July ComplianceAsia newsletter comments

On July 19, the US SEC announced that it had adopted Rule 206(4) – 8 under the Investment Advisors Act of 1940. The new rule makes it a fraudulent, deceptive or manipulative act, practice or course of business for an investment adviser to a pooled investment vehicle to disseminate false or misleading information to investors or prospective investors or otherwise defraud any investor or prospective investor in a fund. Further information can be found at the Sidley website at the following link- US SEC rule.

Sidley’s asset management practice in Hong Kong is headed by Effie Vasilopoulos who can be reached at evasilopoulos@sidley.com. For those in the USA we recommend you contact Michael Schmidtberger on mschmidtberger@sidley.com who leads the US asset management practice.

So much for a nice quiet summer with the considerable market volatility in August producing a number of high profile problems at hedge funds, mortgage arrangers and banks. With noted economic bears like Simon Ogus (www.dsgasia.com) in Hong Kong and Nouriel Roubini (www.rgemonitor.com) in the US calling the credit crunch for some time, it will be interesting to see how far the fallout goes – they were right about the crunch, scary to think that they may be right about how far it will go.

These events always produce some surprising corporate failures and we expect to see more of this in the months to come. Seeing how fast a highly leveraged hedge fund can completely implode is certainly sobering – we have a chart on our blog at www.complianceasia.blogspot.com that illustrates the sequence of events. We expect to see retail fallout and lawsuits in Australia resulting from the collapse of a Basis fund, considerable legal discussion on the implications of a US bankruptcy judge essentially ignoring the Cayman Islands jurisdiction relating to the Bear hedge fund collapse, interesting consequences of the SIV / Cheyne issues and prosecutors getting very interested in the Sentinel issues.

The fallout in the Asian alternative industry has thankfully been a lot lighter than in the US and UK. Asian banks probably have more to worry about than many Asian funds. However smaller funds will find this environment very challenging as capital moves towards quality and track record.

On the flip side, this volatility has produced some big winners by all accounts with some intermediaries and funds benefiting from increased turnover or taking advantage of the volatility. Seems like Risk does equal Return after all.

In Singapore there have been some important regulatory developments in August and September with new tax rules regarding funds managed in Singapore and the MAS issuing new directions on competence for exempt fund managers and exempt financial advisors.

We are delighted that Ernst & Young will be preparing a paper on the tax issues for our subscribers which we will publish shortly and Philippa will be writing up her thoughts on the new competence provisions.

June ComplianceAsia newsletter comments

June, while it now seems a little distant, was another interesting month around the region.

Further developments regarding foreign investor participation in the Chinese markets is to be
welcomed but our sense is that now is the time when those who have had joint venture relationships or a foothold in this market are turning their attention to establishing a more robust, internationally consistent compliance regime. The super profits generated in the China market in 2007 will not be coming without risk. We expect to see all sorts of shenanigans come out when the market corrects or, as is often the case in China, when someone who wanted to be part of the scheme, but was left out, decides to blow the whistle.

We have previously reported on the Hong Kong SFC steps in relation to streamlining the registration process for hedge fund managers and advisors already registered offshore. We can report that our own experience with the new system is positive and we continue to see enhancements in regulatory practice at the micro level in Hong Kong.

While there are many arguments for and against changes to the regulatory infrastructure in Hong Kong, most market participants would agree that change has been needed in the way regulation is conducted on a day to day basis. The hedge fund changes set out in this report are really just a process of reform of several areas where small changes can make a lot of difference for those regulated by the SFC.

The Hong Kong Monetary Authority has recently been making noises about systemic risk with hedge funds and other capital flows. Readers may wish to check out the Chief Executive’s blog .

India continues to be a challenging environment for hedge funds with the Government thus far refusing to let hedge funds trade directly. While SEBI seems to be softening its views, the Reserve Bank of India does not. In our view the RBI is the key player here and we don’t yet see major political interest in changing the status quo. In the interim funds will continue to pay higher fees and transaction costs.

For those of your north of the equator, enjoy your summer months and hopefully not too many
typhoons, for those south, enjoy the winter and the footy, and for those of us in the middle, well its just more of the same.