Summer, Summary 2021 -Part 2 Deeper Dive

Some highlights from enforcement and SFC updates for Quarter 2 (originally distributed in July)

We typically issue newsletter updates at the end of each quarter and discuss the issues raised with our clients as part of our ongoing monitoring, but we also like to highlight the issues we are working on with our wider ecosystem.


Please note that we have provided links to other firm/association/government websites but we are not responsible for the security or safety of the those sites.


SFC Enforcement Digest

Enforcement continued to focus on listed company disclosures, listed company director's obligations and the ramp and dump schemes identified from 2020. There were two more Section 213 Compensation Orders made on behalf of impacted investors in that quarter ($622 Million awarded against former directors of listed company and various awards for boiler room practices identified by the SFC). We also noted the alignment of focus between the SEC and SFC when it comes to the required disclosure by listed companies as we are seeing similar comments in the enforcement cases promoting appropriate disclosure.


SFC Regulatory Digest

The SFC continues to focus on ensuring that the Hong Kong IPO process is clean as possible, but ESG continues to be cause of note (possibly so for the next few years)

  • OFC Grant Scheme- The Hong Kong Government launched its grant scheme for open ended fund companies and real estate trusts.

  • Vaccination Drive - The SFC promoted and issued expectations on vaccination impact on business continuity - We are looking at broader improvements to continuity solutions for our clients.

  • Competence Standards - The SFC issues changes to the competency standards from January 2022 increasing (in some cases) competency requirements and ongoing CPT requirements to 10 hours for licensed representatives and 12 hours for responsible officers. See our update.

  • Operation of Bank Accounts - Although we don't expect this will impact to many firms that we work with as authorisation on bank accounts is normally relatively clear and straight forward, we are working on updates to policy to ensure the process we normally see and expect is properly document in line with these expectations as part of standard procedural updates.

Other Key Issues - Sanctions and List Management

  • Sanctions Tennis

On the one hand we have had a US advisory warning everyone about doing business here and on the other mitigation of conflict risk appears to be happening. It is clear that high level diplomacy is taking place. There is nothing much more we can say other than it is a good idea to remain on your toes and be aware of the developments and changes on an ongoing basis.

  • Chinese Military-Industrial Complex Companies Sanctions by US Treasury.

It is definitely worth checking in with your sanctions advisors if you don't already have a handle on the updates. In particular, the update relating to Chinese Military-Industrial Complex Companies changes is likely to impact firms with and even without a US nexus. Worth checking in with operations to see whether required purchase restrictions are in place (if you have any US nexus). Hopefully your brokers have reminded you of the limits when you try to place an order if not. There are a few public resources available, but AIMA has held as number of extremely well presented webinars on the topic and but I believe the industry will be grateful for the input from the international and local community on this difficult area. Playback is available for AIMA members. Non members should raise with US counsel.

  • Investments in Politically Sensitive Industries

A webinar on the increase in political impact on investment activities was organised by AIMA and provided by experts from Aosphere and FundApps in capturing the complexities of keeping on top of the all the global requirements from a pre-approval or reporting point of view. It is worth a view even as a reminder about how difficult it is in keeping up on all the changing restrictions and reporting requirements across all the different jurisdictions. E.g. Utility Firms in South Korea.


Issues such as these require constant awareness when the data source changes and therefore we re-iterate the need to be signed up directly to the various technical updates so that you can discuss with your investment teams as they come up. There are costs with investing in different parts of the world and those costs are becoming less easy to absorb.


Some relevant US Regulatory Updates

Some US updates for Hong Kong based firms that you may already be aware of but worth a reminder

  • Change to Advertising Rules in US and Performance Advertising

Since the change published in March, there has been several events/webinars/updates explaining the changes to the rules. Please arrange adiscussion with your US consultant on this area, but the general approach seems to be that unless there is a pressing need to relax an obligation contained in the old rules a full transition to the new requirements should be on a considered basis. ACA Global have arranged a number of useful webinars on the topic including a very well-presented compendium in their recent Fall conference that is worth a review for anyone seeking to source US investors. There is a long transition period but best to be aware of your options.

  • Change to definition of Accredited Investor and QIB

Importantly, the US has added some additional categories of investor types which will satisfy accredited investor and also Qualifying Institutional Buyer definitions so worth checking in on that with your US adviser when you are looking at your US Marketing and consider some updates to your investor profile forms with your administrator if you have not done so already.


Europe/UK Regulatory Considerations

Reverse Solicitation

At the beginning of the year, ESMA reminded firms of MiFID II rules on reverse solicitation. We recall the now established position that reverse solicitation is not a marketing strategy, and it is important to understand the nuances of each country in Europe before you (or a person acting on your behalf) does something that requires registration.


The 2nd of August saw the introduction of pre-marketing requirements in Europe. There are indications that while the new requirements/processes are not intended to impact/be available for non-EU managers, the national authorities are to ensure that non-EU firms are not afforded more favourable treatment. Therefore it is likely that similiar standards will be applied. Please refer to the ACA Global update on this topic for further details.


We recommend that firms take a look at the resources provided by AIMA in their industry sponsored 360 distribution programme which discusses some of those changes but also provides access to a database of growing resources of global marketing requirements put together by a raft of AIMA sponsors. This is the kind of information that needs to be sourced across the whole community and AIMA is working hard to build up a library for their members.


Soft Commission/Unbundling/Soft Dollar/Commission Sharing Arrangements

MiFID 2 Dial back - In case you missed this, there were some Interesting developments on Commission bundling harking back to the logic presented by the SFC in 2015 on soft commission in thier risk outlook on asset management highlighting that the strong stance taken by Europe would not work well out in Asia.


Both US and Hong Kong regulators expect that you assess the services that you pay for with your client’s resources and the SFC expects you to account to your clients for what you have spent their money on. In Europe, higher standards have been applied due to the concern that giving managers absolute discretion over the quantum of payments made to brokers for services was too much of conflict and per se resulted in unfair outcomes for clients, However, following years of experience the logic is being reassessed.


Recital 5

Services provided to professional clients and eligible counterparties should be exempted from the costs and charges disclosure requirements because professional clients of brokers analyse the cost of services as part of their negotiation with them.

Recital 8

"Research on small and middle-capitalisation issuers is essential to help issuers to connect with investors. That research increases the visibility of issuers and thus ensures a sufficient level of investment and liquidity. Investment firms should be allowed to pay jointly for the provision of research and for the provision of execution services provided certain conditions are met."

Source: Amendment to MiFID II from February 2021 DIRECTIVE (EU) 2021/338


The pendulum of global regulation has started to swing back towards a more reasonable approach. The logic is sound and now backed up by research. It may be useful in the expense allocation discussion to understand this point.


I will leave it there on a positive note. These topics have been selected from our newsletter for the purposes of providing a broader understanding of the issues that we discuss with our clients as part of our service support. If you wish to obtain a deeper understanding you will need to speak with your regulatory adviser. If you are an employee of a client, please contact us and we can add you to our distribution.

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Summer, Summary 2021 - Part 1 Topics of Interest

These are just some of things we raised in our newsletter update earlier this summer and thought that some of our wider contacts might be interested in what we are/were looking at. SFC Items of Intere