Hong Kong SFC Licensing Update

The December 2006 SFC Enforcement Reporter provides a timely reminder that carrying out regulated activities without a licence is a highly risky endeavour in Hong Kong. This caps off a year where there were a number of significant enforcement actions for unlicensed dealing activities.

When hiring professionals either from Hong Kong or from offshore, if the individual is not currently licensed by the SFC and their new duties will be to perform SFC regulated activities, a provisional licence may be granted but only if the individual is deemed suitable by the SFC, and following submission of an application to be a licensed representative.

For professionals who have a similar role overseas, and are subject to authorisation by a regulatory body in the home jurisdiction, if you are planning a visit to Hong Kong to carry out regulated activities for a licensed corporation, you will need to apply for a temporary licence. Temporary licenses are restricted to certain activities but include dealing in securities and futures and advising on securities, futures and corporate finance. Temporary licenses are granted for a maximum duration of three months at any one time and a total of six months in any 24 month period.

Itinerant professionals who perform regulated activities and who regularly visit Hong Kong for short periods of time each visit may be exempt from the local regulatory framework papers. The conditions applying to itinerant professionals are that: (i) the individual will not carry on regulated activities in Hong Kong for more than 30 days in any calendar year; and (ii) a licensed or registered person will always accompany them when they are conducting regulated activities in Hong Kong. In these circumstances, the sponsoring corporation also has to provide undertakings that they will be responsible for supervision of the individual’s activities during his stays in Hong Kong, to ensure compliance with Hong Kong requirements.

Back to Top

The Cayman Islands Mutual Funds (Amendment) Law 2006
by John P. Wolf of Campbells

On 14 November 2006, a Law amending the Cayman Islands Mutual Funds Law (which governs open ended investment funds in the Cayman Islands) came into effect. The Mutual Funds (Amendment) Law, 2006 (MF Amendment Law), makes a number of significant changes to the regulation of Mutual Funds in the Cayman Islands dealing with matters from minimum subscriptions to whistle blowing.

The New Law - Amongst the more significant changes introduced are the following:

John P. Wolf is a partner of Campbells, one of the leading law firms in the Cayman Islands. John can be contacted by telephone on +345 914 5856 or email jwolf@campbells.com.ky.

Back to Top

Risk management policies and procedures for the use of expanded investment powers under UCITS III

Under UCITS Regulations, UCITS III funds are permitted to use financial derivative instruments (FDIs) not only for hedging but also as part of their general investment policies. The Irish Financial Regulator requires that the risks involved in using FDI are properly managed, measured and monitored in an ongoing basis through designing and implementing a comprehensive risk management process (RMP). In other words, if a UCITS III fund is not using FDIs for investment purpose but is using the other expanded investment powers under the UCITS Regulations such as expanded powers regarding investment in money market instruments and other collective investment schemes, the Irish Financial Regulator does not require that the fund’s RMP be submitted for its approval.

However, it should be noted that the SFC does not take the same position. Even though the RMP is usually FDI-oriented in its content, the SFC prefers a fund which uses the UCITS III expanded investment powers to submit its RMP for its approval even if the fund does not seek to use FDIs for investment purpose. Fund managers of UCITS III funds should therefore be aware that an RMP may still be required to be approved by the SFC even though it is not required by the home regulator.

To ensure that UCITS III funds can fully utilise the non-FDI-related expanded investment powers under the UCITS Regulations 2003, it is recommended that fund managers should submit the RMP to the SFC for approval even if it is not currently envisaged that the funds will invest in FDIs. The RMP should be prepared in accordance with the SFC’s Circular on Information relating to the Risk Management and Control Process of UCITS III Funds applying for SFC authorisation issued in August 2006. According to that Circular, the RMP for non-FDI users should contain the following information:

Back to Top

SFC focuses on mis-selling

In a speech on 20 November 2006, Mrs Alexa Lam, the SFC's Executive Director of Intermediaries and Investment Products, announced that the SFC will continue its focus on ensuring that financial products are not mis-sold in Hong Kong and that investors are provided with appropriate advice from their investment advisers (IAs). The speech notes that the SFC is conducting a second round of inspection on IA activities and that the SFC will provide more detailed guidance on existing regulatory requirements concerning the duties and obligations of IAs to their clients. IAs are reminded that they have a duty to act in the clients' best interests by knowing their clients, ensuring adequate due diligence, making reasonable recommendations, helping clients make informed decisions, and employing competent staff with appropriate training. The SFC expects senior management to take responsibility for ensuring that proper standards of conduct and compliance are adhered to.

Mrs Lam's speech comes in the aftermath of a leading HK negligence case regarding the duty of care owed by IAs to their clients. The SFC commenced disciplinary proceedings against Mr Andrew Nicholas Barber after a court of first instance held that he was liable for giving unsuitable advice to his client. The Securities and Futures Appeals Tribunal (SFAT) affirmed the SFC's decision to suspend Barber, and, in September 2006, the Court of Appeal unanimously upheld SFAT's decision. The Court held that it was not sufficient for Barber to merely talk a client through all the relevant documentation, and that Barber had to make clear to his client the full picture of the investment including whether the client could afford the risks involved and whether the client was, in the light of investment objectives, prepared to take those risks. The Court ruled that, in doing this, Barber had to show his client an individualised example of possible loss scenarios. The SFC commented, "Advisors must ensure clients are properly informed of the risks of products to enable them to make informed decisions. They cannot just explain documents and must independently ensure that their clients understand the product and that it is reasonably suitable for them, considering their circumstances."

Back to Top

China Updates - NSSF

In late 2006, China’s National Social Security Fund Council for the first time granted overseas mandates to 10 global investment managers to manage in total USD 1 billion of the National Social Security Fund (“NSSF”). It is reported that the NSSF, China’s national pension fund of last resort, has total assets worth of around USD30 billion.

The 10 managers are AllianceBernstein, Allianz, AXA Rosenberg, BlackRock, JanusINTECH, Invesco, PIMCO, State Street Global Advisors, T. Rowe Price and UBS/CICC who will respectively manage mandates in Hong Kong equities, US equities, Non-US equities, global bonds and foreign currency cash products.

Deacons’ Financial Services Practice Group advised clients on these mandates.

Back to Top

China updates - cIRC issues draft rules

The China Insurance Regulatory Commission (CIRC) recently issued draft rules namely, Regulatory Measures on Offshore Investment of Insurance Assets, governing China's insurance companies' investment in their assets offshore and the appointment of foreign investment managers. These rules seek to replace the provisional rules issued in August 2004 and give a wider investment scope of insurance companies' assets, as well as establish an independent registration regime for foreign managers seeking to manage such assets. The new rules are expected to become effective later in the year.

Back to Top

Deacons Compliance Services Practice Group

We are delighted to announce that Deacons’ industry leading Financial Services Practice Group is now offering an expanded range of compliance services through a team of seven regulatory and compliance professionals. The team comprises former regulators, industry participants with a background in compliance, in-house legal, finance and operations, and former audit professionals, and is under the management of Jennifer Davies.

Jennifer Davies, an Australian lawyer, heads the Compliance Services team. Jennifer has lived and worked in the Asian region since 1996 and during this time she has been responsible for the compliance function for asset management businesses in Australia, Hong Kong, India, Indonesia, Japan, Korea, PRC, Singapore and Taiwan. Prior to joining Deacons, Jennifer held the role of Asian Regional Head of Compliance, Asset Management for both Deutsche Asset Management and UBS Global Asset Management.

Back to Top

Deacons Financial Services Seminar Series

The next seminar in our 2007 Financial Services Series will be held on Thursday 15 March 2007 in our Hong Kong Office.

Back to Top

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.