Asian hedge fund managers are busily sending out questionnaires to investors to determine if they fall under the category ‘US persons’ – a new classification under the Dodd-Frank Act that will be required to comply with within the next two months.

It comes after the US Commodity Futures Trading Commission (CFTC) added the provision to Dodd-Frank legislation in mid-July, stating that a non-US hedge fund will be considered a US person if the majority of its investor base is made up either of permanent US residents or businesses incorporated in America.

Nathan Howell, senior associate at law firm Sidley Austin in Chicago, says some of his Asian hedge fund clients have been rushing to their investors to clarify, but that more need to respond to the change.

“It’s a significant development, particularly for non-US managers,” Howell tells AsianInvestor. “Now, managers need to look through their funds and determine who owns it. Are my ultimate investors US persons? Because if the fund is beneficially owned by a majority of US persons, then the fund is also a US person.”

While he acknowledges that hedge funds know plenty of information about their investors, he adds that many don't have the level of detail required by CFTC to determine who should be classified as a US person.

Asian hedge funds will have to move fast. Unlike other US extraterritorial regulations such as the Foreign Account Tax Compliance Act (Fatca), which were recently pushed back by six months to July 2014, CFTC has moved more swiftly – non-US funds are expected to adhere to the new rules by October 9.

“The CFTC has definitely garnered some controversy both in the US and abroad with how quickly it has implemented Dodd-Frank relative to other jurisdictions,” says Howell.

“All of this, of course, stems from commitments made by the G20 to bring standardised derivatives under regulation. From the CFTC’s perspective, I think they would say they are just implementing those understandings and their mandates under Dodd-Frank.”

Asian hedge funds with a majority of investors from the US – the number is understood to be significant – will soon fall under the Dodd-Frank umbrella, which involves an array of requirements covering mandatory clearing, trading on public exchange and reporting.

Until October 9, only hedge funds set up in the US have to comply with Dodd-Frank, implemented by the US government in 2010 to increase regulation of banks and hedge funds on the back of the 2008 financial crisis.

Thereafter this new classification will have a number of implications. Drivers for it include bringing non-US approved swaps in a cross-border exchange under one US regulation, while it is also designed to prevent offshore US investors from evading US regulatory requirements.

Ultimately, what determines whether a fund is a US person depends on who the beneficial owner is, even if an institution such as a bank is holding the legal ownership on behalf of another party. (For example, if a Swiss private bank invests on behalf of a US client into a hedge fund in Hong Kong, that fund would fall under Dodd-Frank.)

Howell notes it is difficult to identify the beneficial owner of an investment, as individuals may invest in hedge funds through nominee or third-party managed accounts.

While funds can circumvent Dodd-Frank regulations by simply not allowing US persons to become the majority of their investor base, Howell notes this is a route that many won't be able to take as US investors form a significant portion of Asian hedge funds.

Ultimately, complying with these regulations will become routine. But it will not happen overnight, he suggests.

“The industry will get there [in terms of complying with Dodd-Frank rules]. They will get to a point where compliance with CFTC rules become a more routine matter and not constantly driven by massive new regulatory developments,” notes Howell. “[But] it may take years before that happens.”