A season's compendium of compliance reminders from Hong Kong
- Derek McGibney
- Dec 20, 2024
- 19 min read
A veritable buffet, a digestif, a smorgasbord, a collection of informative dumplings, compliance reminders, whatever you like to call it; be prepared for an artificial additive free, feast of thoughtful reflections, on recent developments in Asia, and across the globe that are likely to be relevant to your regulated business here.
Please note that we provide links to external sites which were correct at the time of publication, but they may be updated. Cognitive GRC provides regulatory advisory services to regulated firms in Hong Kong on international requirements and works with various service partners to deliver these services. Firms should obtain specific advice relating to matters that we highlight here. This is neither legal, accounting or investment advice.
Introduction
This is a unique presentation of the latest regulatory developments, latest relevant conferences and discussions for your review and consideration. It is designed to give you a good lens on the future in relation to regulatory action and developments in the following year.
The SFC obliged Asset Managers in Hong Kong by producing a circular highlighting its focus for private funds. The topics highlighted substandard conducts that were noted in management of private funds and discretionary accounts. We feel that we are well covered in our standard assurance programmes and general recommendations, but we will of course seek to strive to identify residual gaps in that framework. Conflicts and Risk management have always been a key focus in our approach, and we have been working hard with Disclosure and Valuation since the FMCC was updated in 2018 and therefore feel confident that we have equipped our clients with the tools to address all the issues highlighted in the recent circular.
Market Observations
The end of 2024 has seen a huge number of changes in the global governance landscape (regime change). The UK and US have both fundamentally flipped leaderships, recognising the respective failures of incumbent governments to stave off economic woes from society. France and Germany are also struggling to maintain stability in Europe as China, while stable, continues to strive to ignite its economy, with perhaps more longer-term solutions.
Weirdly, there is hope, and possibility. Maybe because circumstances of these changes have created a chance to reset the opportunity set. We collectively realise that we all need to work together to recover from the precipice of another potentially catastrophic economic cliff.
Despite the economic challenges, Asia remains a wonderful place to be. It is impossible not to notice an increase in visitors to Hong Kong, as the city climbs back up the charts (whoever may have compiled them). You could hardly move around last week with visitors back in numbers and a little glimpse of the old days, albeit with a more mainland focused vibe. Airport numbers coming back, Christmas Office parties, International Horse Racing, Chamber events and a buzz around parts of the city, there is much to be hopeful about, despite the closure of several expat favourites.
Following a series of positively vibing Asia based global conferences, between the stimulus, the rhetoric, and the attendance, we have to ask whether Asia's Dragon is preparing for its return. While it feels imminent, the question remains is of timing? Costs are certainly down, and opportunities are arising to refresh activity into a newly redeveloping market.
While UK/US elections results may suggest some continued economic tit-for-tat to come, the unpredictability of the new US administration, and the debt/credit relationship between east and west, it would seem to conclude that either by necessity or design, we need a more collaborative future for the world for everyone.
We maintain a strong belief that that inflection point is approaching. We have hope, borne from experience, but we cannot guarantee when it will occur of course. Therefore, in a true risk based approach, we hope for the best but prepare for the worst, ...case scenarios that are not beyond the bounds of probability.
Regulatory Developments
Relevant market updates for Hong Kong firms from the SFC, SEC, and CFTC are included in our detailed newsletters, where we cover enforcement actions, regulatory changes and Anti-Money Laundering resources for clients. Subscribe below for our next update in January. However, we have provided below a roundup of our broader thoughts.
We hope that you will find them useful to ponder as we pass through into the new year and consider what to focus on for the near future.
Each year, we try to gather the intelligence that is generated through the conference season to divine where we are likely to focus our resources for the following year. We also seek to ensure that we (that is, both of us) are not missing out on the next big threat or opportunities. Where we have come across useful and appropriate resources, we will either point to it below or add it to our collateral for client access. If it is not provided hither or tither, we will have it sourced somewhere and if the required solution is not yet delivered, we will strive to fill the gap.
Where we recognise that some more thought is still required, we will come back with a proposed solution. “In our humble opinion”, “this is the way!”. In fact, this has been the way for us, in general, for some time now. Noisy regurgitation of headlines tends to be reactionary and without reflective thought. We do client focused solutions so we thought we should share where we have been inspired in the last quarter by reference to key observations.
Events Attended:
AIMA APAC Forum 2024 (Oct 24th) - AIMA held a packed agenda of interesting discussions around current issues facing hedge funds, private equity and private credit. We attended the pre-forum on structured credit, and manager only events, held with the NFA, the DFSA and the SEC. We had the opportunity to interview two Senior Managers of the Nation Futures Association (NFA), Patty Cushing and Susan Koprowski, who provided some clear guidance on current and future issues relating to commodity and futures trading and NFA expectations which were well received by all those who attended. We certainly enjoyed curating the discussion. There was also an excellent session with SEC Commissioner Mark Uyeda who looked to the immediate future of US regulation just prior to the election. The team from the DFSA (which included a familiar face) and the Dubai IFC highlighted the latest options for entry to the growing region. The broader APAC conference highlighted all the recent concerns being discussed across the industry and the content curated by the committees captured all the key issues of concern. The event is a tremendous collaboration of different parts of the market orchestrated by AIMA for the industry and importantly delivered by the industry. They always welcome participation, and the event is enriched by every new volunteer that is happy to get involved and share their insights to the broader community.
Topics Covered - Political Changes, Trade Development, Investor Innovation, Hong Kong, China, India, US updates, Impact of Artificial Intelligence, New Technology, Arbitration, Cybersecurity, Insurance, and Digital Assets. There were some great keynotes and headline speakers including a group of leading allocators talking about what they are looking for in the current environment. All worthwhile expressions of opinion to help divine a path for 2025. We were there to cover as much of it as we could, but we also got involved in the discussions around research methodologies and navigating expert networks. We are able to draw a lot from what was discussed, both on the stage and the corridors of the event.
Fintech Week (28th Oct to 1st Nov)
Of course, the speeches by the HKMA, the FTSB, and the SFC on trajectory and direction of travel for the Hong Kong market were both anticipated and welcomed. We are already seeing the outcomes from the proposed programmes. While some may have been feeling that Hong Kong had got a bit clogged up on moving forward on digital assets, I would consider that Hong Kong has actually proven to be steadier in feeding the market with forward momentum at a sufficiently constant pace, that avoids it from getting ahead/over of its skis. Almost in response to the existing challenges that were highlighted in our recent blog on the digital asset regulatory landscape, the government has taken on some of the key issues head on with much resolve. The recently appointed head of intermediaries announced an accelerated approach to dealing with the remaining deemed applicants, promising some additions to the list by the end of the year (delivered) and some welcome developments coming up in the new one. (Full speech here: Source SFC)
The key takeaways for me were:
Establishing an official consultative panel for VATPs in 2025 to act as a driver of development and change from within the industry.
Comprehensive Virtual Asset White Paper to outline the development road map as well as developments in compliance and risk management to help better foresee the challenges and put programmes in place to for more efficient movement.
Regulated Stablecoins as early as 2025 (And we have already seen the Bill has been gazetted).
Project Ensemble. And other proofs being implemented in ether sand box, production or live environments.
Upskilling across the market, including the regulator, which is evidenced in their industry collaborations.
Please refer to our blog from September for more details on the technical challenges and licensing options for regulated firms in Hong Kong for some high level and critical insight. Exploring Hong Kong's Digital Asset Regulation and Licensing, Sept 22, 2024, Source Cognitive GRC.
There was many other great topics discussed at this conference but the one that stood out for me, was the panel with Sergey Nazarov of Chainlink (The Future of Finance is Decentralised: Source Hong Kong FinTech Week) It piqued interest most and hence, we headed off the following week, to Smartcon, on invitation of our good friends there. Fintech Week refreshed a lot of current discourse on Artificial Intelligence, Digital Assets and the Future of Finance but Smartcon seemed to promise something entirely different.
Full coverage and recordings of the Fintech conference are available online here.
SmartCon by ChainLink
The Future of Asset Management | Chainlink SmartCon - “In my opinion”, this conversation by asset management industry leaders, led by Chainlink Cofounder, Sergey Nazarov, was one of most informative and entertaining reviews of the digital transformation that the asset management industry is going through right now. It is well worth a listen/review for anyone trying to work out where we are going to be in the not-too-distant future and how we are going to get there. Indeed, the whole conference contained many innovative announcements that were designed to help bring traditional finance and decentralised finance together in a way that was never done before. It was evident from the structure of the event that the future lies in bringing the traditional finance world into a more respectful dialogue with both Web3 and digital native communities. Even if you don’t feel the FOMO, with regards to cryptocurrency, the future of traditional markets is going to be eclipsed by the speed of development in the decentralised one. Although we have your back, we all need to stay on top of the changes to ensure no one is caught off guard, either strategically or operationally.
The full schedule and recordings are also available via that link. It was pleasure to have witnessed what I believe was a historic event. Chainlink kindly provides a recap of the announcements here (Source: Chainlink). Highlights for me are the solutions that were discussed to matters that we had previously identified as key roadblocks to the development of both new and traditional markets. Items such as cross chain interoperability, the success with swift integration, the innovative solutions around delivery of privacy onto a public chain and for me an introduction to verifiable legal identifiers (Source: GLIEF) (Global Legal Entity Identifier Foundation) were all worthy of consideration. The core content was very strong and it was great to see many industry participants from multiple parts of the digital spectrum actively engaged in lively and relevant discussion with a newly forming ecosystem detached from the old divisive ego that may have existed. The energy and collaborative spirit were palpable.
Regulation Asia Awards 2024 (Nov 4th)
We really appreciate our participation in Regulation Asia’s Awards for Excellence. It really helps to get us to see what is out there and how fast things are changing and developing in the different industry and markets. Giving us some further insight into which technology is in the market and how it is changing over the years. This supports us finding the right solution for our clients when and if they need them, and we are always considering new solutions from a right sizing point of view as many solutions are generated for those with the resources to utilise them, so we are always on the lookout for the ones that create true efficiencies during these exercises.
Source: Regulation Asia Awards for Excellence 2024 We have also been tracking how “AI” and “LLM” has already infiltrated the service solutions across the market thus far. The acceleration in the last year has been significant. You can find out who was found best in class here (Source: Regulation Asia).
On AI and LLM point we adopted the expectations highlighted by IOSCO in the early part of the year and sprinkled in some of our expectations. We came up with something that aligns very well with the ultimate conclusions issued by the different regulators in Asia. Clients can refer to our resource database for access.
AIMA Fund Manager Briefing on Market Misconduct (Nov 19th)
Extremely grateful to be able to participate with Herbet Smith Freehills on a summary of the latest enforcement cases and discuss current standards and best practice for managing market misconduct risk. We often provide summaries in our training but the opportunity to discuss them with the lawyers who may have to dealt with the sharp end of the sword is always a worthwhile exercise (better than finding it necessary to do so for an active reason). Discussing the latest cases and developments with Hannah Cassiday, was useful exercise for those seeking to catch up on the latest trends on Hong Kong enforcement.
We will be updating some of our collateral and online training materials to help. You can also refer to our best practice guide on expert network call management here for more details of what we believe is important (Source Cognitive GRC).
Source: AIMA. Cognitive GRC While we review the new market sounding guidelines (see FAQs here) prior to implementation, as discussed with clients during in person trainings, in Cognitive GRC's view, we don’t believe that the guidelines will have a significant impact on the standards that were expected prior to the update. We maintain the view that market participants ought to know when the information they receive is market sensitive and should act accordingly. On the other hand, the market now has clear guidance on the expectations and process that should be followed which is a good thing as for some, it was difficult to determine the correct approach in the local vacuum that existed prior to this point. Buy side firms should decide who will be the contact person for sell side soundings and consider more focused training on identification of sensitive matters should they have a higher risk that those matters might come up in their regular dealings with companies and their ecosystems. More to come on this prior to the implementation deadline in the new year.
Asian Venture Capital Journal Conference November 18th- 21st.
The AVCJ Private Equity Forum 2024 by Mergermarket/ION Analytics brought together a large number of industry experts/thought leaders, covering a wide range of hugely relevant topics during a 4-day mega event. We managed to cover some of the key content within Day1 - ESG, including effective impact investment and diversity which was solutions focused, balanced with experience and logic, and extremely informative of the current landscape. The climate coverage was excellent and built on updates from the previous year, aligning with our observations on the environmental market hierarchy that has emerged at the different stages of the investment life cycle. [We cover these concepts in our online Climate 101 training and discuss the emergent concepts in our SFC training update from September]. In addition to following other key discussions throughout the conference, we attended the investment summit day two and took away a lot to be positive around Asia, with a focus on India, China (Exits: Right Timing, Right Channel) and Japan (Japan@: A reliable choice). The conference had something for everyone in the PE/VC space and certainly a lot of cross over and alignment from Venture Capital through PE/Private Credit into liquid markets. This is certainly one of the better PE/VC industry gatherings in the region from a content and attendance point of view, with lots of new perspectives, in a format that allows you to select those that are most relevant for you. The team do a great job to make it all gel in live and broadcast format. If you are not already a participant, we would recommend either online access for your support team and/or attendance by key decision makers to access peers from across the market spectrum. Sometimes a chat in the wings can provide the most valuable level of insight into regional considerations.
Inflection Point Intelligence Gathering (Nov 26th)
We are grateful for those who turned up to this event with Inflection Point Intelligence and sponsored by us, K&L Gates and Interactive Brokers. It was nice to catch up with our clients, and IPI Alumni in Tai Kwun, beside the Christmas Tree in Tai Kwun to kick off the season of Christmas cheer. We were happy to so many people and connect with our peers. We have delivered online content during 2024 and have recently launched a new module on Anti-Corruption and Bribery which is now available on IPI Catalog offering 45 minutes of training on this key topic. Please also find more details on the topic 'Online SFC Anti-Bribery and Corruption Training' (Source: Cognitive GRC). Please also see our piece on Core training for SFC Regulated Firms covering key compliance concepts, featuring other training topics.
Commentary on recent SFC Enforcement Actions
In our autumn newsletter we noted sustained focus on SFC enforcement activities concerning market misconduct that has recently included overseas co-operation, asset freezes and extraditions from jurisdictions as they continue to get active on insider trading and market manipulation.
Notable cases this year included:
Convictions relating to false trading.
Preservation orders against asset disposal (Canada).
Prosecutions and overseas arrests (Singapore) for ramp-and-dump schemes.
Firms are reminded to bolster internal controls during challenging market conditions, but also to consider such risks as returns improve.
Please find more about market misconduct risk mitigation in our commentary on Expert Network Chaperone Services (Source: CGRC). We covered the broader developments and mitigating techniques in our webinar with Herbert Smith Freehills on November 19th where we co delivered on recent enforcement and best practice. We also provide quarterly summaries on cases as part of our regular update to clients and make recommendations where necessary. We continue to remind market that every firm’s information footprint and strategy is different, as is a firm’s risk profile and tolerance. Therefore, we caution firms against using peer comparisons (e.g. my peers “don’t do that” or “we just do this”) to justify their approach as often the answer to adequacy will heavily depend on nuances of the approach taken and how information is accessed by each firm. Adequacy justification requires proper consideration of a firm’s information perimeter and proper adjustment of your mitigation approach.
Governance and Compliance (Financial Returns)
At the beginning of this quarter, the SFC emphasized effective governance and internal controls for licensed corporations (LCs) around financial controls in their circulars and enforcement. Key points included:
Common Deficiencies: Issues such as inadequate liquid capital management and improper accruals have been identified.
Compliance Requirements: LCs must maintain sufficient liquid capital and comply with Financial Resources Rules (FRR).
Internal Controls: Establishing sound accounting policies and regular monitoring is essential for compliance.
We have always expected our clients to have such areas battened down and discuss these key issues in our annual refresher trainings. However, we have also updated policies and provided resources for firm self-assessments if firms believe they are required to do so.
A key to note is the new FRR form that will be implemented for all firms from November 2024. While changes are targeted at the new type 13 and VASPs, we specifically highlight changes relevant to all firms as the new forms will be needed for all firm's submissions, and some more subtle changes include strategy category changes in Form 12 which firms should all look at.
Virtual Asset Regulations in Hong Kong
Regulatory updates on Virtual Asset Service Providers (VASPs) were discussed including warnings against unlicensed providers and insights into the recent listing of Virtual Asset Spot ETFs. While this is a dynamic area, we invite those interested to review our discussion blog (Source CGRC) on Hong Kong VASP licensing to find the basics on the requirements or to access deeper dives into some of the more technical matters that would need to be considered if you are interested in a virtual asset license.
While Hong Kong approved a third VATP earlier this quarter, and four more this week, Hong Kong continues to steadily build up its market infrastructure as per its stated development programmes, we also note that other contending jurisdictions step onto the digital stage with updated frameworks.
The SFC's announcements during Fintech Week followed by Chain Link's Smartcon provided an injection of adrenaline into the market dealing efficiently with all the potential threats to the development of a healthy ecosystem in Hong Kong, and indeed globally, while other jurisdictions are hastily trying to backfill to catch up.
Although we had not attended Digital Assets Forum in Hong Kong this year, we recently came across the following snippet. A little technical but demonstrates the way plans discussed are now much more advanced due to the determined approach by the collective participants in bringing the environment up to speed in a relatively rapid way to connect traditional finance to new technologies that are being tested in live environments.
Next-Generation Big Technology Application Cross-Chain Interoperability, Proof of Reserve and Real-Time Valuation. (Source: Digital Assets Week).
On 6th December, we saw the gazettal of stablecoins bill, as promised in Hong Kong Fintech Week, and also the potential game changing proposal on Tax concessions for carried interest, funds and single family offices which also extend the tax credit to virtual asset. Although we have been unable to locate the consultation paper content, we understand tax industry insiders are reviewing the content in detail.
This is the outcome of multi-year industry lobbying under the Action Plan for Alternatives (Source AIMA/KPMG).
Latest updates from PWC hongkongtax-news-nov2024-19.pdf (PWC) and Deloitte’s Enhancements to the preferential tax regimes for asset and wealth management industry under consultation (Deloitte). We are sure there will be more to come on this as the detail is analysed to ensure that it achieves the stated objectives, but we are confident that this will be competed based on the latest direction of travel.
The achievement in already delivering on its swift programme demonstrates that impetus that is being placed in this area.
Climate Risk Management
New reporting standards for listed firms in Hong Kong will take effect by the end of this year and the SFC has issued a voluntary code for data providers seeking to provide ESG data.
SFC-backed launch event garners broad industry support for voluntary code of conduct for ESG ratings and data products providers | Securities & Futures Commission of Hong Kong - We note that this initiative will make it easier to conduct due diligence on the data being provided but you may need to bring the voluntary code to the attention of the provider as part of service provider due diligence.
All firms are encouraged to formalize their climate risk review as climate-related risks become increasingly important in investment decisions as the data is enriched. See our blogs (Source CGRC) on Climate (now two years on) and training (Source CGRC) for insight and key reminders on the obligations.
Artificial Intelligence and Large Language Models (LLMs)
The SFC issued a circular on Use of Generative AI Language Models (Source: SFC) and it resonates with the global standards that were reviewed earlier this year. Clients can refer to the previous collateral that we provided, but a key action to take now is to ensure that firms appoint someone to take responsibility for this rapidly developing area as it is both a threat and an opportunity that cannot be ignored. Managing the key risks (Cyber, Privacy, Intellectual Property, and Market Disruption) does not require a rocket science level of understanding and using any system that might impact on client data, or the market, needs to be subjected to appropriate review, even if “everyone” is using it. See our resources as mentioned earlier on this topic provided on datasite from earlier in the year.
US Private Fund Developments
Legal developments this year have certainly impacted the private fund industry in the US, with the Fifth Circuit vacating proposed Private Fund Rules (Goldstein - De Ja Vu all over again). The courts have also vacated the Dealer rule and there are huge doubts over a number of other implemented and yet to be implemented regulations either because they were promulgated under the same flawed logic or as a result of the change in regime. While these changes raise questions about future regulatory actions by the SEC they will still be focused on enforcement and addressing fraud. In our prior newsletter, we covered the recent cases on unapproved communications channels and ways to manage risk, highlighting a number of relevant cases covering the SEC’s agenda (Marketing, Market Integrity, Anti-Fraud). We also discussed this at our Fund Manager Briefing. At AIMA APAC Forum 2024, we were delighted to see SEC Commissioner, Mark Uyeda, who spoke in three separate events, providing some clarity on an unsure future.
We specifically highlighted the changes on beneficial ownership and regulation SHO. See informative update from SS&C and ACA Group for those who should be preparing for the updated reporting obligations commencing from 2025. We noted some interesting curveballs in those rules and most clients with whom we have discussed the matter will be using swap at least in the short term.
As usual the force of these cases may need to be considered in the light of the way in which firms can negotiate fines in return for accepting charges. The cases are indicative of the SEC's focus and provide some indication about what they are looking for, however, as highlighted in recent SFC cases, standards bleed across markets and firms do well to understand trajectory of regulatory enforcement even in places where they have no nexus.
US Resources: AIMA's regulatory horizon (Source: AIMA)
ACA Group Regulatory Calendars Q3/4 2024 Regulatory Reporting Deadlines | ACA Group (acaglobal.com)
The updated reporting obligations for US short sale (SHO/13f-2) will be coming into effect in the new year, 2nd of January. We highlighted the issue in our previous newsletter and reached out to the clients that may be affected. The issue was discussed at the AIMA conference and although the current status for non-US issuers remains somewhat unresolved, we understand many have reconciled their understanding with the potential issues regarding the broader scope of the requirements and taken a risk-based approach. The hope is that it will be resolved by the deadline but there is no guarantee and as such it leaves advisors and managers in limbo.
We will be following up with clients on the changes with regards to annual CPO affirmations, ADV updates and general US reporting. One mater to focus on is to remember is to ensure that you have accessed the relevant system and make any changes required by security updates including refreshing your passwords and confirming access well in advance of deadlines.
Although out of scope for many non-US firms, the NFA provided a reminder regarding beneficial ownership reporting which was supposed to be due on 1st January 2025. However, the NFA retracted the reminder due to a court injunction that was subsequently lodged which means the reporting has been delayed for now.
Other Client Resources Available
For further details on these topics, we invite clients and friends to access our detailed newsletters and additional resources available through our digital library. We also provide checklists, training and working papers to assist firms in navigating these regulatory challenges.
We have added our more interesting newsletters to Datasite and clients that have access to our repository will be able to download them to assist with any longer seasonal commutes. Notifications and links have been sent out to Datasite Users already, but we will also provide this newsletter in that format to take away for good read.
See our blogs referenced above/below for your consideration and don't forget to discuss your offshore obligations with your friendly Cayman/Bermudian/Gibraltan/Maltese/Luxembourger/Irish lawyers.
If you don’t have access, we encourage you to subscribe to our newsletter for ongoing updates, and follow us on LinkedIn, for more insights into regulatory developments that may have an impact on you. Subscribe below.
For inquiries or access to our resources, please contact us directly.
This summary serves as a reference point for us for our clients. For more detailed explanations or specific inquiries, please reach out directly or subscribe to our newsletter.
If we have not had a chance to meet with you in December, we will be sure to rectify that in the new year as we will follow up on FRRs, the Joint Product Survey, the BRMQ, Annual AML and Valuation Reviews and the various items discussed above.
We will also be rolling out a number of online training resources for clients in the new year, to bolster the infrastructure that we already have in place for conflicts of interest, risk management, valuations and disclosures.
All the very best from the team at Cognitive GRC.
Stay Informed, Stay Compliant
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