On the theory that three’s a charm, our third and final blog on Hong Kong private equity activities will take a look at Asset Management (Type 9) activities, which are among the most relevant regulated activities for private equity firms in Hong Kong.

 Asset Management (Type 9) covers managing, on a discretionary basis, portfolio of securities for and on behalf of a third party. If a private equity firm is licensed by the SFC to carry out the regulated activity of asset management, then in addition to being able to exercise discretionary portfolio management, such firm is able to rely on what is commonly referred to as the “incidental exemption” and market funds under its management or sub-management, without the need to obtain a separate Type 1 license. The Type 9 license is therefore very flexible.

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In our first blog on Hong Kong private equity licensing, we looked at Dealing in Securities (Type 1). This second blog deals with Advising on Securities (Type 4).

Advising on Securities (Type 4) includes not only giving advice on acquiring or disposing of securities, but also advising on the terms or conditions on which securities should be acquired or disposed of. There is an important "intra-group" exemption for the requirement for a Type 4 license, and many private equity firms have traditionally relied on this to conduct advisory activities in Hong Kong. This exemption is available if advice on securities is provided by the private equity firms in Hong Kong to (i) any of its wholly-owned subsidiaries; (ii) a holding company which wholly owns the private equity firms; or (iii) wholly-owned subsidiaries of its holding company. The recipient of the advice, recommendation, or research should assess the advice, recommendation or research (as the case may be) and has the discretion to reject it, before issuing the material to its own clients in its own name. In other words, the recipients must assess the advice, and not merely rubber-stamp it.

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In keeping with our interest in global financial regulatory developments, in this and two blog posts to follow, we examine recent regulatory developments and responses in the active Hong Kong private equity markets.

Historically, the most popular setup of private equity firms in Hong Kong involve a Hong Kong onshore investment adviser providing advice to an offshore investment manager or a general partner in the Cayman Islands. The Hong Kong investment adviser will typically be a wholly owned subsidiary of the offshore entity. If structured in this manner and subject to certain additional parameters, the Hong Kong investment adviser will be able to operate without any licence in Hong Kong as the Hong Kong investment adviser will be able to rely on what is commonly referred to as the “intra-group” exemption.

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We are always looking to identify good forums for keeping abreast of global fintech developments and trends. One such interesting platform was Cross-Border Fintech: Regulation & the Law 2019, held in London on June 6, where we heard some great insights into the current market trends in and the future of fintech. The conference was well attended, with representatives of many industry leaders, authorities, and industry bodies in attendance. The participation of many on the front lines of fintech from financial institutions, fintech startups, and industry bodies created a forum to share innovative ideas and trends that allowed participants—including us—to keep up with the latest innovation.

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Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.

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Two years ago, we wondered in our blog post whether the staff of the US Securities and Exchange Commission (SEC) would have to further extend no-action relief to permit a broker-dealer to rely on an SEC registered investment adviser (RIA) to perform the broker-dealer’s customer identification program (CIP) requirements. And . . . here we are.

On December 12, the SEC staff issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief to allow a broker-dealer to rely on RIAs to perform some or all of the broker-dealer’s CIP requirements as well as the broker-dealer’s obligations under beneficial ownership requirements that went into full effect in May 2018.

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As we have been reporting, cryptocurrency, as an asset class, is currently taking the world financial markets by storm. Total market capitalization of cryptocurrency is estimated to be in the hundreds of billions of dollars and new initial coin offerings (ICOs) seem to crop up every other day, while the United States and other countries' governments have been left scrambling to figure out how to best regulate this new asset class and protect market participants and end users.

The US Securities and Exchange Commission (SEC) has been a leader in taking affirmative steps toward exercising some oversight of the fragmented cryptocurrency market. On January 18, the SEC’s Division of Investment Management published a staff letter detailing some of the Commission’s concerns about how cryptocurrency-related products will comply with the Investment Company Act of 1940, including specific issues relating to valuation, liquidity, custody, arbitrage, and potential manipulation.

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US Attorney General Jeff Sessions has just issued a memorandum (AG Memo) rescinding prior US Department of Justice (DOJ) guidance on the federal prosecution of marijuana offenses, including the 2013 “Cole Memorandum” (Cole Memo) and subsequent guidance regarding marijuana-related financial crimes (Financial Crimes Memo). The Cole Memo, among other things, expressly acknowledged the legalization of marijuana in several states for medical and recreational purposes and directed federal prosecutors to focus their enforcement priorities and resources on activities that align with current DOJ enforcement priorities. In turn, these priorities emphasized the prevention of marijuana-related activities posing the most significant threats to public safety and welfare (such as preventing the sale of marijuana to minors, or preventing marijuana sales from benefiting criminal enterprises). The Cole Memo in substance encouraged federal prosecutors to take a “hands-off” approach on the prosecution of “low level” marijuana-related offenses in those states that have legalized in some form the possession or use of marijuana for medical or recreational purposes. The subsequent Financial Crimes Memo carried forward the Cole Memo principles to the prosecution of banks and other financial institutions participating in marijuana-related banking and financial activities.

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On December 12, the staff of the US Securities and Exchange Commission (SEC) issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief that allows broker-dealers to rely fully on SEC-registered investment advisers (RIAs) to perform some or all of the broker-dealers’ Customer Identification Program (CIP) obligations under federal anti-money laundering (AML) requirements. The SEC extended the no-action relief for the earlier of (i) two years (December 18, 2018) or (ii) such time that RIAs become subject to an AML program rule.

Although the extension of relief applying to broker-dealers’ CIP obligations is not new, in this newest iteration of the letter, the staff also extended no-action relief to permit broker-dealers to rely on RIAs to perform the portion of the customer due diligence rule regarding the recently adopted beneficial ownership requirements for legal entity customers (31 C.F.R. § 1010.230) (Beneficial Ownership Requirements). In submitting the request this year, SIFMA asked the SEC staff to apply the principles underlying the CIP no-action position to the Beneficial Ownership Requirements.

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On July 19, the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury responsible for the Bank Secrecy Act, issued guidance in the form of frequently asked questions (FAQs) regarding its recently adopted customer due diligence requirements (CDD Rule). The FAQs offer a condensed summary of the CDD Rule’s requirements, but FinCEN has missed an opportunity to address an ambiguity in the CDD Rule regarding its application to private investment vehicles.

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