Hong Kong’s markets regulator risks harming the city's competitiveness as an asset management centre with proposed changes to the fund manager code of conduct, argues Philippa Allen, chief executive of Compliance Asia Consulting.
The proposed measures formed part of a consultation paper issued by the Securities and Futures Commission (SFC) last Wednesday on the fund managers’ code of conduct (FMCC). They also incorporate proposals to increase the level of disclosure of fund commissions.
Industry experts argue the new rules will result in fewer fund launches and place an unfair regulatory burden on smaller private equity and hedge funds.
Allen said the measures would be a further disincentive to alternatives managers. This is unfortunate for Hong Kong, she told AsianInvestor, given that Singapore is considering a lighter regulatory touch for alternative funds.
“It’s definitely anti-competitive, and particularly at a time when the MAS [Monetary Authority of Singapore] is revisiting its policy on regulating venture capital companies,” noted Allen, who is based in Hong Kong. Her firm has an office in both cities.
“A fund manager that is fully embedded in Hong Kong [as opposed to working on a delegated basis from overseas] will be bearing the full burden of this," she said. "So you’re putting the local, home-grown funds at a disadvantage.”
She added: "We are seeing a lot of difficulty in getting things off the ground here."
The additional compliance burden will raise a barrier to entry for new funds and small managers, agreed Rolfe Hayden, partner at law firm Simmons & Simmons in Hong Kong.
By contrast, MAS is studying the possibility of enhancing the existing incentives for venture capital funds and managers. The regulator is looking to simplify and shorten the licensing process for new VC firms and to exempt them from the business conduct requirements that apply to fund managers in general.
Other bones of contention
In Hong Kong, meanwhile, the SFC proposals raise other issues, particularly for hedge funds, said Hayden.
Under the classic example of a Cayman Island fund, the board of directors is the legal party, responsible for making the decisions. But the SFC is saying it will override the contractual arrangements that are in place, noted Hayden, and that the measures will be applicable to everyone regardless of where their funds are domiciled.
Two other areas of contention are the proposals on conflicts of interest and side letters, he added.
The FMCC draft rules appear to suggest that fund managers must appoint independent directors to address potential conflicts of interest, said Hayden. That comes at a cost. “For a big hedge fund that is not a problem, but for a small start-up in its initial launch period, trying to build a track record, it may be.”
Moreover, the SFC seems to be saying that side letters should be disclosed to all investors, noted Hayden. “But that is effectively going to make it more difficult for big institutions to invest in these funds.”
A large pension fund, for instance, is going to want special rights, and there are also likely to be certain things that are a condition of its investment, said Hayden. “From a commercial perspective, you are not going to want that to be public information."