In our last newsletter we provided a summary of the Securities & Futures Commission’s (“SFC”) proposed amendments to the SFC’s guidelines on hedge funds. The SFC has now concluded its consultations and the hedge fund guidelines have been amended.

As proposed, in assessing compliance of the personnel of investment managers with the requirement for five years relevant experience, a wider range of hedge fund experience will now be acceptable. The requirement for key personnel to possess specific public funds experience (as set out in Chapter 5.5(a) of the Code) may be satisfied if the management company on a firm wide basis is able to demonstrate that it possesses the requisite experience and resources to administer public funds. This, in effect, means that large institutional fund managers will find it easier to have a hedge fund authorised by the SFC than core hedge fund operators as they will be more likely to satisfy this requirement by virtue of the public funds management undertaken by other divisions of the institutional fund manager’s organisation.

Increased levels of disclosure will be required in the fund’s offering document relating to the risk management operations of the scheme, management of conflicts of interest, the relationship between the prime broker and the fund, ring-fencing arrangements for umbrella structures, the on-going monitoring of the scheme’s investment and asset allocation process and the performance of the scheme, the ongoing monitoring of the standards of the services provided by key service provides and the replacement process for such service providers.

The proposals to reduce the minimum investment requirement for a single strategy hedge fund from US$50,000 to US$30,000 and to permit an increase in the value of the assets of a hedge fund that may be charged to a prime broker have been dropped.

The new hedge fund guidelines became effective at the end of September 2005.

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In January 2005, the Hong Kong Securities & Futures Commission (“SFC”) issued a Consultation Paper on the disclosure of interests in securities of Hong Kong listed companies under Part XV of the Securities & Futures Ordinance (“SFO”). Conclusions to the consultation were issued in May 2005. The most significant of these include the following:

Investment managers: non-aggregation
Interests (and short positions) of companies are attributed to their holding companies and other “controllers”. This can make for onerous monitoring and disclosure requirements for financial services groups’ holding companies, and the SFO contains an exemption which provides that the interests and short positions of certain “qualified” investment managers which operate independently of other group companies.

This exemption has flaws which restrict its applicability, for instance where, as is common, different investment management entities within a group
co-ordinate their activities.

The SFC is proposing various changes which are intended to make it easier to qualify for the exemption in circumstances where qualified investment managers co-ordinate their activities, and for investment management operations which are within the same legal entity as other operations.

To count as a “qualified” investment manager for these purposes, the investment manager must be regulated in an approved jurisdiction - including Hong Kong, the UK and the USA but not, for example, Singapore. The SFC is not intending to widen this category in the short term, despite pressure to do so.

Security interests given by substantial shareholders
The giving of securities interests to “qualified lenders” can currently be exempt from disclosure on both the chargor’s and chargee’s parts. This has been subject to considerable public debate, and the SFC has canvassed opinion on a range of possible changes, including the acceleration of disclosure where security is being enforced. No conclusions were reached, and the SFC is setting up a working group to consider this difficult area further.

Changes in the nature of interests
The issue of what changes in relation to a person’s interests require disclosure is one of the most difficult, and least understood, areas of the disclosure regime. The range of events which may give rise to a disclosure obligation is extraordinarily wide and arbitrary. The SFC is proposing to restrict disclosure obligations to a few specified types of change; this would be a welcome reform of a most unsatisfactory area of the law.

Other areas
The SFC also proposes to:

• relax the “exempt custodian interest” exemption so as to be applicable even where custodians have certain residual rights to the relevant shares;
   
• exclude Saturdays from the three-day time period for notification.

William Mackesy is the author of Disclosure of Interests in Securities of Hong Kong Listed Companies, the only detailed textbook on this subject, which is available from Deacons at book.order@deacons.com.hk

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FUND DISTRIBUTION IN MACAU

Authorisation of funds by the Macau Monetary Authority (“MMA”) is necessary for funds to be distributed to the public in Macau. Authorisation will only be granted if the investment funds have been duly authorised in their country of origin and the respective funds managers and custodians are subject to supervision by a competent home regulator. In practice funds are usually authorised in Macau on the basis that they are already authorised by the SFC in Hong Kong.

As part of the approval procedures, applicants must submit an application form and the following information for review by the MMA:

• information on the fund such as the name, structure, domicile/jurisdiction, supervisory authority and details such as the investment objectives, fees and charges and valuation arrangements (similar to the SFC application form);
   
• information on the parties involved in the fund such as the name and address of the management company, trustee/custodian, investment adviser, Macau representative, auditors and solicitors; and
   
• the offering and constitutive documents of the fund (including M&A and material contracts), the latest audited report of the fund, trustee/custodian and the management company, the agreement between the fund and its representative in Macau, and evidence of the authorised status of the scheme in its place of establishment.

Although the information required for MMA is similar to that required to be submitted to the SFC in Hong Kong, the registration process in Macau is in the nature of a filing. Past experience indicates that it would be unusual for the Authority to make detailed comments on the documents submitted.

The MMA relevant approval committee meets once a week every Thursday to consider applications for authorisation. An application should be submitted at least one week in advance so that the MMA can review the papers before putting forward the funds for approval by the committee so the approval process usually takes around three to four weeks. We would generally make the application when SFC authorisation is granted.

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PROPOSED AMENDMENTS TO "REGULATED ACTIVITIES"

The SFC published its conclusions on the Consultation Paper on Proposed Amendments to the Schedule 5 to the Securities and Futures Ordinance in September.

The Consultation Paper had proposed amendments to the definitions of certain regulated activities as set out in the SFO. The main proposals were:

• To extend the definition of "asset management" to include management of real estate investment trusts.
   
• To amend the definition of "dealing in securities" so that:
  (a) the dealing activities of approved money brokers on behalf of authorised financial institutions are excluded; and
  (b) the exemption for disposing of securities as a principal would no longer apply.
   
• To amend the definitions of "advising on securities" and "advising on futures contracts" so that the giving of advice by a licensed asset manager, solely for the purposes of carrying on fund management activities pertaining to collective investment schemes under his management, is to be excluded. This carve out enables managers to introduce their products to the market without having to obtain a separate licence for advising on their products. It only applies to products which they themselves manage.

In the light of comments received, the SFC has decided not to implement the proposal to remove the exemption for disposing of securities as a principal for the time being and will reconsider such amendment in a separate consultation exercise.

Subject to the legislative process, the other proposed amendments will become effective on 9 December 2005.

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CHINA INVESTMENT MANAGEMENT UPDATE

Offshore Investment of Foreign Currency Assets of Chinese Insurance Companies
Following the Provisional Regulatory Measures on Offshore Investment of Foreign Currency Insurance Assets (“Provisional Measures”) issued by the China Insurance Regulatory Commission (“CIRC”) in August 2004 which allow qualifying PRC insurance companies to invest their foreign currency assets (which include proceeds raised through overseas listing) offshore subject to certain limits (please refer to our Client Update on this published in September 2004 and posted on our website: www.deacons.com.hk), the CIRC has issued on 1 September 2005 a set of implementing measures (the “Implementing Measures”) to the Provisional Measures.

The Implementing Measures permits qualifying PRC insurance companies to appoint offshore fund managers or onshore managers to manage their foreign currency assets offshore. The Implementing Measures set out the qualifying proceeds for the PRC insurance companies as well as the reporting obligations and responsibilities of the appointed managers.

The Implementing Measures clarified and supplemented the application of the requirements under the Provisional Measures. The Implementing Measures set out in details the permitted investment scope for foreign currency insurances funds that may be invested offshore. Of significance, it is provided that up to 10% of the foreign investment quota granted by the State Administration of Foreign Exchange (“SAFE”) may be invested in shares of Chinese companies that are issued offshore and listed in stock exchanges in New York, London, Frankfurt, Tokyo, Singapore or Hong Kong. This will allow PRC insurance companies that invest their foreign currency insurance assets offshore to invest in equity securities, amidst other more conservative type of investments allowed such as deposits with banks of certain minimum rating, mortgage-backed securities which are government guaranteed, money market instruments and bonds of Chinese companies issued offshore that are of certain investment grade. Offshore investment of the PRC insurance companies may be denominated in US dollar, Euro, Japanese Yen, the Pound, Canadian dollar, Swiss Franc, Australian dollar, Singapore dollar or Hong Kong dollar.

Some regard the CIRC measures allowing PRC insurance companies to invest overseas as a positive step towards the introduction of a “Qualified Domestic Institutional Investors” (“QDII”) regime in China. The QDII regime has been long talked about as a regime that will formally allow Chinese institutional investors to invest offshore. However, a distinction should be made in that a full QDII regime would allow convertibility of Renminbi assets into foreign freely convertible currencies to be invested offshore, whereas the Provisional Measures as supplemented by the Implementing Measures only allow PRC insurance companies to invest their assets which are already in foreign currencies.

QFII Development
China has increased the total quota that may be given to qualified foreign institutional investors (“QFII”) from US$4 billion to US$10 billion, under the QFII scheme that was introduced since November 2002 to allow qualifying foreign institutional investors to invest into the mainland securities market. Currently US$4 billion quota was approved and granted to a total of 27 QFIIs, and the maximum quota limit per QFII was US$800 million. There was much lobbying which led to the quota increase, and the SAFE has started accepting and approving applications for quota increase from existing QFIIs.

Commercial Banks Wealth Management Business
The China Banking Regulatory Commission (“CBRC”) on 30 September 2005 issued the Regulations on Commercial Banks Personal Wealth Management Business and the Guidelines on Risk Management for Commercial Banks Personal Wealth Management Business (together, the “Rules”).

The Rules formally regulate personal wealth management services offered by commercial banks in the PRC, including sino-foreign commercial banks and wholly-foreign owned commercial banks. The rules broadly categorise wealth management services provided by commercial banks into

1. wealth management consulting services, under which investments will be made on customers’ instruction and behalf following information and consultation provided by the bank; and
2. wealth management consolidated discretionary investment services, where the bank shall provide discretionary management of customers’ assets.

The latter is further divided into private banking services for specific customers and wealth management plans for specific target customers. There are requirements on the types of products that commercial banks may offer under the wealth management services, with specific type of products subject to the prior approval of the CBRC. The Rules also cover information disclosure, qualifications of front-line staff, risk management and reporting requirements to the CBRC.

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The Taiwan Financial Supervisory Commission (“FSC”) on 2 August 2005 promulgated new rules governing the offering of overseas funds in Taiwan (the “New Rules”). Please refer to our Client Update by email which was issued in September 2005 and posted on our website: www.deacons.com.hk for our Executive Summary on the New Rules.

Deacons has held a client seminar on the subject in September and we had the honour of Mr. Gordon Hsin, senior director of SITCA presiding. The following is a list of frequently asked questions (“FAQs”) that represent common concerns in view of the introduction of the New Rules.

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POSSIBLE REFORMS TO THE PROSPECTUS REGIME

At the end of August 2005 the SFC issued a consultation paper which comprised the final phase of a three part review of the manner in which shares and debentures are offered to the public pursuant to the Companies Ordinance (“CO”).

The SFC is seeking the views of industry on the following issues:

Consolidation of Existing Legislation
The Consultation Paper discusses the introduction of a unified offering regime for all regulated investments currently falling within the CO and the Securities and Futures Ordinance (“SFO”). The objective of such consolidation would be to amalgamate all securities law into one piece of legislation and to remove all inconsistencies between the CO and the SFO. This would be very positive for parties seeking to make private offerings in Hong Kong as it would mean that funds structured as companies and funds structured as unit trusts would be treated equally.

Enhancement of Investor Protection
The Consultation Paper proposes several measures which are designed to enhance investor protection, including proposals:

• that the compensation provisions whereby shareholders can claim compensation for loss sustained by reason of untrue statements in a prospectus set out at Sections 40(1) and 40(7) of the CO and which currently only apply to persons who acquire shares in the primary market be extended to shareholders who acquire their shares on the secondary market (this has been proposed to remedy a loophole in the existing legislation and presumably will apply to all types of offering regardless of whether they are offerings of shares, units or interests in limited partnerships if the SFC’s proposal to consolidate the SFO with the relevant provisions of the CO as set out above is implemented although this is not altogether clear from the Consultation Paper);
   
• to extend the circumstances in which a shareholder can claim compensation for loss resulting from an untrue statement in the prospectus;
   
• to impose due diligence obligations on those responsible for the contents of a prospectus and to provide that only those persons who are responsible for a contents of a prospectus who have completed this due diligence will successfully be able to use the defence that they reasonably believed that an untrue statement contained in the prospectus was true;
   
• to update the disclosure standards set out at the Third Schedule to the CO, to move these provisions in to the body of CO prospectus regime (to be set out in a discrete section of the revised SFO) and to expressly tie such disclosure provisions to the civil and criminal liability provisions for untrue statements in a prospectus set out currently at Section 40 of the CO; and
   
• to clarify Section 38(1) of the CO which prohibits the issue of any form of application for shares or debentures unless the form is issued with a prospectus that complies with the requirements of the CO prospectus provisions. It is also proposed to extend the scope of this regulation to any type of application form or application process and to any person engaging in their distribution or implementation.

The SFC has requested comments from market participants and interested parties by 30 November 2005.

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SFC SIGNS LOI WITH JERSEY

The SFC and the Jersey Financial Services Commission have signed a letter of intent to enhance regulatory co-operation. The SFC has indicated that this is part of a programme being undertaken with a view to working towards mutual recognition of investment products to enable easier distribution of recognised products. The practical impact of this programme has yet to be seen.

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DEACONS FINANCIAL SERVICES PRACTICE GROUP
We are delighted to announce the expansion of our Financial Services Group with the arrival of Mary Nieto, Hiromi Takeno and Winnie Cheung.

	Mary has joined us as a financial services Professional Support Lawyer (PSL), expanding the firm’s existing PSL team, which encourage excellence in specialist legal and market information by managing knowledge systems, providing training and promoting business development. Mary has an LL.B (honours) and has practiced as a solicitor in both London and Hong Kong. In her previous role, Mary was a Managing Director at Bankers Trust, where she was the head of Transaction Management.
	Hiromi has joined us recently as a Regulatory & Compliance Executive to assist our clients in compliance matters. She is a Certified Public Accountant and has previously audited funds and fund management companies. She also worked in listed international financial institutions where she held responsibilities for internal control and compliance matters. Hiromi is Japanese and holds Postgraduate Diploma in Hong Kong and English Law.
	Winnie has joined us as a Paralegal to assist with authorised funds matters. Winnie previously worked with a leading fund manager as manager of their business development team. Apart from managing delivery of various major product and business projects, Winnie was also responsible for preparing fund documentation and dealing with regulators including the SFC and MPFA. Winnie is fluent in English and Chinese.

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DEACONS FINANCIAL SERVICES SEMINAR SERIES
的近律師行金融服務研討會系列

我們的2005年金融服務系列的下一次研討會將於2005年11月10日於我們的香港辦事處舉行。是次討論的範圍包括符合證監會持牌人或註冊人操守準則的問題。

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.