hk fund managers grapple with new client rule _ iflr

5/16/2016 HK fund managers grapple with new client rule | IFLR.com

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HK fund managers grapple with newclient ruleAuthor: Brian Yap | Published: 12 May 2016

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Hong Kongbased private fund managers are struggling with thepossibility of being brought under new client agreement regulations,counsel tell IFLR.

The Securities and Futures Commission (SFC) made it mandatorylast December for licensed companies to include a new contractualclause in client agreements requiring them to ensure the suitabilityof investment of investment recommendations and solicitations totheir clients.

But counsel in Hong Kong point to uncertainty about the applicationof the new clause to licensed private fund managers, claiming

those advising on securities and asset

http://www.iflr.com/Article/3553394/Golden-rules-of-compliance-for-first-time-fund-managers.html



Gaven Cheong,Simmons &Simmons

those advising on securities and assetmanagement would fall into the category oflicensed intermediaries covered by the newrequirements.

“In the narrow context of a fund managerexercising type nine asset management typefour investment regulated activities to its fund,then there’s little scope for the application,”said Gaven Cheong, partner at Simmons &Simmons.

Counsel suggest that, in most cases, there is no existingagreement in place between the manager and the investors in thefund. They also cite the potentially cumbersome process of beingrequired to include any form of undertaking from the managerdirectly to investors, or making the manager a party to thesubscription agreement.

They dismiss the work scope of the new client suitability clauserequirement as limited as there is only one new clause to beinserted. They predict that implementing it across different businessand product lines will require extensive documentation review andan amendment exercise to ensure compliance.

“We have to draw a distinction between the different types ofmanagement services in assessing the applicability of the newclient suitability clause. There is still ongoing industry debate anddiscussions on this point,” said Minny Siu, partner at King & WoodMallesons in Hong Kong.

KEY TAKEAWAYS

Hong Kongbased private fund managers engaging insecurities and asset management activities may bebrought under the regulation of city’s new clientagreement requirements, counsel tell IFLR; The Securities and Futures Commission (SFC) made itmandatory last December for licensed companies toinclude a new contractual clause in client agreementsrequiring them to ensure the suitability of investment ofinvestment recommendations and solicitations to theirclients; But counsel in Hong Kong point to uncertainty about theapplication of the new clause to licensed private fundmanagers, citing those advising on securities and assetmanagement would fall into the category of licensedintermediaries covered by the new requirements.



"It would be achallenge for the SFCto monitor whethersuch arrangementsare in place"

There is also a multijurisdictional barrier to the new clause ascounsel warn of the difficulty facing the regulator and businesses toidentify when the provisions apply in light of the many customersacross Asia buying various products, who are not regulated by theSecurities and Futures Ordinance (SFO).

“It is quite a difficult task for banks to work out how to apply theseprovisions will they just identify customers to which theseprovisions apply or apply the provisions to situations where, strictlyspeaking, they do not apply?” said Richard Mazzochi, partner atKing & Wood Mallesons in Hong Kong.

“These changes only apply in situations where the SFO applies.The securities law needs to apply in order for these provisions to berelevant,” he added.

But Cheong doesn’t rule out the possibility of the new clauserequirement being imposed on private fund managers in the nearfuture. He argues that, in cases where a licensed investmentadvisor is producing research reports for external parties, there isscope for including that clause as there will be individual clientagreements in place between the advisor and the advisee.

“It would be a challenge for the SFC to monitor whether sucharrangements are in place,” said Cheong, adding that thecommission doesn’t actually review fund documents created for aprivate fund before launch as they don’t need SFC authorisationbefore being made available for sale to the public.

Counsel also warned that if the SFCreally wants to regulate privatefunds, it will require the legislativeframework to be changed by thelegislative council, Hong Kong’sparliament.

“If, by reason of the imposition ofthe new clause requirement onprivate fund managers, privatefunds themselves become subjectto an additional regulatory burden, I can foresee a lot of challengesbeing made by industry participants,” said Cheong.

“It shouldn’t try to effect such change by way of subsidiarylegislation, and definitely not through the Code of Conduct, whichby itself, has no force of law,” he added.

Some argue that if a manager is marketing a fund they are alsomanaging under the type nine license, so it may then be



appropriate for the SFC to impose the new clause requirement.

“But even in this context, there may be some resistance from theindustry because the manager is indemnified out of fund assets,and imposing this additional contractual requirement on managerswould ultimately translate to an increased burden on the fund,” saidCheong.

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hk fund managers grapple with new client rule _ iflr

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