Asian hedge fund managers say they are not worried that incoming legislative amendments under Dodd-Frank rules which will require the disclosure of past offences will impact the region.
Under the Bad Actor rule, set to become effective on September 23 along with other updates, senior management will need to disclose to US investors criminal convictions, injunctions and disciplinary orders from US courts and regulators. Securities offences committed outside the US will be exempt.
Under the rule, Asian hedge funds will need to amend subscription documents in the event of a disqualifying event, and obtain certificates of acknowledgment about the indiscretions from directors, executive officers and beneficial holders with at least 20% of voting shares.
But Henri Arslanian, director for UBS business consulting services, notes that hedge funds in Asia already offer similar disclosures as part of the due diligence process. It’s common for investors to request information on whether any principal at a hedge fund has been involved in legal or regulatory conviction/discipline in the past.
“In comparison with some of the bigger regulatory development mountains that Asia-Pacific chief operating officers and general counsels have had to climb in the past 18 months, this is a relatively small hill, although one that needs to be climbed quickly due to the September 23 deadline,” he tells AsianInvestor.
Joshua Sterling, Washington-based partner at law firm Bingham McCutchen, adds: “I think in general serious misconduct, at least by a manager’s personnel, would often be known anyway in the hiring process or as part of their due diligence by investors.”
Nevertheless, he advises all firms’ general counsels to have a sound understanding of incoming Securities and Exchange Commission requirements, as well as the US laws and rules they reference. They should draw up a list of possible misconduct or sanctions to review with executives, shareholders and others covered under the rule.
A large proportion of Asian firms do not have operations in the US, but rather focus on fundraising. As such, many executives may not be familiar with the US laws. “Their personnel may not have run into these types of violations and sanctions on a day-to-day basis since they are operating out of Asia,” Sterling notes.
Although the Bad Actor rule will not have as big of an impact on the Asian hedge fund industry as Europe’s Foreign Account Tax Compliance Act (Fatca) or Hong Kong’s short-selling rules, fund managers raising money in the US should aim to familiarise themselves with the guidelines soon, given the short deadline, he adds.
“I think firms that raise capital in the US should begin considering how they will seek to confirm that they comply with the new Bad Actor rule,” says Sterling. “I think it would be achievable for the simple reason that they must do in order to raise capital.”
Other notable amendments to Dodd-Frank rules set to be implemented on September 23 include a new classification for “US persons”, stating that a non-US hedge fund will be considered a US person if the majority of its investor base is made up of permanent US residents or businesses incorporated in America. Many Asian hedge funds have significant US investor bases.