| QFII Update
The China Securities Regulatory Commission (CSRC), People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued new regulations effective 1 September 2006 that govern the regime allowing qualifying foreign institutions approved by the CSRC as Qualified Foreign Institutional Investors (QFIIs) to invest in China A shares and other Renmimbi (RMB)-denominated securities in the People's Republic of China (PRC) subject to the grant of investment quotas by SAFE.
Key relevant changes for fund managers under the New QFII rules include the following:
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The qualifying criteria for fund management institutions in terms of assets-under-management (AUM) has been reduced from US$10 billion to US$5 billion for the most recent financial year. The requirement for five years operating history remains. |
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QFIIs may now operate multiple securities sub-accounts with the PRC clearing and settlement house and have corresponding multiple RMB special accounts. The sub-accounts may be opened as direct accounts or nominee accounts. Where a QFII establishes a securities account for funds, the account may be opened in the direct name of "QFII+fund". It is expressly provided that assets in such account belong to the relevant fund and are independent of the QFII and the custodian. |
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The new regulations no longer set out the specific requirements with respect to remittance and repatriation, but instead provide that remittance, repatriation and any lock-up period shall be as adjusted by SAFE based on the economic and financial situation of the PRC, foreign exchange balance of payments and according to arrangements set by the PBOC. At press time, SAFE has yet to issue any supplemental regulations that specify the remittance and repatriation requirements. However, based on previous proposals, the lock-up period may be reduced to three months for open-ended investment funds and similar investment bodies, and further the three months lock-up period may start to run from remittance of a certain minimum amount of the QFII quota (rather than the full QFII quota) and thereafter, remittance and repatriation may generally be made freely according to subscription and redemption requirements of such funds. |
For a fuller discussion on the changes under the new QFII regulations, please refer to our separate client alert entitled "Revised China QFII Rules" which is also available from our website: http://www.deacons.com.hk/eng/knowledge/knowledge_268.htm
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Relaxation of ERISA "Plan Assets" Test
The recently introduced Pension Protection Act 2006 makes two important changes to the definition of the term "plan assets" for the purposes of ERISA. The new legislation continues to provide that the assets of a fund or other entity will not constitute "plan assets" and will therefore not be subject to the fiduciary obligations under ERISA if less than 25% of the value of each class of equity in the entity is held by "benefit plan investors".
The Changes
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the term "benefit plan investor" now excludes government plans, foreign plans and other plans that are not subject to the fiduciary provisions of ERISA or of the Internal Revenue Code; and |
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an entity in which a benefit plan investor invests will only be considered to hold plan assets to the extent that benefit plan investors have invested in that entity. Accordingly, if 30% of a particular class of equity issued by an entity is held by benefit plan investors then only 30% of the entity's assets will be considered benefit plan assets and not 100% as has previously been the case. |
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The New BVI Business Companies Act
Phasing out of the International Business Companies Act, 1984 (the IBC Act)
On 1 January 2005, the BVI Business Companies Act 2004 (the New Act) was introduced. Pursuant to the New Act, from 1 January 2006, new BVI companies can only be incorporated under the New Act, and companies already existing under the International Business Companies Act 1984 will continue to be subject to the IBC Act until the 1 January 2007, when all IBC Act companies will be automatically re-registered under, and become subject to the New Act.
The New Act
The following changes have been introduced by the New Act:
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seven different types of companies are now available under the New Act (including companies limited by guarantee, unlimited companies and segregated portfolio companies) whereas previously, under the IBC Act, a company limited by shares was the only type of company available; |
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concepts of authorised share capital and general capital maintenance have been removed; |
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companies are no longer restricted to paying a dividend only out of "surplus" if certain formalities are satisfied; |
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registration of charges under the New Act will be made with the companies registrar (as opposed to on the company's private register) and the chargee can effect the registration of the charge itself without the assistance of the company; |
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foreign characters (e.g. Chinese characters) can now be included in the name of the company; |
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directors may act in the best interests of a company's holding company even if it is not in the best interests of the company itself so long as this is permitted by the Memorandum and Articles of Association; |
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a sole director who is also the sole member of a company can nominate a reserve director to act in his/her place upon his/her death; and |
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a minority shareholder can take statutory derivative actions when granted leave of the court to do so. |
Please note that the deadline for re-registering new memoranda and articles of association in accordance with the New Act expires on 1 January 2007. Adoption of new memoranda and articles of association is not mandatory but there may be some inconsistencies between the existing sets of memoranda and articles of association adopted under the IBC Act and the New Act or companies may wish to take advantage of some of the provisions of the New Act. Existing memoranda and articles of association will be automatically
re-registered under the New Act on 1 January 2007.
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EU Markets in Financial Instruments Directive (MiFID) to be implemented in 2007
By January 2007 all EU members are supposed to adopt MiFID, including its implementation measures published in June 2006. Firms carrying out investment services will then have to comply with it by November 2007.
MiFID should greatly facilitate EU cross-border activities since passported firms will no longer be subject to prudential regulation in each country where they provide services but only by their home country. However to convince member states to renounce national supervision, EU regulation has become much more detailed and harmonised.
Although the new regulation might be partly covered by existing national rules or firms’ practices, firms need to audit their internal policies and organisational structures in order to ensure compliance with MiFID. They will need new documentation, notably to ensure that they:
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know their clients sufficiently well to classify them under MiFID's three categories (retail client, professional client and eligible counterparty) and implement corresponding investor protection measures; |
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comply with the "best execution" rule when executing clients orders, establish order execution policies and review them annually; |
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manage conflicts of interests and, where such management may be insufficient to prevent damage, disclose them to clients before undertaking business; |
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publish pre-trade quotes and post-trade details of transactions in listed shares concluded outside regulated markets or MTF; |
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have internal compliance and risk control functions, including risk management, outsourcing critical functions and business continuity. |
MiFID has a wider scope than the current Investment Services Directive (ISD) it replaces. It also covers for instance investment advice and commodities business. Pure investment advisors and commodity dealers will thus benefit from EU passporting but need to be MiFID compliant.
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Side Letters and the FSA
In the recent Feedback Statement (FS06/2) from the UK's Financial Services Authority (FSA) to its Discussion Paper entitled "Hedge funds: A discussion of risk and regulatory engagement", the FSA identified the use of side letters as an area of concern where a market failure may be present, thus potentially requiring regulatory intervention by the FSA.
Side letters are agreements or arrangements entered into between hedge funds and/or their managers with key investors which provide such investors with more information and preferential (early) redemption and other terms compared with other investors in the same share class (who may be unaware that the side letters exist and who will be denied these terms). The FSA pointed out that this may be to the detriment of other investors in the same share class in the fund who should be aware that side letters can affect the risk profile of their investment. The FSA believes that failure by UK based hedge fund managers to disclose the existence of these side letters maybe, amongst other potential breaches, in breach of Principle 1 of the FSA's Principles of Business ("a firm must conduct its business with integrity").
FS06/2 states that, as a minimum, the FSA would expect acceptable market practice to be for managers to ensure that all investors are informed when a side letter is granted (i.e. the existence of these side letters, and not the nature of the individual agreements, must be disclosed) and any conflicts that may arise to be adequately managed. The FSA also intends to undertake a review of a sample of firms’ practices in this area later this year. This will inform their policy thinking and enable them to take action against firms and management if appropriate.
At a recent meeting between the UK chapter of AIMA and the FSA in relation to FS06/02 and the use and disclosure of side letters, the following were noted: (i) AIMA and FSA will continue their dialogue and a fuller note of the outcome of these discussions will be circulated; (ii) the FSA will not be commencing its thematic review of side letter disclosure practices before October 2006; (iii) the FSA expects fund managers to have written - by 30 September - to all underlying investors in the funds which they manage disclosing the existence of any side letters (AIMA will continue to discuss with the FSA the nature of the disclosure which managers will be expected to make).
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Summary of the SFC Circular re. Information relating to the risk management and control process of UCITS III Funds applying for SFC authorisation
The SFC has recently published a guide to the information required to be submitted to the SFC in relation to risk management and control processes by fund managers seeking approval to use the expanded investment powers under UCITS III (Guide).
The Guide sets out the items and areas relating to the risk management and control process that the SFC normally expects to be provided in order to give the SFC an understanding of the risk management processes of the relevant UCITS III funds. The SFC recognises that the extent and types of financial derivative instruments employed by each UCITS III fund may be different and hence information provided to the SFC may vary for each application.
Fund managers that will use the expanded investment powers are encouraged to submit the risk management policies to the SFC at an early stage of their application in order to facilitate the authorisation process.
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Deacons Financial Services Seminar Series
The next seminar in our 2006 Financial Services Series will be held on Wednesday 4 October 2006 in our Hong Kong Office.
| Topic |
SFC Investigations and Enforcement |
| Speaker |
Joseph Kwan, Partner
Litigation Department, Deacons
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| Language |
English |
| CPD points (Law Society) |
One CPD point has been applied for |
| CPT points (SFC) |
CPT attendance certificates will be available on request |
| Fee |
Complimentary |
| Time |
1:00 – 2:00pm (registration starts at 12:30pm) |
| Venue |
Deacons, 14th Floor, Alexandra House,
18 Chater Road, Central.
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| RSVP |
RSVP by 27 September
2006
Please email Ms. Ruth Chan |
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