The global regulatory landscape for fund management is undergoing a significant shift, driven by new U.S. Outbound investment rules and increased scrutiny of enforcement practices in key Asian financial hubs. These developments, detailed in recent reports from Sidley Austin LLP, are forcing fund managers to reassess strategies, enhance due diligence, and prepare for a more complex compliance environment.
U.S. Outbound Investment Rules Reshape Fund Management
New regulations governing U.S. Investments abroad are fundamentally altering fund management, particularly concerning exposure to China. Three key developments are driving this change: the Outbound Investment Regulations (OIR) which took effect ; the Comprehensive Outbound Investment National Security (COINS) Act enacted ; and subsequent Treasury FAQs issued .
The initial OIR focused on prohibiting and requiring notification for U.S. Investments in China-related entities involved in semiconductors, artificial intelligence, and quantum computing. The COINS Act significantly expands this framework. “Countries of concern” will now include Russia, Iran, North Korea, Cuba, and Venezuela, in addition to China, Hong Kong, and Macau. The scope of “covered foreign persons” extends to include members of the Chinese Communist Party Central Committee and entities “subject to their direction or control.” the number of covered technologies expands to five sectors, adding hypersonic systems to the existing categories, with the Treasury authorized to designate additional technologies.
Recent Treasury FAQs provide crucial guidance on publicly traded securities. Settlement timing, not the execution date, determines eligibility for an exception. Acquisitions are considered within the exception if settlement occurs after listing, even for pre-IPO subscriptions. Treasury also reversed its position on minority shareholder protections, now considering director nomination rights as standard protections when generally available to similarly situated shareholders, though director appointment rights remain restricted.
Enhanced due diligence is now paramount. Each investment requires assessment through “reasonable and diligent inquiry,” involving public information searches, questioning targets when possible, and securing contractual representations. While the COINS Act authorizes Treasury to publish a non-exhaustive list of covered entities, transaction-specific diligence remains essential.
The COINS Act may significantly alter limited partner (LP) investment frameworks. Currently, U.S. LPs can invest in non-U.S. Funds with assurances that capital won’t fund prohibited transactions. Under COINS, LPs would need assurances against any investment in entities from countries of concern, regardless of sector involvement, potentially restricting U.S. Participation in non-U.S. Funds with such exposure.
Treasury has been granted new tools, including non-binding feedback mechanisms for transaction guidance, voluntary self-disclosure frameworks for violations, and expanded exception categories covering de minimis transactions, ancillary transactions, ordinary business activities, and regulated foreign investment companies. Fund managers face comprehensive operational changes, requiring reassessment of investment strategies, potentially pivoting toward allied nations, and implementing sophisticated screening mechanisms. Compliance frameworks need substantial updating with new monitoring systems and revised fund documentation.
Treasury has 450 days from , to implement COINS Act regulations. Fund managers must immediately audit existing portfolio exposure, update compliance programs, and enhance investor communications while preparing for more restrictive requirements. The changes represent more than additional regulation – they fundamentally reshape global fund management toward domestic and allied nation investments with enhanced compliance requirements.
SFC Enforcement Under Scrutiny
The Securities and Futures Commission (SFC) in Hong Kong is facing scrutiny over its enforcement capabilities. A Process Review Panel (PRP) report released in revealed operational strengths alongside systemic challenges affecting regulatory effectiveness. The review covered 60 cases, 24 of which were enforcement matters.
The report identified worrisome delays in case processing, ranging from three months to 16 years. One case highlighted a 17-month delay stemming from a nine-month lag in referring matters to the Department of Justice, followed by an eight-month wait for approval for Market Misconduct Tribunal proceedings. Another case revealed over a year elapsing between investigation completion and disciplinary action, despite the case’s straightforward nature.
Cross-border investigations, particularly those involving Mainland suspects, present significant challenges. While cooperation with the China Securities Regulatory Commission has strengthened through memoranda of understanding, practical enforcement outcomes remain limited, with several cases concluding with no further action due to suspects being based in or having absconded to the Mainland.
The PRP also noted instances where significant SFC resources were expended without meaningful enforcement outcomes, often due to suspects being unlocatable or having limited realizable assets. This suggests potential inadequacies in early case assessment and strategic planning. The panel recommends more proactive measures, including earlier asset freezing orders and improved coordination with the Accounting and Financial Reporting Council.
The SFC is adopting advanced technologies, including an investor identification regime launched in , but historical cases demonstrate inefficiencies in handling voluminous trading data. The PRP encourages continued exploration of artificial intelligence to enhance investigative efficiency.
The SFC has implemented measures to improve efficiency, including streamlined referral processes and expanded expert pools. However, the fundamental challenges – lengthy processing times, cross-boundary enforcement difficulties, and resource allocation inefficiencies – suggest deeper structural issues requiring sustained attention.
MAS Updates Liquidity Risk Management Guidelines
The Monetary Authority of Singapore (MAS) issued a consultation paper in proposing amendments to its Guidelines on Liquidity Risk Management Practices for Fund Management Companies. The proposals align with recommendations from the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board.
Key proposed amendments include strengthening internal governance, aligning fund redemption terms with the liquidity of fund assets, adopting anti-dilution liquidity management tools (ADTs), imposing liquidity costs on transacting investors, enhancing investor disclosures, and ongoing liquidity risk management. MAS also proposes removing exchange-traded funds (ETFs) from the scope of the guidelines, citing their different liquidity considerations.
The consultation period closes on . The revised guidelines are expected to come into effect six months after being finalized.
Regulatory Updates and Enforcement Actions
In other regulatory developments, the SFC will exempt non-centrally-cleared equity options from OTC margin requirements effective , aligning with approaches in the EU and the UK. MAS has also set standards on recruitment and onboarding training of representatives and revised representative misconduct reporting requirements, effective .
Recent enforcement actions highlight the SFC’s focus on market misconduct, conflicts of interest, and internal controls. These include custodial sentences for finfluencers providing unlicensed investment advice, sanctions against investment managers for fund management failures, and reprimands for firms with inadequate internal controls. The SFC is also cracking down on IPO gatekeepers and enhancing regulatory cooperation on cross-border digital asset-related matters.
