Author: Rory Gallaher
Service Area: Financial Services
Date: October 2013
Country: Hong Kong


Financial Services Newsletter
Issue 7 of 2013: October


Work continues on establishing Hong Kong's independent Insurance Authority

by Scott Carnachan (

On 3 October 2013, the Government announced that it was establishing a working group to facilitate the smooth transition of the existing self-regulatory regime for insurance intermediaries to a new regime administered by an independent Insurance Authority (IIA). "Independent" because, in contrast to the existing Office of the Commissioner of Insurance, the IIA will be financially and operationally independent of the Government.

Under the current regulatory regime, the conduct of insurers and insurance intermediaries is carried out by self-regulatory organisations including the Hong Kong Federation of Insurers, the Insurance Agents Registration Board, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association.

Under the new regulatory regime, the regulatory functions of the self-regulatory organizations will be removed and the IIA will assume responsibility for setting conduct requirements for insurance intermediaries and for licensing, investigating and disciplining insurance intermediaries.

The proposed structure and scope of responsibilities of the IIA are broadly similar to the role of the Securities and Futures Commission (SFC) in relation to the regulation of brokers, advisers, asset managers and other securities market intermediaries. Indeed, many of the terms used, such as "regulated activities" and "responsible officer", would be familiar to SFC-licensed corporations.

The Government has indicated it intends to introduce enabling legislation for the new regulatory regime in the 2013-2014 legislative year, with the aim of establishing the IIA in 2015.

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Reminder: Hong Kong electronic trading rules come into effect 1 January 2014
by Scott Carnachan (

The electronic trading rules (Rules) set out in paragraph 18 and Schedule 7 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission come into effect on 1 January 2014. The Rules apply to all licensed corporations and registered institutions that conduct electronic trading of securities and futures contracts that are listed or traded on an exchange, as well as licensed corporations and registered institutions that provide trading of leveraged foreign exchange contracts electronically by means of internet trading.

Licensed corporations / registered institutions must conduct "appropriate due diligence" on third party-provided electronic trading systems, algorithmic trading systems and trading algorithms they use. To help meet this requirement, various industry associations (including, from the buy-side, the Alternative Investment Management Association and the Hong Kong Investment Funds Association) have collaborated on an Electronic Trading Information Template. The template includes a summary of the Rules and illustrative questions to ask third party providers as part of the due diligence process.

Please refer to our earlier client alert for a summary of how the Rules affect Hong Kong-regulated asset managers.

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SFC licensing and compliance hints
by Rebecca Yip ( and
Jason Hung (

Visa requirements: SFC licensed representatives being relocated from overseas must have a valid employment visa sponsored by their employer issued from the Hong Kong Immigration Department which does not restrict them from being engaged in the relevant regulated activities.

Before employing a new responsible officer or licensed representative within Hong Kong, the employer should check whether the candidate is a Hong Kong permanent identity card holder. If not, the person should have an employment visa to work in Hong Kong. The candidate will need to submit a change of employment application sponsored by the new employer to the Immigration Department and can only commence work with the new employer after the Immigration Department has granted approval for the change of employment.

Both the applicant and the employing company will need to submit certain application forms and supporting documents, including the applicant's original passport, to the Immigration Department. Normally it takes four to six weeks for the Immigration Department to process a change of employment application. The applicant will need to be physically present in Hong Kong on the day the application is submitted.

Got the name right? Some companies in Hong Kong have both English and Chinese names on their Certificates of Incorporation, but do not show both names on all stationery and agreements. According to Section 93(1)(c) of the Companies Ordinance, "every company shall have its name mentioned in legible characters in all business letters of the company and in all notices and other official publications of the company, and in all contracts, deeds, bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company, and in all consignment notes, invoices, receipts and letters of credit of the company." If a company has both English and Chinese names as its official name, they should be used in full in all circumstances mentioned above. Even though the Companies Ordinance does not list email signatures, with the increasing dominance of emails in our daily correspondence, it is advisable for email signatures to comply with the requirements. As an alternative to having both English and Chinese names as its official name, a company can adopt a Chinese name as a business name which can be used whenever the company wants.

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Draft statement of guidance for corporate governance for Cayman Islands regulated mutual funds
by Robert Searle of Campbells (

In January 2013, the Cayman Islands Monetary Authority (CIMA) announced a private sector consultation on a proposed Statement of Guidance on Corporate Governance for CIMA licensees across the range of regulated sectors, seeking comments and feedback. Following initial responses, CIMA then opted in July 2013 to issue a further draft sector-specific guidance for CIMA-regulated mutual funds on corporate governance (Draft Guidance). It should be noted that the Draft Guidance is in draft form only and does not have any current effect.

The Draft Guidance describes the general expectations that apply to the directors of Cayman Islands regulated funds by providing a minimum level of activity and supervision. The Draft Guidance principles are in large part, an expected recitation of sensible fiduciary practice which most directors would adhere to regardless of any statutory prescription. CIMA takes care to note that the manner of undertaking the role of the director must be commensurate with the characteristics of the fund itself and there is not a "one size fits all" approach. The Draft Guidance is not intended to codify law or otherwise be exhaustive.

Most Cayman Islands resident professional directors already adopt a rigorous approach to continual supervision of service providers, engagement with investors as requested and focus on any regulatory investigations or questions which arise: the Draft Guidance provides for minimum standards of behaviour below that normally exhibited by Cayman Islands resident professional directors. The Draft Guidance is likely to reinforce to non-Cayman Islands directors that CIMA expects fund directors to adhere to global best practice standards, in particular by holding substantive meetings and actively monitoring the performance and risk management of the fund.

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US bad actors
by Ethan W. Johnson, Morgan, Lewis & Bockius LLP (

Effective 23 September 2013, funds may no longer rely on SEC Rule 506 of Regulation D when making a private offering in the US if the fund or any other covered person is a "bad actor" meaning that it has been the subject of a disqualifying event during a particular look-back period. Funds making a private offering in the US under Rule 506 must now determine who their covered persons are, whether any of their covered persons has been subject to a disqualifying event and, if so, whether an exception from the prohibition is available.

Among the universe of "covered persons" of a fund are certain affiliated funds; a fund's directors, executive officers, officers who participate in the offering and general partner / managing member (but not trustees of unit trusts); investors with at least a 20% beneficial ownership of the fund's voting equity securities; promoters connected with the fund; investment manager of the fund; placement agents; and certain personnel of a fund's investment manager.

Disqualifying events include among others certain US felonies, misdemeanors, court orders, final regulatory orders, SEC orders, industry suspensions, which generally involve some fraud in connection with the purchase or sale of securities, US regulatory filings or conduct in a financial services business. Generally, the applicable look-back period is either five or ten years, or the period for which the applicable order is in effect.

The new rules include an exception for funds that do not know and in the exercise of reasonable care could not have known that a disqualification existed. As such, due diligence processes will become of key importance for funds relying on Rule 506 to engage in private offerings of their securities in the US. The processes that a fund should implement depend on the facts and circumstances of the particular fund. The SEC has indicated that for continuous offerings, such as for hedge funds, reasonable care "include[s] updating the factual inquiry on a reasonable basis." Private funds will thus need, among other things, to update investor and placement agent representations periodically regarding disqualifications.

The SEC may provide funds with a waiver upon a showing of good cause. A fund relying on Rule 506 will have to disclose information about disqualifying events occurring before 23 September 2013 but the disqualifying events will not prevent the fund from relying on Rule 506.

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Recent Deacons' publications


Closer Economic Partnership Arrangement Between Mainland China and Hong Kong


Construction Newsletter, Issue 1 of 2013: September

Financial Services Newsletter, Issue 6 of 2013: September

Hong Kong OTC derivatives regulation – Amending legislation introduced

China Legal Update, Issue 6 of 2013: September

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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.