequently-Asked-Question (FAQ) addressing particular issues will be published.

The FAQ issued today advises listed companies not to use the heading “Voluntary Announcement” to disclose information but to use a heading that accurately reflects the substance of the information concerned, and clarifies the statutory obligation of dually listed companies under the new regime in relation to “overseas regulatory announcements”.

"We believe the new statutory regime on disclosure of inside information has certainly raised awareness among listed companies of the importance of making disclosures to the investing public in a timely manner. We will nevertheless continue to maintain rigorous monitoring of listed companies’ compliance with the regime, with a view to promoting enhanced disclosure, fostering a positive change in corporate culture and facilitating more timely regulatory actions on cases involving non-compliance," the SFC’s Chief Executive Officer Mr Ashley Alder said.

End

Notes:

1. Under the new regime, which came into operation on 1 January 2013, listed corporations are required to disclose inside information to the public in a timely manner.
2. The SFC started providing consultation service to listed corporations from 1 December 2012 on application of provisions of the statutory disclosure regime.

Japan takes steps to reform insider dealing rules

Japan has had a number of insider trading issues to consider over the last two years including some serious cases involving the leakage of information from securities companies to their clients.  Recently it was reported in the Nikkei Shimbum daily that further reforms are to be implemented in this area.  Kakuko Takagi of our firm reports:

On 22 March 2013, it was reported that the FSA presented details of proposed amendments of insider trading rules to a Financial Affairs Meeting of the Liberal Democratic Party, the ruling party in Japan.  The FSA plans to submit the proposal to the ordinary parliament session in the middle of April 2013.  While currently only a person actually making an insider trade is penalized in Japan, a party who leaks insider information is going to be subject to the insider regulations under the proposed amendments.  Major amendments presented are:

 Where insider information was leaked by a securities company and it triggers a transaction:

- A fine to a securities company is calculated based on an amount of commission fees for 3 months from clients;

- Where a securities company also underwrites capital increases of a company whose information is leaked, 50% of the underwriting fee from that company is forfeited.  

Where insider information was leaked by a party other than a securities company:

-  50% of the unjustified profit of a person who received the information and made a transaction is forfeited;

It was stated that criminal penalties are imposed only for especially egregious cases such as a significant amount of transactions or repeated leakages of information and those penalties will be:

- No longer than 5 years’ imprisonment or not greater than JP 5 million yen’s fine is imposed to an individual who leaked insider information;  

-  Where a corporation has a supervisory responsibility to an individual who is found guilty of criminal conduct, not greater than JP 0.5 billion’s fine is imposed on the corporation.

ComplianceAsia actively tracks Japanese regulatory developments on behalf of our clients.

Anti Money Laundering rules finally getting the public scrutiny they deserved

Two articles in the SCMP over the weekend (one here) have finally highlighted to the Hong Kong public some of the downsides of this incredible raft of global legislation and regulatory burden.

Don't get me wrong, we hate drug traffickers, terrorists, kidnappers, people smugglers, despot rulers and arms traffickers.  These are problems that have massive social costs and some unusual laws seem like a good way of addressing them.

However laundering has always been subsidiary to these predicate crimes.  What we are now seeing in Hong Kong is public concern over how laundering itself has become a crime without reference to the underlying wrong it was designed to counter.

The case itself, for those not reading the local newspapers, involves an old woman who was smurfing and received a 10 year jail term.  What is missing from the case against her, at least so far, is any evidence that she was part of some criminal scheme.  The public prosecutor, Kevin Zervos, is also coincidentally a long time member of the anti money laundering establishment (if I can call it that) and is probably as well placed as anyone to be taking an educated position on this case.  His view is that the prosecution was warranted.  With respect, I differ.

Some years ago a very eloquent US prosecutor, John Moscow, put the case to an assembled group of bankers and compliance officers that it was their duty to assist the global fight against crime by participating in anti money laundering issues.  With respect to the crimes mentioned above, John was right.  Whatever our role in generating profits for our company, surely our social conscience overrides this when dealing with something as grievous as potential terrorism.  AML rules in fact gave bankers and compliance a way to legally assist law enforcement with these horrible social wrongs.

The problem is that now that these rules are in place, for example where failure to report a suspicion of crime is a crime in itself, and the rules have been drafted in such a way as to include a very wide range of crimes, prosecutors are resorting to a charge of money laundering as a quick way to win rather than using AML as a way of getting at the king pins or providing intelligence to knock out the terror cell.

AML globally needs a complete rethink.  Law enforcement needs intelligence and more resources.  The public do not need draconian legislation that can be turned on them in the most unjust of ways.  Bankers are not cops or spooks and there must be other ways to focus on the major crimes of our time and not see our civil liberties flushed down the toilet.

Well done Jake Vander Kamp and Philip Bowring for getting this issue into the spotlight, at least for a little while.

SFC kicked into touch on the eve of 7's weekend

In a widely anticipated case at the Eastern Magistrates court where the SFC sought to go after a local hedge fund manager for advertising his fund without SFC approval, the Eastern Magistrates court has dismissed the SFC's claims.  The SFC says they are considering an appeal.

From what we have seen of this case in the public disclosures this was never something the Commission should have gone after.

If the SFC is worried about the extent of hedge fund advertising it has a multitude of options for ensuring that what is done in, or from or into, Hong Kong is done in an acceptable manner.  Using the courts to try and set a precedent on issues such as what constitutes marketing and what constitutes the public in relation to asset management is a frightening way to do business.

Asset managers look for certainty in their regulatory dealings and operational structures and this case has been the cause of significant uncertainty.

Our message, don't appeal this one, work with the industry to agree standards of conduct with respect to advertising private funds to institutions and other professionals.  Clear industry standards will become the norm and then look to prosecute cases where firms ignore those standards and are truly targeting inappropriate classes of investors.  As for now, go and enjoy the rugby.

The full text of the SFC announcement is set out below:

Pacific Sun Advisors Limited and its director acquitted of issuing advertisements without SFC authorization

21 Mar 2013

The Eastern Magistracy has acquitted Pacific Sun Advisors Limited (Pacific Sun) and its director Mr Andrew Pieter Mantel for four counts of issuing advertisements to promote a collective investment scheme without the authorization of the Securities and Futures Commission (SFC) in contravention of section 103 of the Securities and Futures Ordinance (SFO) (Note 1).

The SFC alleged that between November and December 2011, the defendants issued an advertisement on the corporate website of Pacific Sun promoting a collective investment scheme called “Pacific Sun Greater China Equities Fund” (the Fund) without the authorization of the SFC.

It was also alleged that on or around 2 and 3 November 2011, the defendants issued an advertisement regarding the launch of the Fund to the public by email without the authorization of the SFC.

During three days of evidence, the defendants submitted that they intended to sell interests in the units of the Fund only to professional investors and so the advertisements did not require authorization by the SFC under a statutory exemption. The SFC, on the other hand, submitted that the exemption did not permit advertisements that had not been authorized by the SFC to be issued to the public and that in this case there was no evidence that the interests in the Fund had only been sold to professional investors (Note 2).

The Magistrate accepted the defendants’ argument and ruled also that the advertisements did not constitute invitations to the public to invest in the fund.

The SFC will consider an appeal of the decision.

End

Notes:

1. Pacific Sun is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. Mantel, who is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities accredited to Pacific Sun, is a responsible officer of Pacific Sun.
2. Under section 103(3)(k) of the SFO, an advertisement does not need SFC authorization where the advertisement is in respect of securities, structured products or interests in a collective investment scheme that are or are intended to be disposed of only to professional investors.

MAS in Singapore initiates consultation process to implement FAIR recommendations in wealth management

On 5 March, the Singapore Monetary Authority announced a consultation paper to implement a series of wealth management related reforms.

Firms have until 4 June to make the submission.

The full consultation paper is here.

The FAIR panel announced that it sought change in relation to five topics or 'thrusts':

(a) Raising the competence of FA [Financial Advisory] representatives;

(b) Raising the quality of FA firms;

(c) Making financial advising a dedicated service;

(d) Lowering distribution costs; and

(e) Promoting a culture of fair dealing.

There are some very important issues raised in the consultation and major employers in this sector will want to review carefully the recommendations as they could be costly and we have some concerns over how these reforms will affect mid sized financial advisors and their ability to cost effectively compete with banks.

Former MS employee banned for 14 months for maintaining undisclosed personal accounts

The SFC in HK has announced that Calvin Ho Kei Him, a former Morgan Stanley Asia research analyst employee, has been banned from the industry for 14 months in connection with undisclosed personal share dealing on behalf of his wife and mother in law.

The case highlights the importance of abiding by internal policies and procedures regarding personal share dealing and in particular that relating to connected persons.

The Commission again published the statement of findings and within that it says that Mr Ho breached the Code of Conduct by:

a) failing to disclose his related securities accounts and the stock trading activities to his employer;

b) failing to avoid conflicts of interest between the stock trading activities in the related accounts and his employment as a research associate; and

c)making false and/or misleading declarations to his employer about his and his wife’s stock trading activities.

The full report and a link to the Statement of Disciplinary Action can be found on the SFC website.

The issue was reportedly uncovered during a routine review of his email account.

The SFC stated that "Candid disclosure is fundamental to the character of the licensed representative. . . "

Du Jun banned for life

Former Morgan Stanley MD, Du Jun, who was jailed for insider dealing and received the heaviest criminal sentence handed out in Hong Kong has been banned from reentering the industry for life. 

It is interesting to note that when he was originally sentenced reports in the media at the time stated that Judge Andrew Chan, was highly critical of Du's former employer, Morgan Stanley.  A part of Du's defence was that he had sought approval from the Morgan Stanley compliance department for the trades in question.

The prosecutor in the case was Ms Charlotte Draycott.  She is reported in the media as follows:

"Draycott said Du received approval only because the bank's compliance system was run in a "haphazard and ineffective manner".

The SFC has worked hard at taking strong action against Mr Du but as far as we are aware there has been no public comment about whether there were any issues that arose at Morgan Stanley.  It should be remembered that this employee, according to the judgement issued by the District Court, purchased on nine occasions a total of HK87m (some US11.15m) in shares in a company that Morgan Stanley was giving corporate finance advice to.  A portion of those purchases were, reportedly, financed by Morgan Stanley.  Given the comments of the trial judge that were reported at the time, this seems a curious footnote that remains outstanding.

We are not in any way condoning Mr Du's actions.  All the public materials suggest he deserved imprisonment.  Why has the Commission not addressed in a public way the concerns of the trial judge and the statements made by prosecuting counsel?

The full SFC release regarding Mr Du's recent ban is set out below:

SFC bans Du Jun for life

4 Mar 2013

The Securities and Futures Commission (SFC) has banned Mr Du Jun, former managing director of Morgan Stanley Asia Limited (Morgan Stanley), from re-entering the industry for life (Note 1).

The disciplinary action follows the completion of the criminal proceedings commenced by the SFC against Du for insider dealing in the shares of CITIC Resources Holdings Limited (Notes 2 & 3).

The SFC concluded that Du is not a fit and proper person to be licensed. In deciding the sanction, the SFC took into account all relevant considerations including:

• Du breached the trust and confidence placed in him by his clients and employer;
• Du’s criminal conviction and the direct relevance of the wrongdoings to his fitness and properness to be a licensed person; and
• insider dealing is a very serious misconduct which damages market integrity, a strong deterrent message must be sent to the market to deter other practitioners from committing
  similar conduct.

End

Notes:

1. Du Jun was licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) regulated activities and was accredited with Morgan Stanley from 12 February 2004 to 5 June 2007. Du currently holds no licence with the SFC.
2. Please see the Court of Appeal judgment for Appeal dated 20 September 2012 which is available on the judiciary website and the SFC’s press releases dated 20 September 2012 and 2 January 2013.
3. The SFC’s proceedings against Du Jun under section 213 of the SFO are ongoing.

Possible large fraud uncovered in Hong Kong

The SFC has alleged that employees of China Pacific Securities Limited have misappropriated client assets to the value of some HK$156m (US$20m).  They have obtained an injunction freezing assets to this value and are currently trying to trace the funds.

A timely reminder that fraud is always present in the HK market and it is really just a case of when it will be discovered.  According to the SFC release this one was discovered during an inspection.

We expect to hear quite a bit more about this case in the days ahead.  The SFC press release is below:

SFC obtains court order to freeze assets in misappropriation case

1 Mar 2013

The Securities and Futures Commission (SFC) has commenced legal proceedings in the High Court against five defendants in relation to allegations of misappropriation of clients’ assets by two former staff of China Pacific Securities Limited (China Pacific Securities) (Note 1). 

The SFC alleges that former account executive, Mo Shau Wah, and former settlement clerk, Hui Fong Ting, misappropriated client securities held at China Pacific Securities using false documents and records. 

The alleged misappropriation came to light during an on-site inspection by the SFC in November 2012.  At the time of the commencement of the proceedings, the market value of the discrepancy in client securities accounts was about $156 million.

The SFC earlier obtained an ex parte interim order against Mo prohibiting her from disposing of her assets worldwide in the amount of $156,471,705.  A similar interim order was also obtained against Hui in relation to her Hong Kong assets.

The SFC has also obtained an interim order against three nominees preventing them from disposal of any assets in suspected nominee accounts. 

The Honourable Mr Justice Poon at today’s hearing continued the interim injunctions after representatives of Mo, Hui, and one of the nominees raised no objection to the order remaining in force.

China Pacific Securities and its owners put in place arrangements to reduce and potentially avoid loss to clients. However, the SFC is seeking orders to recoup the losses caused to China Pacific Securities.

The use and possible whereabouts of proceeds of the alleged misappropriation largely remain unknown at this stage. The SFC is tracing the use of the funds and the identity of any assets owned by or on behalf of Mo and Hui.

The SFC is continuing its investigation and assisting the Commercial Crime Bureau in the case.

End

Note

1. China Pacific Securities Limited is a company incorporated in Hong Kong and licensed by the SFC to carry on a business in Type 1 regulated activity (dealing in securities) under the Securities and Futures Ordinance (SFO). The proceedings were commenced under section 213 of the SFO.

Major tax announcement regarding private equity funds managed from Hong Kong

Last night the HK Financial Secretary released the budget for the coming fiscal year and included within were a number of important taxation issues.  Much to the delight of the local private equity industry the Government has confirmed that it will be extending the exemption from profits tax for funds that transact in private companies to the existing exemption that applies to funds that trade listed securities.

This has a major impact in Hong Kong as the current SFO does define private companies incorporated outside of Hong Kong as securities and thus a private equity fund manager requires licensing under the SFO.  However the SFC has been refusing to allow a private equity fund manager to be licensed for asset management unless they could demonstrate that they exercised discretion.  This had the effect of forcing managers to adopt structures that involved taking a securities dealing license rather than the less burdensome and costly asset management license.  If the manager said that they exercised discretion, while they received their asset management approval, they may well have faced taxation of the fund under the pre-existing tax rulings.

A number of industry groups have been working hard to get this impasse between the IRD and the SFC sorted out.  Well done for getting government to put pragmatism first.

A focus on asset management issues and competitiveness by Treasury is warranted and welcomed.

WSJ slams SEC after Supreme Court decides against them

Interesting OpEd from the WSJ regarding the recent 9-0 decision against the US SEC with respect to the statute of limitations and an action against Marc Gabelli and Bruce Alpert.

Link is here.

US Presidential initiative to protect trade secrets

Digressing a little from our regular staple of financial industry news, we thought readers might like a copy of the recent report into theft of trade secrets and the US President's initiative in this area.

Financial firms are certainly ripe targets for theft, be it proprietary software, confidential non-public info or simply current holdings.

The US may finally be getting serious about this issue and they have an opportunity to create laws and administrative structures that will protect so much of the US economic engine.

Good to see.

The full report is here.

I thought the commies lost the war

ESMA released its final provisions regarding remuneration for asset managers both in the EU, those with delegated mandates from the EU and those that will seek to market into the EU - ie, just about everyone.

Exactly why a regulator really thinks that an asset manager needs remuneration guidelines like a bank does - which enjoys (apparently) some form of public guarantee and thus should be subject to greater public input into behaviour - remains beyond the writer.

The rules themselves were obviously well telegraphed but they are still quite silly.

This is just another set of rules that will have the effect of constraining innovation and development of asset management to the ultimate detriment of the institutions that need to fund those long dated pension liabilities.

Will someone please remind ESMA that we beat the commies because of the wonder of free enterprise.  The ESMA release is below:

The European Securities and Markets Authority (ESMA) has published final Guidelines on remuneration of alternative investment fund managers (AIFMs).  The rules will apply to managers of alternative investment funds (AIFs) including hedge funds, private equity funds and real estate funds.  Non-EU AIFMs who market funds (using passport agreements) to EU investors will also be subject in full to the guidelines after a transitional period.

AIFMs will be asked to introduce sound and prudent remuneration policies and organisational structures which avoid conflicts of interest that may lead to excessive risk taking. Stronger governance of how fund managers are paid will ultimately lead to improved investor protection.

Steven Maijoor, ESMA Chair, stated:

“These guidelines will help promote prudent risk-taking by fund managers and help align the interests of both fund managers and investors.  Making sure that these provisions on pay are applied in a common and consistent way is key to increasing investor protection and ensuring a level-playing-field in the alternative fund sector across the EU.”

Pay rules aligned with other financial sectors

The Alternative Investment Fund Managers Directive (AIFMD) establishes a set of rules that AIFMs have to comply with when establishing and applying a remuneration policy for certain categories of their staff.  ESMA’s guidelines further clarify the Directive’s provisions.  In developing these guidelines, ESMA co-operated with the European Banking Authority in order to ensure alignment of guidance on remuneration policies across financial sectors.

The key elements of the guidelines include:

AIFs’ internal governance

•    The governing body of each AIFM has to ensure sound and prudent remuneration policies/ structures exist and are not circumvented;
•    AIFMs should select the type of staff for which a remuneration policy is put in place and be able to demonstrate according to which criteria this selection occurred;

Categories of staff covered

ESMA’s remuneration guidelines apply to identified staff whose professional activities might have a material impact on the AIF’s risk profile. This includes:
•    senior management, risk takers, control functions; and
•    any employee receiving a total remuneration that takes them into the same remuneration bracket as the aforementioned categories of staff.

Types of remuneration covered

•    For the purposes of the guidelines, remuneration consists of all forms of payments or benefits paid by the AIFM, of any amount paid by the AIF itself, including carried interest, and of any transfer of units or shares of the AIF, in exchange for professional services rendered by the identified staff;
•    All remuneration should be divided into either fixed remuneration (payments or benefits without consideration of any performance criteria) or variable remuneration (additional payments or benefits depending on performance or, in certain cases, other contractual criteria).
Both components of remuneration (fixed and variable) may include monetary payments or benefits (such as cash, shares, options, remuneration by AIFs e.g. through carried interest models) or non-monetary benefits (such as discounts, special car allowances etc).

Next steps

The guidelines will be translated into the official languages of the EU.  Within two months of the publication of the translations on ESMA’s website, competent authorities should confirm to ESMA whether they comply or intend to comply with the guidelines by incorporating them into their supervisory practices.  They will apply from 22 July 2013, subject to the transitional provisions of the AIFMD.

SFC takes action against licensed rep who failed to disclose prior regulatory issue

The SFC website reported that the Commission suspended an individual for failing to properly disclose a prior regulatory issue.  The full report is below:

Licence applicant banned for giving false information to SFC

14 Feb 2013

The Securities and Futures Commission (SFC) has banned Mr Kuo Shou Min, a former licensed representative, from re-entering the industry for nine months from 8 February 2013 to 7 November 2013 (Note 1). 

The SFC found that Kuo had failed to disclose the disciplinary action taken against him by the Securities and Futures Bureau of Taiwan (SFB) in his licence application to the SFC (Note 2). 

End

Notes:

1. Kuo was a licensed representative to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities accredited with SinoPac Asset Management Asia Limited from 13 April 2010 to 14 March 2012.    
2. The SFB suspended Kuo for three months in 2005 for breaching Taiwanese investment fund regulations.  

Dechert article on HK / PRC fund passporting

The following article was produced by the law firm Dechert in Hong Kong.  It discusses a very interesting recent development regarding the possibility that a fund authorised in Hong Kong will be able to be sold into the mainland.

We thank Dechert and their partner Angelyn Lim who has allowed us to reproduce this.  For more information please contact Dechert directly:

Door to PRC Domestic Funds Market Nudged Open?
 

While Hong Kong's retail market remains dominated by European Undertakings for Collective Investment in Transferrable Securities (UCITS) (up to about 70% of the funds authorised in Hong Kong for retail distribution are UCITS), both local and international fund managers have shown interest of late in adding a Hong Kong-domiciled collective investment scheme to their stable of funds authorised by the local Securities and Futures Commission (SFC). The reasons are two fold: part pragmatic - having a locally domiciled fund targeted at the local or regional market reduces the number of regulators having supervision over the product (and potentially conflicting regulations and policies) one has to deal with, and part speculative - when the attractive domestic funds market on Mainland China one day opens its doors to foreign funds, funds that are constituted and authorised in Hong Kong should be first in line.

That speculation paid off this past week when a senior executive director of the SFC announced that the SFC and the China Securities Regulatory Commission (CSRC) are working on measures to allow the mutual recognition of funds from both sides of the border. While a full scale passporting system (similar to that of the UCITS passport) has been deemed too ambitious and is firmly not on the cards, the mutual recognition of Hong Kong-based and authorised funds in Mainland China will allow both Hong Kong and global fund managers, issuers and product distributors to go the next best step in applying to the CSRC for approval for such funds to be distributed in the Mainland Chinese market. PRC funds will receive reciprocal treatment and be able to apply for SFC authorisation to be distributed in Hong Kong. Both such steps are currently not possible under existing legislation in both Mainland China and Hong Kong.

The fine details are still being worked out by the respective regulators. There is no indication when the applicable rules will be issued or when the first set of such applications may be made. Apart from the immediate surge in new business opportunities which may be tapped by fund managers on both sides of the border (including fund managers who may not yet have a Hong Kong authorised product but who may now be rethinking their China / North-east Asia distribution strategy), in the long run, this develpment will likely also encourage a revamp of Hong Kong's current state of mutual funds legislation as well as renew interest in an Asia-Pacific funds passporting arrangement.

Hong Kong-domiciled open-ended collective investment schemes must currently be constituted as unit trusts due to challenges posed by the existing companies laws and the absence of any customized mutual funds law. It is hoped that this significant development in the local funds sector will demonstrate the need for, and incentivise the development of, such a mutual funds law. As for an Asia-Pacific funds passport, support for such an arrangement has also been recently overshadowed by the faster rise of an ASEAN funds passport, but, again, this new development will likely turn the spotlight back to an Asia-Pacific equivalent.