The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: China

  • From Vol. 10 No.8 (Feb. 23, 2017)

    How Private Fund Managers Can Access Investor Capital in Hong Kong and China: An Interview With Mayer Brown’s Robert Woll

    As the personal wealth of many mainland Chinese citizens has continued to grow, U.S. and European asset managers are eager to enter that market. Accessing Chinese capital, however, is fraught with barriers to entry, including severe restrictions by the Chinese government on capital outflows by investors. Managers may be able to reach some of these investors through Hong Kong, but that capital raising and asset management activity may trigger a licensing requirement with the Hong Kong Securities and Futures Commission, which is seen as much more hands-on than the SEC and the U.K. Financial Conduct Authority. See “K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia” (Oct. 30, 2014). In a recent interview with The Hedge Fund Law Report, Robert Woll, a partner in Mayer Brown’s Hong Kong office, provided an update on the state of the alternative asset management industry in both China and Hong Kong, particularly as it relates to managers establishing a presence in these jurisdictions and marketing to investors. For insight from other Mayer Brown attorneys, see our three-part series on how funds can use subscription credit facilities: “Provide Funds With Needed Liquidity but Require Advance Planning by Managers” (Jun. 2, 2016); “Offer Hedge Funds and Managers Greater Flexibility” (Jun. 9, 2016); and “Operational Challenges for Private Fund Managers” (Jun. 16, 2016).

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  • From Vol. 9 No.12 (Mar. 24, 2016)

    How Hedge Funds Can Mitigate FIN 48 Exposure in China (Part Two of Three)

    In an increasingly global market, hedge funds must keep up with numerous tax issues when investing in non-U.S. securities, including withholding on interest, dividends and capital gains, as well as the fund’s exposure under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). In addition to regimes developing in the E.U., China has taken positions that are helpful to hedge funds, although significant issues remain for foreign hedge funds investing in Chinese securities. In this guest three-part series, Harold Adrion of EisnerAmper discusses foreign withholding taxes and FIN 48 exposure applicable to hedge funds. This second article focuses on the limited exemption from capital gains taxation for non-Chinese residents and other issues faced by non-resident investors. The first article explained FIN 48 and explored E.U. developments regarding free movement of capital and its impact on funds. The third article will address developments in Australia and Mexico, and how hedge funds can minimize exposure to withholding taxes in those jurisdictions. For more on investing in Chinese securities, see “China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations” (Aug. 2, 2012); and “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies” (Jun. 23, 2011). For further insight from EisnerAmper professionals, see “Legal and Accounting Considerations in Connection With Hedge Fund General Redemption Provisions, Lock-Up Periods, Side Pockets, Gates, Redemption Suspensions and Special Purpose Vehicles” (Nov. 5, 2010).

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  • From Vol. 7 No.44 (Nov. 20, 2014)

    Dechert Partners Provide Roadmap to China’s New Shanghai-Hong Kong Stock Connect Program

    To date, it has been difficult for hedge funds and other foreign investors to gain direct exposure to the Chinese securities market.  The new Shanghai-Hong Kong Stock Connect program went live this week, offering foreign investors the ability to invest in certain mid- and large-cap Chinese securities through a Hong Kong broker.  A recent program presented by Dechert LLP provided a thorough overview of Stock Connect, with an emphasis on the thorny regulatory issues of beneficial ownership and custody of the securities that are traded under the new regime.  See also “China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations,” The Hedge Fund Law Report, Vol. 5, No. 30 (Aug. 2, 2012).

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  • From Vol. 7 No.41 (Oct. 30, 2014)

    K&L Gates Partners Offer Practical Guidance for Hedge Fund Managers on Raising Capital in Australia, the Middle East and Asia

    Pension funds and sovereign wealth funds are important potential sources of capital for hedge fund managers.  Australia and Japan have about $1.7 trillion and $1.2 trillion in pension assets, respectively, while the sovereign wealth funds of Middle East nations hold another $1.8 trillion.  The Chinese market has huge potential as well.  In that regard, a recent presentation by international law firm K&L Gates LLP offered a comprehensive overview of the regulatory regimes and marketing requirements that affect fund managers seeking capital in Australia, the Middle East, Japan, China, Hong Kong and Singapore.  The program was moderated by K&L Gates partner Cary J. Meer.  The other speakers were her partners Natalie R. Boyd, Elizabeth A. Gray, Betsy-Ann Howe, Tsuguhito Omagari and Choo Lye Tan.  For a similar global regulatory roundup, see “KPMG Report Highlights Key Developments in Hedge Fund Regulation in the Americas, the Asia-Pacific Region, Europe, South Africa and the Middle East,” The Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014).  For a discussion of regional “passport” initiatives that may facilitate marketing of funds in Asia and Australia, see “How Can U.S. Hedge Fund Managers Use Passport and Mutual Recognition Initiatives to Market to Investors in Asia?,” The Hedge Fund Law Report, Vol. 7, No. 27 (Jul. 18, 2014).

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    Chinese Companies “Going Dark”: Finally Accountable to U.S. Hedge Funds and Other Shareholders

    In the last two years, there has been a growing and insidious trend among valuable, operational and publicly listed Chinese companies in the U.S. to suddenly stop reporting and making requisite financial disclosures with the SEC.  After raising millions of dollars on the U.S. capital markets, these companies have either informally, or formally through the filing of a Form 15 with the SEC, “gone dark” – in some cases, with the manifest intention to depress the value of their stock to facilitate an insider-led privatization.  Once a company has gone dark, U.S. shareholders are left with little or no current financial information and are deprived of the most basic of shareholder rights: the ability to make reasoned investment decisions, and, if desired, exit their investment.  The problem is magnified in the case of thinly traded securities, for which the company’s decision to go dark creates an illiquid market.  Hedge funds that have invested in companies that have gone dark and subsequently seen their stock price collapse need not always accept such losses at face value.  In some circumstances, legal efforts to recoup investment value may pay rich dividends.  Moreover, funds that invested in companies that abruptly stopped reporting may be exposed not only to investment loss but also to investor litigation alleging failure of due diligence.  Taking legal action has the added benefit of demonstrating to investors that the fund is vigilant and aggressive in pursuit of its rights as an investor.  In a guest article, David Graff and Shveta Kakar, shareholder and attorney, respectively, at Anderson Kill P.C., describe how hedge funds can pursue recovery when companies in which they are invested go dark.

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  • From Vol. 6 No.13 (Mar. 28, 2013)

    How Can Hedge Fund Managers Understand and Navigate the Perils of Insider Trading Regulation and Enforcement in Hong Kong and the People’s Republic of China

    An old Chinese curse states: “May you live in interesting times.”  This proverb is often coupled with a more severe curse: “May you come to the attention of those in authority.”  For institutional investors trading in markets in Hong Kong and Mainland China (People’s Republic of China or PRC), these are indeed “interesting” regulatory times.  More importantly, an evolving legal and regulatory landscape has significantly increased the likelihood that those traders who are not informed and careful in their research and trading on those markets shall eventually “come to the attention of those in authority.”  For a further discussion of regulatory requirements governing establishing a hedge fund manager presence in Asia, see “Primary Regulatory and Business Considerations When Opening a Hedge Fund Management Company Office in Asia (Part Four of Four),” The Hedge Fund Law Report, Vol. 5, No. 3 (Jan. 19, 2012).  In a guest article, Michael A. Asaro and Douglas A. Rappaport, both partners at Akin Gump Strauss Hauer & Feld LLP, and Patrick M. Mott, an associate at Akin Gump, examine the provisions of Hong Kong and PRC insider trading law most important to U.S.-based hedge fund managers.  For the sake of comparison, the authors also discuss the corresponding provisions of U.S. insider trading law.  For a related discussion of U.S. and U.K. insider trading law, see “Perils Across the Pond: Understanding the Differences Between U.S. and U.K. Insider Trading Regulation,” The Hedge Fund Law Report, Vol. 5, No. 42 (Nov. 9, 2012).  Importantly, in some instances, the insider trading laws in the PRC and Hong Kong may require hedge fund managers to proceed more cautiously than they would with regard to similarly-situated U.S. issuers.  Given that corporate and IR executives in Hong Kong and the PRC may lack the training and vigilance of their U.S. counterparts, it is crucial that hedge fund managers understand the rules applicable to trading on selectively disclosed inside information in these jurisdictions.  The risk of civil and criminal liability for foreign investors has increased as regulators push to clean up the laissez-faire attitude towards inside information that has historically prevailed in the Hong Kong and PRC markets.

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    SEC Flexes Enforcement Muscle with Respect to Stock Offering Abuses Involving Reverse Merger Company China Yingxia International and Settles Enforcement Actions with Hedge Fund Manager Peter Siris and Others

    The Securities and Exchange Commission (SEC) has commenced civil enforcement proceedings against various individuals and entities involved in U.S. stock transactions involving China Yingxia International, Inc. (China Yingxia or Company), which went public via a 2006 reverse merger.  In one action, hedge fund manager Peter Siris (along with two affiliates) is accused of insider trading, acting as an unregistered broker and selling unregistered securities.  He is also accused of insider trading in the shares of a number of other small capitalization companies.  The SEC reports that he has settled those charges.  In a separate action, an investment relations firm employed by China Yingxia is accused of acting as an unregistered broker, and the company’s chief financial officer (CFO) is accused of fraud and a number of reporting violations.  The SEC has also entered into consent orders with three other individuals to resolve enforcement proceedings against them relating to their roles in the Company’s stock sales.  This article identifies the various players and their roles in China Yingxia’s capital markets activities; summarizes the charges against Siris, the CFO and the investment relations firm; and summarizes the settlements with the individuals.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 5 No.30 (Aug. 2, 2012)

    China Launches Landmark Reforms Impacting Hedge Fund Capital Raising, Investments and Operations

    The Chinese government and securities regulators recently undertook a series of historic reforms aimed at dismantling regulations that separate China from international markets.  The first and boldest initiative, the Qualified Domestic Limited Partner Program, has vast potential to enable foreign hedge fund managers and other institutional investors to raise Renminbi (RMB)-denominated funds in mainland China.  See “Local Currency Hedge Funds Expand Marketing and Investment Opportunities, but Involve Currency Hedging and Other Challenges,” The Hedge Fund Law Report, Vol. 3, No. 1 (Jan. 6, 2010).  The second initiative, a trial scheme in the prosperous coastal city of Wenzhou, allows residents to invest funds abroad and facilitates the conversion of underground private lenders into loan companies servicing small and medium-sized enterprises.  The third set of reforms expands the Qualified Foreign Institutional Investor program, enabling foreign hedge funds managers and other institutional investors to invest more easily in Chinese markets.  The fourth initiative, the Renminbi Qualified Foreign Institutional Investor scheme, allows Hong Kong-based arms of major Chinese asset managers and securities companies to raise capital from foreign investors that can then be directly invested into mainland China’s markets.  On the flip side, The National People’s Congress is also proposing to implement significant regulations for private funds and their managers by amending the 2004 Securities Investment Funds Law.  This article summarizes key highlights of each of these initiatives.  See also “Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies,” The Hedge Fund Law Report, Vol. 4, No. 21 (Jun. 23, 2011).

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  • From Vol. 5 No.19 (May 10, 2012)

    Civil and Criminal Enforcement Actions Against Former Morgan Stanley Employee Highlight the Relevance of the FCPA for Private Fund Managers

    Hedge fund managers are often concerned about the potential for firm liability where rogue employees violate securities and other laws.  Recent parallel civil and criminal actions initiated by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) charging a rogue employee of a private fund adviser with violating the anti-bribery and internal controls provisions of the Foreign Corrupt Practices Act of 1977 (FCPA) and the Investment Advisers Act of 1940 demonstrate that a firm that has taken measures to adopt robust internal controls and other measures designed to prevent FCPA violations can avoid liability for the actions of rogue employees.  This article summarizes the parallel SEC and DOJ actions; the terms of the rogue employee’s settlement with the SEC; and the types of measures a company can implement to avoid liability for FCPA violations by a rogue employee.  See also “Practical Considerations for Compliance by Hedge Fund Managers with the FCPA When Evaluating and Engaging Foreign Advisors in Connection with Foreign Bankruptcy Investments,” The Hedge Fund Law Report, Vol. 4, No. 34 (Sep. 29, 2011).

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  • From Vol. 5 No.16 (Apr. 19, 2012)

    Recent SEC Complaint Brings Together Two Headline Enforcement Trends: Insider Trading and China

    The SEC’s Division of Enforcement (Division of Enforcement) has redoubled its efforts to prosecute those engaged in various securities law violations by initiating a record 735 enforcement actions in 2011.  One of the SEC’s key initiatives has focused on ferreting out insider trading, and a number of the targets have been hedge fund managers and their personnel.  See “SEC Files Civil Insider Trading Complaint Against Diamondback Capital Management, Level Global Investors and Seven Individuals Based on Trading in Dell and Nvidia; Diamondback Strikes Non-Prosecution Deal with U.S. Department of Justice and Settles with the SEC for $9 Million,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).  It appears that the Division of Enforcement’s attempts to enhance its subject matter expertise and to upgrade the analytical and technological tools used to sniff out fraud have contributed to these efforts, as recently demonstrated by an action brought by the SEC against six Chinese traders and a British Virgin Islands corporation trader alleged to have engaged in insider trading.  This article describes the factual allegations, causes of action and relief sought by the SEC in the Complaint, as well as the cautionary lessons to be learned by hedge fund managers from the Complaint.  See “Insider Trading – The Long View,” The Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).

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  • From Vol. 4 No.36 (Oct. 13, 2011)

    AsiaHedge Study Finds That a Growing Proportion of Hedge Funds with Asia-Focused Strategies are Managed From Asia

    A September 2011 survey (Survey) by AsiaHedge Research uncovered data with respect to: assets under management (AUM) by Asia-based hedge fund managers and Asia-focused strategies; AUM trends; the composition of the investor base in Asia-focused funds; the evolving industry structure; the level of AUM in Asia-focused hedge funds managed from within the region versus from outside of the region; the amount of assets managed from various sub-regions in or focused on the region; and the top Asia-focused strategies by AUM.  This article details the key points from the Study.

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  • From Vol. 4 No.21 (Jun. 23, 2011)

    Questions Hedge Fund Managers Need to Consider Prior to Making Investments in Chinese Companies

    The negative publicity surrounding Chinese companies listed in the United States seemingly has reached a fevered pitch.  In April 2011, the Securities and Exchange Commission, or SEC, acknowledged that it had established a task force to address what it deemed to be abuses by Chinese companies accessing the U.S. markets through the use of reverse merger transactions.  SEC Commissioner Luis Aguilar referred to the proliferation of these companies as a “disturbing trend that seems to have challenging implications for capital formation and investor protection.”  In addition to the SEC, the U.S. national stock exchanges have been taking more aggressive actions against Chinese companies.  During 2011, almost two dozen Chinese companies have seen trading in their securities halted or have been delisted in large part due to accounting irregularities.  Against this backdrop, it has become increasingly difficult for investors in this space to separate the undervalued from the fraudulent.  In a guest article, Cavas S. Pavri, a Member in the Business Law Department of Cozen O’Connor, discusses areas that hedge fund managers should focus on in performing their due diligence on investments in Chinese companies.  Specifically, Pavri discusses, among other things: relevant PCAOB guidance; specific factors to consider in evaluating a Chinese company’s accounting firm; specific factors to consider in assessing a Chinese company’s chief financial officer and accounting staff; what to look for when evaluating the corporate governance of a Chinese company; considerations in connection with “variable interest entity” structures; local financial reporting; SAFE registration; the importance of a prior underwritten offering; and insurance considerations.

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  • From Vol. 3 No.8 (Feb. 25, 2010)

    Interview with Timothy Spangler: Key Legal and Business Considerations when Launching Hedge Funds or Hedge Fund Managers in China

    In February 2010, People’s Republic of China (PRC)-based investment management firm Munsun Asset Management Limited and its founder, Li Xianghong, announced the launch of the firm's first China-focused hedge fund, Munsun China Opportunity Investment Fund (Munsun fund).  The investment objective of the Munsun fund is to invest in a portfolio consisting primarily of securities of companies established or operating in the Greater China Region, and of companies listed on stock exchanges in Hong Kong, New York, London and Singapore that do business in or are connected to China.  Timothy Spangler, who advised on the launch, recently spoke with The Hedge Fund Law Report about the launch and structuring of the Munsun fund, and what lessons the launch offers for hedge fund managers and investors that are contemplating launching or investing in hedge funds in or focused on China.  In particular, we spoke to Spangler about: the structure of the Munsun fund and advisory entity; the chief business advantages of organizing a hedge fund adviser or a hedge fund in China; the key legal or regulatory hurdles faced in structuring and marketing the Munsun fund; marketing benefits to organizing a fund or adviser in China; licenses required to manage a hedge fund organized in China; laws governing liquidity of Chinese funds; currency issues; the make-up of the Munsun fund investor base; and tax considerations.  The full transcript of that interview is included in this issue of The Hedge Fund Law Report.  See also “Do Collective Investment Management Schemes Offer a Means for Hedge Fund Managers to Access the Potentially Vast China Market?,” The Hedge Fund Law Report, Vol. 2, No. 36 (Sep. 9, 2009).

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