March newsletter comments

Here is the comments section from our March newsletter:

March was an interesting month on the regulatory front.

In Australia, ASIC began a public awareness campaign on financial scams. It never ceases to amaze us how many members of the public still get caught up in advance fee frauds, boiler room operations and other illegal predatory activities. This is an area that deserves continued regulatory focus as those who lose money are often least able to absorb the loss.

Also in Australia a number of court actions were published involving prosecutions or investigations relating to fraud, dishonest behaviour, conducting a regulated activity without a license and even and insider dealing case.

In Hong Kong we noted the SFC alerting market participants on the need for sound hedge fund valuation practices. Hedge fund valuation is an ongoing concern of the SFC and even though the issue is a fund, rather than a manager issue, those firms who do not have third party valuations for all of their fund should be looking at how they can document their existing valuation procedures and what conflicts may arise from those procedures.

On the enforcement side we noted a number of prosecutions of firms and individuals who were found to be conducting regulated activities without a license. Licensing is a critical part of the financial landscape in Hong Kong and the SFC has repeatedly warned participants to ensure that they are properly licensed for the activities they conduct while physically present in Hong Kong.

We welcome the Hong Kong SFC clarification regarding the use of serviced offices by licensed entities and firms applying for a license in Hong Kong. The clarification was issued in March and follows on from several specific instances in 2006 where the Commission was refusing or objecting to license applications where a firm selected short term office space, typically serviced. This despite the fact that a number of reputable firms in Hong Kong were already licensed and operating from such locations. The previous ‘informal policy’ position of the Commission caused not only delays in licensing applications but significant extra costs associated with establishing a permanent office and then awaiting approval to get the license – something which is of itself very time consuming in Hong Kong.

We have felt all along that the appropriate concern of the Commission should not be whether an office is short or long term but rather the actual controls in place at the office as per the internal control guidelines so this develop is positive.

We see this clarification as part of a general improvement in the commerciality of a number of decisions being made on licensing issues and part of the recognition by the Commission that new market participants are by and large good for Hong Kong.

All firms should note the Commission’s requirements regarding licensed premises which we set out in the main body of this newsletter.

Various rumours are circulating in Singapore that the financial regulators are considering a tightening of the rules that have allowed a major influx of niche asset managers, including hedge funds, into the country. There has been no statement to this effect from the MAS.

While the rapid growth of the sector is bound to have attracted a couple of less scrupulous operators and the sheer number of funds suggests that not all will succeed, there are a number of major firms who have established or who want to establish a presence in Singapore to take advantage of a lighter regulatory touch. We expect that the MAS will want to be very careful to ensure that it continues to attract serious hedge funds to Singapore as well as providing a venue for Asian start ups to flourish. Institutional investors are aware of the lighter regulatory regime and tailor their due diligence accordingly. The real concern, in our view, should be the micro funds that establish without any industry experience and drag into their operation family and friend investors.

We mention continued fallout in Thailand from last year’s coup and the investigations into the business interests of former PM Thaksin. Singapore’s purchase of a stake in Shin Corp from Thaksin’s family immediately prior to the coup continues to be a hot button political issue that is effecting investor confidence across a number of sectors in Thailand. Consistent enforcement of securities regulation has never typically been a Thai strong point. Further politicisation of the process due to the coup is going to make the regulatory environment even less predictable.