Rep. Barney Frank and Senator Chris Dodd
It may be no surprise that most market participants in the region consider Singapore and Hong Kong to be well regulated. But should they then rank the United States and Europe as the next-best jurisdictions for asset managers?
A survey conducted by AsianInvestor and Clifford Chance of 241 market participants, mostly based in Asia, and including fund managers, service providers and institutional investors, finds the industry taking a benign view of US and European regulators.
To Clifford Chance’s Asia-based partners focused on funds, this is a little alarming.
“The US has just introduced Dodd-Frank, while Europe is reviewing Mifid and is introducing AIMFD,” says partner Mark Shipman, who believes these laws are going to have a major impact on the asset-management industry worldwide. “So why are the US and Europe rated so highly?”
The survey asked people to name the country or region with the most pragmatic post-crisis regulatory regime for the finds management industry. The US and “Europe” came third and fourth, after Singapore and Hong Kong.
James Walker, partner at Clifford Chance, worries this means that people don’t understand the impact of changes made to US and EU regulations over the past two years.
This isn’t just because people cited the US and Europe as ‘pragmatic’. The survey found 59% of respondents believe US and European regulatory trends will have ‘no significant impact’ to them.
“The notion that nearly 60% of people don’t think the US and European governments will affect their business is crazy,” Walker says. “It suggests that people in Asia don’t truly understand what measures like Dodd-Frank and AIFM are about.”
(Under Dodd-Frank, all fund managers must determine whether their US investor base requires them to register fully with the SEC, register as an exempt-reporting adviser (which still triggers compliance and reporting consideration) or be entirely exempt. Only the smallest funds or those with very little US capital would be fully exempt.
(Dodd-Frank is also likely to impact the ability, or ease with which fund managers outside of the US conduct derivatives trading activities with US swap dealers and major swap participants.
(AIMFD is a little way off and so further down most people’s list of priorities. The focus is not so much about whether Europeans are invested in a fund, but rather whether and how future marketing and placement activities can be conducted with EU-based investors.)
We also asked the industry’s fund managers whether they would seek to register with the US Securities and Exchange Commission if the US government removes the 15-persons exemption for private fund advisers. A stunning 65% said ‘We are not and will not register’.
Given the structure of the survey (in which about 40% of responses came from fund managers), the Clifford Chance partners believe most of these ‘no’ votes came from other parts of the industry, and that asset managers accounted for most of the 35% saying they are, or will be, registered in some form. This would then match the response to a similar question we asked in a survey conducted last year.
Shipman also notes that a high number of people saying they won’t register equates with the equally high percentage who say US/EU regulation will have ‘no significant impact’ on their business.
“If this really reflects opinion in the industry, then the industry is in for some surprises,” he says.
We also asked respondents to name the regulatory change most likely to impact the investment industry in the next 12-18 months, to which 30% cited Basel 3 and Solvency 2, and 20% named ‘capital adequacy requirements’.
“It’s all about capital requirements,” Shipman says.
The partners also note that the Volcker Rule was cited by only 16% of respondents.
The full survey results will be published in the May edition of AsianInvestor magazine.
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