Compliance with company rules and regulations

OFFSHORE FUNDS DISTRIBUTION IN ASIA: TOWARDS TIGHTENING RESTRICTIONS

Asia has definitely become a Promised Land for many funds managers, looking to tap into an impressive but still immature pool of wealth. The message has been positively received on the East side with countries gradually opening up to global markets. But does this openness necessary match with easygoing business? Whereas some aspects are clearly aimed at offering an easy and integrated framework to develop business, constraints are also emerging.

OPPORTUNITIES

 Hong Kong Stock Connect

Inaugurated on November 17, 2014, the initiative was well acclaimed by the international investment sector. Following with the success of RQFII and DQFII programs, the Connect scheme provides additional flexibility and potential to dig into Mainland China’s market. The relative success of the launch should however be considered carefully as current investment restrictions may induce a potential slow down in activity. Notwithstanding the latter, the scheme presents huge potential and will definitely help to strengthen China’s capital markets positioning and RMB internationalisation.

ASEAN Fund passport

In September 2014, financial regulators from Singapore, Malaysia and Thailand launched the ASEAN Collective Investment Scheme (CIS) Framework. The framework allows the units of an ASEAN CIS authorized in its home jurisdiction to be offered in the other host ASEAN jurisdiction, provided that the CIS satisfies a set of specified standards. This cross-border distribution platform  represents a huge potential for fund managers willing to tackle regional but less structured markets such as Malaysia and Thailand. Very positive and promising, this scheme requires though registering funds in one of the participating country. Singapore is therefore aimed at becoming a place of choice for fund managers willing to develop in South East Asia.

AEC – ASEAN Economic Region

With 10 participating countries, the much-anticipated ASEAN Economic Community is an ambitious project that, if brought to life will represent a significant growth potential for the region. Aimed at creating a full regional economic integration, the project is still under discussion and expected to be launched by end of 2015. Despite the skepticism surrounding the project’s feasibility in due date, one must acknowledge that there is an actual willingness of building up a regional framework. While it took about half a century to Europe, one can reasonably estimate that Asia will, once more time, show the world that they can promptly catch up.

CONSTRAINTS

Faced with an unprecedented interest as part of international players, Hong Kong and Singapore have been gradually enhancing local regulation so as to:

  1. Align with international standards and
  2. Gradually operate a “positive discrimination” towards institutions wiling to develop to the region.

Compliance and regulatory constraints have been mounting these last years, especially on the private banking and Wealth Management sectors. Regulatory bodies are now gradually tightening the rules framing the distribution of foreign Collective Investment Funds. Below is a summary of current distribution rules for offshore funds willing to be distributed to institutionals and accredited investors only. One should however keep in mind that such rules will keep evolving and induce higher costs for institutions.

⇒ SINGAPORE

While distribution to Institutionals does not require any registration, the offering of funds to accredited investors requires to be registered under the “restricted scheme” (section 305 – Securities and Futures Act).

But what is an accredited Investor as per MAS regulation?

As per MAS (Monetary Authority of Singapore) guidelines, an accredited investor is:

  • an individual whose net personal assets exceed SGD 2M (about USD1.5M) or whose income in the preceding 12 months is not less than SGD 300,000 (about USD230,000).
  • A corporation with net assets exceeding SGD10M (USD7.6M) in value as determined by its most recent audited balance sheet.

Potential changes

The MAS is currently evaluating the possibility of giving choice to investors to make a personal choice whether to be considered as “accredited investor”. This comes certainly with the objective of avoiding too much marketing towards accredited investors because offering to them is not as restrictive as offering towards public investors. If the change is confirmed, any accredited investor will become “public” (unless otherwise elected). This would accordingly prompt foreign funds to properly register and get licensed in Singapore.

How to register?

Registration is relatively straightforward and can be processed directly through the MAS online portal (CISNet).

https://masnetsvc2.mas.gov.sg/cisnet/home/CISNetHome.action

Whereas no prospectus was previously required, it is now mandatory to attach to the registration file an Information memorandum. Fund Managers can actually use their existing offering documents, provided they satisfy Singapore regulation.

⇒HONG KONG

Offshore funds aimed at being offered to “Professional Investors” only do not require previous authorization and registration with the Hong Kong Securities and Futures Commission (SFC).

What is a “Professional Investor” as per SFC regulation?

Professional investors gather altogher the institutional investors (banks, insurance companies, brokers, investment managers, etc.) and accredited investors.

…. And an accredited investor?

As per SFC regulation, accredited investors are corporations with at least HK$40M (about USD5M) in assets and individuals or corporations with investment portfolios of at least HK8M (about USD1M). Contrary to Singapore, fund managers in Hong Kong have to provide the necessary documentation (statements) so as to certify that the accredited investor truly qualifies as a professional investor.

Potential changes

Although no formal guidance has been published yet, the SFC recently indicated (informally) that they may adopt a more restrictive position and treat marketing to professional investors as marketing to public, therefore forcing managers to properly register and license funds on the HKG Stock Market.

Asia will definitely remain a predominant market where it makes absolute sense to develop a presence. However and considering the current mounting regulatory constraints, there will be a need sooner or later to show increased commitment and, to a certain extent, setup locally. Whereas this will induce short-term costs, related opportunities of development will largely compensate  medium-long term growth potential.

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