A working group composed of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the US Department of the Treasury’s Financial Crimes Enforcement Network issued a joint statement on July 22 that is intended to provide greater clarity regarding the risk-focused approach used by examiners for planning and performing Bank Secrecy Act (BSA)/anti-money laundering (AML) examinations.
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.
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.
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.
The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.
The Federal Reserve Board (Fed) released on April 23 a notice of proposed rulemaking to clarify the standards and criteria under which one company “controls” another company under the Bank Holding Company Act (BHCA) and the Savings and Loan Holding Company Act (SLHCA). This long-awaited proposal, which Fed officials have stated for some time was in the works, is notable for several reasons—primarily because if adopted, it will bring much-needed clarity to an area of banking law that historically has been notoriously opaque.
Kathleen Kraninger, only the second Senate-confirmed director of the Consumer Financial Protection Bureau (CFPB) in its almost eight-year existence, recently gave her first public remarks. The priorities Director Kraninger laid out will materially impact the CFPB’s direction and mission until the end of her term in December 2023. Director Kraninger, appointed by President Donald Trump, succeeds the first CFPB director, Richard Cordray, who was appointed by President Barack Obama.
In a recently published statement, the Basel Committee on Banking Supervision (BCBS) has raised concerns relating to the risks that crypto-assets pose to the global financial system. While it acknowledges that banks do not currently have significant exposure to crypto-assets, it warns that these assets are increasingly becoming a threat to financial stability.
These concerns are founded on the volatility, constant evolution, and lack of standardization of crypto-assets, which the BCBS believes exposes banks to liquidity, credit, operational, money laundering, legal, and reputational risks. It considers that crypto-assets should not be referred to as “cryptocurrencies,” given that they fall short of being currencies that are safe mediums of exchange.
As readers of our blog are aware, courts and regulators are playing catch-up when it comes to cryptocurrencies, and to interpreting existing laws and regulations as applied to these new and innovative offerings. One of these many important questions relates to whether virtual currencies are “commodities” within the meaning of the Commodity Exchange Act (CEA) and subject to regulation by the Commodity Futures Trading Commission (CFTC). A recent ruling by a US district court in Massachusetts held that a virtual currency (My Big Coin) is a commodity within the meaning of the CEA and is therefore subject to the anti-fraud authority of the CFTC, even though there currently is no futures contract on My Big Coin. My Big Coin is a Las Vegas-based creator of software that purportedly allows for the anonymous exchange of currency.
The five federal banking agencies (Federal Reserve, Bureau of Consumer Financial Protection, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency – collectively Agencies) have issued a joint statement on the role of supervisory guidance.
The statement says that supervisory guidance does not have the force and effect of law, and that the Agencies do not take enforcement actions based on supervisory guidance. However, the Agencies state that supervisory guidance outlines the Agencies’ “supervisory expectations or priorities and articulates the [A]gencies’ general views regarding appropriate practices for a given area.” For example, supervisory guidance often contains examples of practices that the Agencies “generally consider consistent with safety-and-soundness standards or other applicable laws and regulations.”