Asia Funds & Financial Services Newsletter

Sidley’s Asia Funds and Financial Services Newsletter discusses important regulatory and enforcement developments that affect financial institutions, investment advisers, and investment funds operating in the Asia-Pacific region in a fast-changing regulatory landscape. In this issue, we cover (among other things) a crackdown on cross-border investment fund-related activities, reforms to the preferential tax regime for private funds and Hong Kong’s expanded virtual asset licensing regime.

Featured articles

• Editorial: SFC/CSRC Crackdown on Cross-Border Brokerage and Investment Fund Activities 
• Hong Kong Expands Virtual Asset Licensing to Cover Advisors and Managers
• MAS Recalibrates Risk Frameworks for a Digital Era

Editorial: SFC/CSRC Crackdown on Cross-Border Brokerage and Investment Fund Activities 

The Hong Kong Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC), alongside other Mainland authorities, have launched a coordinated enforcement initiative targeting cross-border securities and investment fund-related activities. These developments signal heightened regulatory scrutiny of Hong Kong intermediaries servicing Mainland Chinese investors and a clear expectation of enhanced compliance standards. 

The SFC recently completed a sweep of 12 licensed brokers, identifying systemic deficiencies in onboarding controls, beneficial ownership verification, and cross-border account monitoring. The sweep culminated in the SFC circular dated May 22, 2026, which was released in parallel with a notice issued by CSRC and other Mainland regulators targeting illegal cross-border securities, futures, and investment fund-related activities. Together, these actions reflect deepening regulatory coordination and materially elevated enforcement risk for firms engaged in cross-border wealth and asset management services. 

Regulators are focusing in particular on the unauthorized marketing and distribution of offshore private funds, hedge funds, and structured investment products to Mainland residents. This includes indirect subscription arrangements through Hong Kong brokerage accounts, digital promotion targeting Mainland investors, and purported “reverse solicitation” structures that may, in substance, constitute active marketing. Chinese law generally requires that cross-border fund distribution occur through approved mechanisms (e.g., Mutual Recognition of Funds or Wealth Management Connect). Activities conducted outside these frameworks may be characterized as illegal securities business operations.

Scrutiny is also directed at structural arrangements designed to obscure beneficial ownership or facilitate capital movement in circumvention of Mainland foreign exchange restrictions. This includes (i) nominee or third-party Hong Kong accounts acting on behalf of Mainland investors, (ii) omnibus or pass-through accounts aggregating funds into private investment vehicles, and (iii) complex trust or special purpose vehicle arrangements used to subscribe to offshore funds.

While the SFC circular focuses primarily on deficiencies in onboarding controls, beneficial ownership verification, and supervisory oversight, the weaknesses identified create heightened exposure where brokerage accounts are used to access offshore private capital structures and alternative investment vehicles. In such circumstances, opacity of ownership and cross-border capital flows materially increase regulatory sensitivity. The circular underscores that senior management and responsible officers are expected to exercise effective oversight over cross-border business models and intermediary relationships.

Together, these developments represent a material escalation in cross-border regulatory coordination. Investment fund–related activities — particularly private capital vehicles and alternative investments that combine structural flexibility with reduced transparency — are at the center of regulatory concern. Hong Kong intermediaries can no longer adopt a purely formalistic approach to documentation or unquestioningly accept investor representations where cross-boundary fund activity is involved. Firms should anticipate increased inspection intensity, enhanced cross-border information sharing, and potential retrospective review of fund-related activity. A proactive reassessment of cross-border risk governance is strongly advisable. 

Hong Kong Expands VA Licensing Regime to Cover Advisors and Fund Managers

Following public consultation, Hong Kong regulators are moving forward with extending mandatory licensing requirements to VA advisory and management service providers. This framework builds on the rules for VA dealers and custodians, which were advanced following joint consultation conclusions published by the Financial Services and Treasury Bureau and the SFC in December 2025 as detailed in our July 2025 Update. 

New Licensing Requirements

Under the finalized regulatory framework, any person providing VA advisory services or managing VA portfolios in Hong Kong must obtain SFC licensing or registration and satisfy the fit-and-proper tests under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) regime. 

VA advisory licenses under AMLO will align with traditional Type 4 regulated activities under the Securities and Futures Ordinance (SFO), covering providing advice and analyses to assist others in acquiring or disposing of VAs. The use of technology — such as algorithms, AI large language models, or automated tools — does not exempt a provider from licensing. Providing tools that generate specific VA recommendations based on user investment profiles, or tools that output trade alerts (specifying whether, which, when, or on what terms to trade), will trigger licensing requirements. For portfolios combining securities and VAs, the VA advisory component cannot be treated as “wholly incidental” to the securities advice, even if provided concurrently or as a minor part of the service. However, advising on derivatives and structured products that reference VAs will generally remain under existing SFO regimes, specifically Type 4 (advising on securities), Type 5 (advising on futures contracts), and/or Type 11 (OTC derivatives). 

VA portfolio management licenses under the AMLO regime will mirror traditional Type 9 regulated activities under the SFO. It applies to firms exercising discretionary investment decision-making power to manage portfolios of VAs. Unlike the existing regime, any entity managing portfolios that invest in VAs must obtain a license, regardless of the percentage allocated to VAs. Traditional exemptions will apply, such as providing management services solely to wholly owned group companies or services that are wholly incidental to a licensed VA dealer’s operations. However, if a manager inadvertently acquires VAs due to an unexpected or involuntary event (e.g., an invested token ceases to be a security), a license will only be triggered if the manager decides to retain the holdings. No license is required if the manager takes timely and reasonably practicable steps to dispose of the VAs. Similarly, a separate VA dealing license is not required for managers who deal in VAs solely to carry on their VA management business. This includes accepting VAs for fund subscriptions and converting them to cash or converting assets into VAs as part of managing the fund. 

Financial Requirements and Exemptions

Financial resource requirements mirror those for traditional Type 4 and Type 9 regulated activities, mandating a minimum paid-up share capital of HK$5 million. Required liquid capital ranges from HK$100,000 to HK$3 million depending on whether client assets are held. Furthermore, licensed firms are expected to maintain excess liquid capital sufficient to cover at least 12 months of operating expenses.

The framework provides specific institutional exemptions. These include exclusions for peer-to-peer trading between individuals, stablecoin issuers already regulated by the Hong Kong Monetary Authority (HKMA), and entities that delegate safekeeping to third parties without holding private keys themselves. Additionally, carveouts are available for intragroup transactions, VAs used strictly for payments of goods and services, and standard activities carried out by legal and accounting professionals operating in their professional capacities.

Implementation Timeline

Legislative amendments to AMLO are planned to be introduced in 2026, alongside the legislative proposals for the new licensing regimes for VA dealers and custodians. Once enacted, unlicensed VA advisory or management activities will carry penalties of up to seven years’ imprisonment and HK$5 million in fines, with no planned transitional arrangements. Market participants currently engaging in VA-related activities pursuant to the terms and conditions imposed by the SFC are required to obtain a license or registration under the new VA licensing regime and should therefore prepare early for compliance, particularly given the serious penalties and absence of transitional provisions.

Singapore Recalibrates Risk Frameworks for Digital Era

Driven by widespread digital acceleration, artificial intelligence (AI) adoption, and climate change, the Monetary Authority of Singapore (MAS) has overhauled its risk management expectations. Through a series of recent frameworks and consultations, MAS is pushing financial institutions (FIs)—including Fund Management Companies (FMCs)—to build deeply interconnected governance structures that ensure total operational resilience. For private fund managers, this represents a shift away from siloed compliance toward a holistic, risk-proportionate governance model.

Navigating AI Governance

MAS introduced a comprehensive AI Risk Management Toolkit on March 20, 2026. Developed alongside a consortium of industry leaders, this toolkit provides FIs with a clear blueprint for managing risks across traditional, generative, and emerging agentic AI technologies. The toolkit features an Executive Handbook for strategic rollout and an Operationalisation Handbook detailing practical implementation case studies. Because MAS intends to update the operational guidelines periodically, asset managers utilizing automated trading algorithms, predictive analytics, or AI-driven compliance screeners must treat AI governance as an evolving, audited process rather than a static check-the-box exercise.

New Third-Party Risk Management (TPRM) Guidelines

Moving beyond traditional vendor oversight, MAS is poised to publish new TPRM Guidelines that will completely supersede the current outsourcing guidelines for FMCs. Crucially, the regulatory definition of a third-party arrangement has expanded to cover all formal service contracts, explicitly including intragroup entities. Private fund managers who rely on overseas parent companies, regional affiliates, or centralized internal tech hubs for operational infrastructure must now subject these internal relationships to the same strict risk assessments, data privacy standards, and service-level agreements as external third-party vendors.

Operational and Liquidity Resilience

MAS has proposed a complete overhaul of the decade-old Operational Risk Management (ORM) Guidelines. Under the modernized regime, fund managers must establish explicit internal frameworks to identify, measure, mitigate, and report operational failures or system disruptions directly to the board and senior management. This works in tandem with MAS’s December 2025 proposals, which specifically tighten liquidity risk management practices within FMCs to prevent structural mismatch during market stress.

New ERM Transition Planning Guidelines

Finally, sustainability has shifted from an ethical consideration to a hard fiduciary requirement. Following extensive consultation, MAS issued its new Environmental Risk Management (ERM) - Transition Planning Guidelines on March 5, 2026. Applicable to all FMCs with discretionary investment portfolios, the guidelines require managers to embed climate transition and physical environmental risks directly into their core asset allocation strategies. FMCs are expected to actively engage with and push investee companies toward sustainable adaptation measures. Managers have an 18-month transition window to update their investment playbooks before the rules officially take effect on September 5, 2027.

REGULATORY STANDARDS/UPDATES

Hong Kong to Pilot Secondary Trading of Tokenized SFC-Authorized Investment Products

April 2026: The SFC unveiled a pilot framework enabling secondary trading of tokenized SFC-authorized investment products. The initiative offers retail investors 24/7 liquidity and peer-to-peer trading opportunities for tokenized money market funds. As of March 2026, 13 tokenized products were offered to the public in Hong Kong, with assets under management of the tokenized classes exceeding $10.7 billion. The new pilot framework allows retail investors to trade tokens directly with one another on SFC-licensed VA trading platforms rather than being restricted to buying/redeeming tokens directly from the issuer.

SFC Warns Crypto Firms of Heightened Cyber Threats

June 2026: Following a 27% surge in local cyber incidents, the SFC has mandated urgent cybersecurity upgrades for VA service providers (VASPs) and their associated entities to counter AI-driven threats. To protect client assets, crypto firms must immediately accelerate patch management, deploy advanced anomaly detection, and mitigate such internal AI risks as system prompt override and data leakage, with ultimate accountability resting on senior management and the manager-in-charge (MIC) of information technology.

INTERMEDIARIES/MARKET SUPERVISION

SFC to Strengthen Hong Kong’s Listing Rules

March 2026: The SFC issued a two-month consultation paper to amend the Securities and Futures (Stock Market Listing) Rules to combat market misconduct and refine initial public offering (IPO) and post-listing enforcement. If implemented, the proposals will enable the SFC to impose ongoing, continuing conditions on IPO applicants that remain effective after listing, allow listings to proceed conditionally while enforcing post-IPO compliance and enhanced disclosures. Additionally, the proposals offer a targeted and less disruptive alternative to full trading suspensions when managing market irregularities and streamline the pathway for suspended shares to return to active trading.

SFC Appoints New Head of Investment Products

May 2026: The SFC announced the appointment of Elisa Ng as its new Executive Director (Investment Products) for a three-year term beginning June 8, 2026. She brings nearly two decades of leadership experience to the role, having most recently served as CEO of J.P. Morgan Asset Management Hong Kong. Ng succeeds Christina Choi, who transitioned to lead the Corporate Finance Division in late 2025, and takes over from Alexandra Yeong, who continues to serve as the interim head of investment products during the transitional period.

KEY PRODUCT DEVELOPMENTS

Singapore and Hong Kong Compete to Become Gold Trading Hubs

March 2026: The Monetary Authority of Singapore (MAS) and the Singapore Bullion Market Association announced a roadmap to develop Singapore into a premier gold trading hub, expanding gold-linked financial products and physical vaulting infrastructure. While Singapore offers a neutral safe haven for RWA tokenization managers, Hong Kong holds a first-mover advantage with a centralized gold clearing platform launching in July 2026. This intensifies regional competition, giving on-chain commodity issuers a choice between Singapore’s institutional safety and Hong Kong’s deeper mainland market liquidity.

Hong Kong Transitions to Paperless USM Regime by November 2026

March 2026: Following extensive rounds of market rehearsals, the SFC announced its plan to implement the paperless Uncertificated Securities Market (USM) regime on November 16, 2026. Once enacted, newly listed securities must be issued in paperless form from listing. For existing listed securities, issuers will gradually integrate into the USM regime over a five-year period. Investors holding physical share certificates retain the flexibility to choose when to convert them into paperless form.

HKMA Issues Inaugural Stablecoin Licenses

April 2026: After a rigorous evaluation process that saw only two (out of 36) applications approved, the HKMA granted the first two stablecoin issuer licenses since the new licensing regime came into effect in August 2025. The newly approved issuers intend to deploy their fiat-referenced stablecoins in 2H2026 to enable retail payments and tokenized asset investments via consumer banking apps, alongside high-speed corporate cross-border trade settlements. Prioritizing stringent financial safeguards, the HKMA signaled that further approvals will remain strictly limited in the near term. 

New MAS Rules for Complex Financial Products

May 2026: MAS is upgrading its retail investment framework following a public consultation. While private investment funds offered to accredited or institutional investors remain exempt, managers using retail wrappers, digital feeder platforms, or offering investment-linked policies —which are now classified as complex products—are heavily impacted. Intermediaries must implement pre-transaction alerts and investor experience checks. Inexperienced retail buyers require mandatory financial advice and verification call-backs. Legislative amendments will follow.

SIGNIFICANT ENFORCEMENT ACTIONS

We highlight below several noteworthy disciplinary and enforcement actions that may be of interest to MICs, responsible officers (ROs), licensed representatives, intermediaries, and others operating in the Hong Kong financial markets. These recent actions should be read in conjunction with the SFC’s Enforcement Reporter (March 2026), which makes good on the SFC’s warning to asset managers that it will “take firm and proportionate enforcement action where misconduct is uncovered. This includes imposing significant financial penalties, revoking licenses, issuing industry bans, or restricting operations to ensure compliance with regulatory requirements, deter systemic threats, and preserve confidence in Hong Kong’s financial markets.”

Market Misconduct

March 2026: A proprietary trader and RO was banned for four and a half years and imposed a HK$1 million fine for false trading. The trader executed 25 matched trades in Hang Seng Index options between his firm’s account and a secret account in his wife’s name and submitted false compliance declarations to evade detection.

Unauthorized Personal Trading

March 2026: A hedge fund manager was reprimanded and fined HK$2 million, and its former director, RO, and MIC were, for compliance and overall management oversight, banned for eight months following failures to comply with staff personal trading restrictions. This included executing over 2,500 unauthorized personal transactions, trading the same securities on the same day as the funds under management, and participating in identical IPO allocations. The SFC held the firm liable for failing to implement effective staff monitoring controls and penalized the director/RO/MIC for neglecting his critical compliance duties, though it noted no evidence of intentional investor harm.

Money Laundering

March 2026: A Singapore licensed fund manager was raided, with two directors arrested and over S$160 million in assets frozen due to severe AML control failures. The fund manager allegedly failed to implement proper screening protocols, allowing its funds and securities accounts to be actively used by an international syndicate to layer illicit proceeds from sophisticated, cross-border online scam networks.

Regulatory Capital and Licensing Conditions Breaches

May 2026: An investment firm was fined S$40,000, and its CEO and Executive Director reprimanded by MAS for failing to adequately monitor its asset under management, breaching its base capital requirements, and violating its license conditions by launching a new product without prior MAS approval. The firm was forced to completely shutter its retail fund management business and is permanently barred from managing monies for retail investors.

June 2026: A securities broker was reprimanded and fined HK$2.5 million after self-reporting internal failures, including misreported financial returns that resulted in a liquid capital deficit of up to HK$32.3 million in violation of the Financial Resources Rules. 

Miscellaneous: Life Bans

March 2026: A former investment manager was banned for life following a severe failure to manage conflicts of interest. The manager recommended that the fund extend loans to his own private company without disclosing his ownership interest. The scheme allowed the manager to siphon HK$14.43 million for personal use before defaulting on repayments, resulting in the maximum professional ban and a fine matching the illicit gains.