Asian fund managers need to be nimble to adapt to changing rules governing the industry in an environment of continuing regulatory uncertainty, says Mark Shipman of law firm Clifford Chance.
Since September 2008, investment managers have had to deal not only with the fall-out of the financial crisis, but also with an ever-growing spiral of legislative review, consultation and change.
Shipman, a funds partner and co-head of Asian regulatory practice at Clifford Chance, notes that the new Dodd-Frank Act alone, which runs to 2,300 pages, could comfortably contain a large chunk of all the securities legislation passed in the US from 1993 to 2008.
Asked if he felt areas were emerging that Asian fund managers should pay more attention to, he replies, “yes, and no”. He suggests there are three “slightly murky realities” they need to live with.
Firstly, deepening regulatory fragmentation between countries and even regulatory bodies within countries, which he notes are likely to continue for some time.
Secondly he names creeping criminalisation. “As regulators flex their enforcement muscles both in Asia and elsewhere, more and more civil actions will move into the criminal sphere, with prosecutors beginning to target individuals as well as their employers,” he finds.
Lastly he mentions “continual change”, highlighting the possibility of shifts in governments that could see laws softened or toughened up before many of the proposed regulatory changes come into force.
He makes the following recommendations for different jurisdictions:
Hong Kong: Although there has been little new legislation to bring about significant regulatory change (and little is expected), changes to a number of areas of the Securities and Futures Commission’s Product Handbook and its Code of Conduct, designed to protect the investing public, will affect most managers, depending on their strategies and products. Many are in effect, with others to be phased in over the next year. Each area of business should be checked against the changes.
United States: The second deadline to consider is registration with the US Securities & Exchange Commission (SEC) as a private fund adviser, as a result of changes brought about by the Dodd-Frank Act. Theoretically the deadline for registration and compliance is July 21, 2011. If you do business in the US, you need to start preparing your application.
Singapore: The new licence regime for alternative fund managers is confirmed, and draft legislation is expected in the next few months. The regime is most likely to come into effect in the third quarter of 2011 for those making first-time applications for licensing, while existing managers will have an additional transition period of six months to comply.
European Union: The next impact will come from the implementation of the Alternative Investment Fund Managers (AIFM) directive. Although full compliance will only be required by 2013, the changes required to business practices will take time to complete and, if you raise funds or do business in Europe, should be built into strategy now.
James Burdett, a partner at rival law firm Baker & McKenzie in London, notes the AIFM directive will mean that many Asian managers and advisers will be required to register with regulators in Europe for the first time (and to comply with the associated reporting and disclosure requirements) if they want to conduct fundraising anywhere in the EU.
“The AIFM directive will impose rules which seek to influence the way in which such managers and their funds conduct business [including leverage limits, asset stripping prohibitions, limits on remuneration of fund managers and regulatory capital requirements for managers],” he adds.
He also notes that European reforms will permit the “passporting” of funds across European member states, in contrast to being subject to specific offering exemptions in each country (which he describes as a cumbersome and costly process).
“Crucially, however, while the new passporting regime will be available to European-based managers from day one, non-European managers may have to wait up to five years for equivalent rights – leaving them at a competitive disadvantage,” he states.
He points out at the same time that the new AIFM directive rules are not likely to become binding until the early part of 2012 at the earliest.
In terms of US reforms that Asian managers should be aware of, Addison Braendel, a Baker & McKenzie partner in Chicago, notes that they may be subject to the Investment Advisers Act of 1940, which was revised by the Dodd-Frank Act.
He points out that foreign firms raising over $150 million in the US will probably have to register as an investment adviser; those raising between $25 million and $150 million will probably have some recordkeeping and reporting obligations; while those under $25 million probably have no new obligations.
But he adds: “Most of the new rules are not effective until July 21, 2011, so for most fund managers, there is nothing they need to do before then.”