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) the impact of the U.S. Outbound Investment Rules on managers with Chinese investment exposure, a critical review of the Hong Kong Securities and Futures Commission (SFC) enforcement process, as well as Singapore’s proposals to tighten liquidity management guidelines for fund managers.
Featured articles
U.S. Outbound Investment Rules Reshape Fund Management Strategy
New U.S. regulations on outbound investments are fundamentally transforming fund management, particularly affecting managers with Chinese investment exposure. Three key developments are driving this change: (i) the Outbound Investment Regulations (OIR) that took effect January 2, 2025; (ii) the Comprehensive Outbound Investment National Security (COINS) Act enacted December 18, 2025; and (iii) new Treasury FAQs issued December 23, 2025.
Expanding Scope Under COINS Act
The existing OIR, as detailed in our May 2025 Update, established prohibitions and notification requirements for U.S. person investments into China-related entities in semiconductors, artificial intelligence, and quantum computing. The COINS Act significantly expands this framework in three ways.
First, “countries of concern” will expand beyond China, Hong Kong, and Macau to include Russia, Iran, North Korea, Cuba, and Venezuela under the Maduro regime. Second, covered foreign persons will include Chinese Communist Party Central Committee members and political leadership of countries of concern, plus entities “subject to their direction or control.” Third, covered technologies expand to five sectors, adding hypersonic systems to the existing categories, with Treasury authorized to designate additional technologies.
Key Clarifications on Public Securities
The new Treasury FAQs provide crucial guidance on the publicly traded securities exception. Settlement timing, not execution date, determines exception eligibility. If settlement occurs after listing, acquisitions fall within the exception, even for pre–initial public offering (IPO) subscriptions. Treasury 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 Requirements
Each investment requires individual assessment through “reasonable and diligent inquiry” involving public information searches, target questioning when possible, and contractual representations. The COINS Act authorizes Treasury to publish a nonexhaustive list of covered entities, but transaction-specific diligence will remain necessary.
Impact on Limited Partner Investments
The COINS Act may fundamentally alter limited partner (LP) investment frameworks. Currently, U.S. LPs can invest in non-U.S. funds with contractual 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 severely restricting U.S. participation in non-U.S. funds with such exposure.
Administrative Enhancements
The COINS Act provides Treasury with new tools including nonbinding 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.
Operational Implications
Fund managers face comprehensive operational changes. Investment strategies require reassessment, with potential pivots toward allied nations and sophisticated screening mechanisms. Due diligence processes become more complex and time-consuming, examining ownership structures, revenue sources, and potential connections to restricted entities. Compliance frameworks need substantial updating with new monitoring systems and revised fund documentation. Different fund types face unique challenges. Private equity managers must navigate complex exit strategies with potentially limited strategic buyers, while venture capital funds may redirect focus from restricted country startups toward opportunities in allied nations.
Implementation Timeline
Current OIR rules remain effective while Treasury has 450 days from December 18, 2025, to implement COINS Act regulations. Fund managers must immediately audit existing portfolio exposure, update compliance programs, and enhance investor communications while preparing for substantially 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 and permanent structural market changes.
SFC Enforcement Activity Under Scrutiny: Review Identifies Critical Gaps in Case Management and Cross-Border Corporation
The Process Review Panel (PRP) annual report (released December 2025) presents a comprehensive evaluation of SFC enforcement capabilities, revealing both operational strengths and persistent systemic challenges that affect regulatory effectiveness. Of the 60 cases reviewed, 24 were enforcement matters, providing significant insight into the SFC’s regulatory performance during a period of evolving market complexity.
Case Management and Procedural Efficiency
The report identifies worrisome delays in case processing, with enforcement cases ranging from three months’ to 16 years’ completion time. Four specific cases highlighted critical bottlenecks in SFC’s internal machinery. One case demonstrated a particularly problematic nine-month delay in referring matters to the Department of Justice, followed by an additional eight-month period to secure approval for Market Misconduct Tribunal proceedings. This 17-month administrative lag underscores fundamental inefficiencies in interdivisional coordination and external referral mechanisms.
Another case revealed excessive delays between investigation completion and disciplinary action, with over one year elapsing before issuing a Notice of Proposed Disciplinary Action despite the case’s straightforward nature. The PRP’s criticism here reflects broader concerns about the SFC’s ability to balance thoroughness with timeliness in regulatory responses.
Cross-Boundary Enforcement Challenges
The report emphasizes growing complexities in cross-border investigations, particularly involving Mainland suspects. While acknowledging the SFC’s strengthened cooperation framework with the China Securities Regulatory Commission through various memoranda of understanding (MOUs), including the significant 2023 bilateral agreement, practical enforcement outcomes remain limited. Several cases concluded with no further action despite substantial investigative investment, primarily due to suspects’ being based in or having absconded to the Mainland.
The PRP’s observations suggest that while cooperation mechanisms exist, their practical application requires further refinement. The panel encourages deeper collaboration with Mainland authorities, recognizing that successful cross-boundary enforcement is increasingly critical to Hong Kong’s regulatory effectiveness given integrated market structures.
Strategic Planning and Resource Optimization
Perhaps most concerning are cases where significant SFC resources were expended without meaningful enforcement outcomes. The report describes investigations involving fictitious transactions and false disclosures that ultimately yielded no disciplinary or legal action due to suspects being unlocatable or having limited realizable assets. This pattern suggests potential inadequacies in early case assessment and strategic planning.
The PRP recommends more proactive measures to protect investor interests, including earlier asset freezing orders and improved coordination with related regulatory bodies such as the Accounting and Financial Reporting Council. These suggestions reflect growing expectations that regulators should act preventively rather than merely reactively.
Technological Advancement and Operational Modernization
The report highlights technology as both a solution and an ongoing challenge. While acknowledging the SFC’s adoption of advanced technologies and the positive impact of the March 2023 investor identification regime, historical cases demonstrate significant inefficiencies in handling voluminous trading data. The PRP encourages continued exploration of artificial intelligence and other technologies to enhance investigative efficiency, recognizing that technological sophistication is essential for modern financial regulation.
Overall Assessment and Future Priorities
The SFC’s responses to PRP recommendations demonstrate it has implemented various measures to improve efficiency, including streamlined referral processes, expanded expert pools, and coordination mechanisms with law enforcement partners. However, the fundamental challenges revealed — lengthy processing times, cross-boundary enforcement difficulties, and resource allocation inefficiencies — suggest deeper structural issues requiring sustained attention.
The report coincides with increasingly complex regulatory challenges, including cryptocurrency activities, algorithmic trading, and sophisticated cross-border market manipulation schemes. While the SFC plainly demonstrates its commitment to improvement and has established robust frameworks for international cooperation, translating these frameworks into successful enforcement outcomes remains challenging. The PRP’s recommendations provide a roadmap for addressing these systemic issues, emphasizing the need for more proactive case management, enhanced technological adoption, and deeper cross-boundary collaboration to maintain Hong Kong’s position as a leading international financial center.
MAS Proposes Updates to Liquidity Risk Management Guidelines for Fund Managers
In December 2025, the Monetary Authority of Singapore (MAS) issued a consultation paper proposing amendments to the current Guidelines on Liquidity Risk Management Practices (Fund Management Companies) (LRM Guidelines), to provide greater clarity on MAS’ expectations on the management of liquidity risks by fund management companies (FMC).
The proposals were issued pursuant to the International Organization of Securities Commissions (IOSCO) Final Report on Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes issued in May 2025 and Financial Stability Board’s Final Report on Liquidity Preparedness for Margin and Collateral Calls issued in December 2024. As before, an FMC may apply the LRM Guidelines in a proportionate manner, taking into account the nature, size, and complexity of its activities.
The key amendments proposed in the consultation paper:
(a) Strengthening internal governance: An FMC should establish clear accountability and decision-making processes for the design and activation of liquidity management tools under both normal and stressed market conditions. The circumstances under which such tools may be activated should be set out, and the roles and responsibilities of decision makers should be defined. The board and senior management of an FMC should have adequate understanding of potential interactions between liquidity risk and other risk types.
(b) Alignment between fund redemption terms and liquidity of fund assets: An FMC managing open-ended funds is expected to maintain consistency between the fund’s investment strategy and redemption terms under both normal and stressed market conditions. This alignment should be maintained both at the initial product design stage as well as on an ongoing basis.
(c) Adoption of antidilution liquidity management tools (ADTs): An FMC is expected to adopt a diversified approach to liquidity management using both quantitative tools (e.g., suspension of redemptions and redemption gates) and ADTs (e.g., swing pricing). There should be provisions in place for at least one appropriate liquidity management tool, preferably ADTs, and reliance should not be placed solely on suspension or redemption gating. In the case of open-ended funds, particularly those that invest mainly in less-liquid assets, there should be at least one ADT implemented to mitigate material investor dilution.
(d) Imposition of liquidity costs to transacting investors: To safeguard the interests of all investors, an FMC should implement measures such that investors who subscribe to or redeem from a fund bear the liquidity costs associated with their transactions. In particular, where ADTs have been activated, an FMC managing open-ended funds should impose both the explicit costs (e.g., brokerage fees and commissions, trading levies, and settlement fees) as well as implicit costs (e.g., bid-ask spread and market impact costs) on the subscribing or redeeming investors.
(e) Enhancing investor disclosures: An FMC managing open-ended funds should disclose to investors (i) an overview of the fund’s investment strategy and potential liquidity risks, (ii) the features of the redemption terms (e.g., dealing frequency, lock-up periods, and notice and settlement periods), and (iii) the objective and circumstances under which liquidity management tools may be activated.
(f) Ongoing liquidity risk management: An FMC should regularly monitor market depth, liquidity, and concentration of their portfolio positions so that liquidity risks arising from margin and collateral calls are adequately managed and mitigated. Regular reviews should be performed to assess the effectiveness of the liquidity management tools applied and whether additional tools are needed in the management of liquidity mismatches and to provide fair treatment of all investors, where relevant. There should be formalized processes to monitor early warning indicators of potential deterioration in a fund’s liquidity as well as escalation and reporting procedures.
(g) Removal of exchange-traded funds (ETFs) from the scope of the LRM Guidelines: This is pursuant to further guidance issued by IOSCO on ETFs, as ETFs have different liquidity considerations and structural features from open-ended funds.
The consultation period closes on 28 February 2026. The revised LRM Guidelines are expected to come into effect six months after being finalized and published by the MAS. In the meantime, FMCs are encouraged to begin preparations as early as possible.
REGULATORY STANDARDS/UPDATES
SFC Exempts Non-Centrally-Cleared Equity Options From Over-the-Counter Margin Requirements
December 2025: The SFC confirmed it will exempt non-centrally-cleared single-stock options, equity basket options, and equity index options from the over-the-counter (OTC) margin requirements with effect from January 4, 2026. This exemption, which will last until further notice, aims to align with global developments, specifically mirroring approaches in the EU and the UK, and is partly due to licensed corporations’ insignificant current exposure to these options.
MAS Sets Standards on Recruitment and Onboarding Training of Representatives
December 2025: MAS issued an information paper setting out standards that it expects financial institutions to apply when assessing whether their appointed representatives are fit and proper to carry out regulated activities. The paper sets out MAS’s supervisory expectations in the following areas: (i) onboarding of representatives, (ii) monitoring of representatives with adverse information, (iii) onboarding training, and (iv) hiring of assistants by representatives and outsourced activities.
MAS Revises Representative Misconduct Reporting Requirements
December 2025: The new Notice SFA 04-N24 on Reporting of Misconduct of Representatives by Holders of Capital Markets Services Licence and Exempt Persons was issued by MAS after two rounds of public consultation. The new notice, which takes effect on January 1, 2027, revises the scope of reportable “misconduct” to mean (i) any act relating to a contravention of the market conduct provisions under Part 12 of the Singapore Securities and Futures Act 2001, or (ii) any act involving fraud, dishonesty, illegal monetary gains, or any offense of a similar nature (such as cheating, forgery, dishonest misappropriation of monies, criminal breach of trust, bribery, money laundering, and tax evasion). The reporting templates to be used by financial institutions for the misconduct report and investigation report is expected to be shared by MAS by Q2 2026.
MAS Streamlines Incident Reporting Processes
December 2025: MAS has streamlined its incident reporting template and submission channel to facilitate more standardized and streamlined incident data collection. The updates apply to incident reporting under various MAS-issued instruments, including the following notices and guidelines as applicable to Singapore fund management companies: Notice on Technology Risk Management, Guidelines on Business Continuity Management and Guidelines on Outsourcing (Financial Institutions other than Banks). In the event of a reportable incident, financial institutions are to provide initial notification to MAS by contacting its MAS review officer (during office hours) or MAS duty officer (outside of office hours or if the MAS review officer is uncontactable). Following the initial notification, financial institutions are to submit all incident reports to MAS via MAS-Tx using the new incident reporting template from February 1, 2026, onward.
SFC Refines List of Persons Designated as Financial Services Providers Under OTC Clearing Regime
December 2025: The revised list of designated financial service providers (FSPs) under the OTC derivatives clearing regime became effective on January 1, 2026. Licensed persons (including significant nonfinancial counterparties) whose average total position in OTC derivatives meets the US$20 billion clearing threshold must ensure that relevant transaction with designated FSPs are centrally cleared. The list, which contains over 100 entities, primarily includes entities that are part of global systemically important bank groups or major dealer groups that are also clearing members of the largest central counterparties for interest rate swaps in major markets (U.S., Europe, Japan, and Hong Kong).
Hong Kong to Standardize Calculation Periods Under OTC Clearing Regime
January 2026: The SFC and HKMA have jointly proposed adopting two “Calculation Periods” annually for OTC derivatives clearing, effective March 1, 2027. These periods would run from March 1 to May 31 and September 1 to November 30 each year, aiming to enhance operational efficiency and certainty for derivative dealers by standardizing the process for identifying firms that meet the US$20 billion clearing threshold.
INTERMEDIARIES/MARKET SUPERVISION
SFC Enhances Regulatory Cooperation on Cross-Border Digital Asset–Related Matters
January 2026: The SFC entered into an MOU with the Capital Markets Authority of the United Arab Emirates to enhance regulatory cooperation on the supervision of cross-border digital asset–related activities. The MOU establishes a framework for cooperation and exchange of information including, changes that potentially affect the financial or operational stability of regulated entities, for example, enforcement actions or sanctions, ownership changes, major cyberattacks, security breaches, or system failures.
Reminder of Statutory Obligations During SFC Inspections
January 2026: The SFC issued a stern reminder that Section 180 inspections are mandatory statutory obligations, not negotiable requests. The SFC is moving to eliminate the “friction” caused by firms’ using administrative or legal excuses to stall supervisory efforts. Common shields such as client confidentiality, staff absences, or data privacy are now explicitly deemed insufficient reasons to delay or withhold information. Beyond criminal liability for obstruction, the SFC warned of immediate supervisory interventions for noncooperation, including suspending the onboarding of new clients and restricting business activities. Ultimately, the manager-in-charge (MIC) for overall management oversight (supported by the MIC for compliance) will be held personally accountable for any attempts to impede the process.
Hong Kong Regulators Tighten Grip on IPO Gatekeepers
January 2026: The SFC is cracking down on IPO sponsors following a surge in “process-driven” listing applications and declining document quality. Regulators are targeting resource strain, specifically identifying principals overseeing six or more active deals as lacking adequate supervision capacity.
Sponsors must immediately report staff who haven’t passed HKSI Paper 16 and disclose principal workloads. “Concerned sponsors” face on-site thematic inspections and must submit signed rectification plans within three months. The SFC warns that persistent failures in due diligence or expert oversight will result in restricted business scopes or suspended applications to protect market integrity.
KEY PRODUCT DEVELOPMENTS
SFC Streamlines Measures for Authorized EU-Regulated Retail Funds
November 2025: The SFC announced streamlined post-authorization measures for Undertakings for Collective Investment in Transferable Securities (UCITS) funds to align with home jurisdiction regulations and enhance Hong Kong’s position as an asset management hub. Key changes include removing the need for prior SFC approval for changes to depositories, investment delegates supervised by home regulators, and material changes in investment objectives.
Hong Kong Regulators Outline Strategic Priorities for Green Finance
January 2026: The Green and Sustainable Finance Cross-Agency Steering Group (co-chaired by the SFC and HKMA) outlined its three-year (2026–28) strategic priorities to consolidate and strengthen sustainability disclosure, sustainable finance markets, external engagement, and talent development while elevating the focus on transition. Key initiatives include developing best practices for transition plan disclosure through a pilot program and enhancing Hong Kong’s position as a leading sustainable financing hub in Asia.
Boosting Liquidity: SFC Permits Affiliated Market Makers and VA Margin Trading
February 2026: The SFC issued new guidance to enhance the liquidity of the regional virtual asset (VA) market. These initiatives include permitting licensed VA brokers to offer margin financing for Bitcoin (BTC) and Ether (ETH) and providing a framework for licensed platforms to offer perpetual contracts to professional investors. Additionally, affiliates of licensed platforms can now act as market makers. On February 13, 2026, the SFC granted a new virtual asset trading platform license to Victory Fintech (VDX), bringing the total number of licensed platforms to 12.
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.
Market Misconduct
November 2025: The SFC secured its first custodial sentence against a finfluencer for providing unlicensed investment advice through a paid Telegram chat. A request for bail pending appeal was denied.
December 2025: The SFC secured the conviction and immediate eight-month custodial sentence against the wife of a listco chairman for false trading. The defendant had placed a series of bid orders at inflated prices for the listco shares through her own personal account in the final minutes before market close to create a false appearance of demand and alleviate pressure from margin calls on her husband’s account.
December 2025: A former vice president of a share registrar company was given an immediate custodial sentence following his guilty plea for insider dealing. While handling proxy forms for a proposed privatization, the defendant learned that the necessary voting threshold would not be met and sold his shares, avoiding a loss of approximately US$37,000.
January 2026: A retail trader was convicted of false trading, ordered to disgorge all profits and complete 220 hours community service following his guilty plea to “scaffolding” (i.e., repeatedly placing and canceling trading orders at progressively higher prices) and conducting wash trades (i.e., acting as both buyer and seller).
Conflicts of Interest
February 2026: The SFC sanctioned an investment manager and two MICs for extensive fund management failures involving six closed-end Cayman subfunds (Segregated Portfolios). The firm was fined over US$1 million for (among others) failure to disclose and avoid conflicts relating to six high-interest bearing loans made by the investment manager and its director (as lenders) to the Segregated Portfolios (as borrowers). The SFC also banned the CEO/RO and MIC for overall management oversight for 14 months for approving the loans and its MIC for anti-money-laundering for 12 months for failing to adequately screen investors of the Segregated Portfolios (or their beneficial owners), including checking their politically exposed person status.
Virtual Assets
January 2026: The SFC reprimanded and fined an online brokerage firm over US$500,00 for allowing retail clients to trade VA products intended only for professional investors over a four-year period. In determining the penalty, the SFC noted the firm self-reported the breaches, voluntarily compensated affected clients, and ceased all regulated activities in Hong Kong.
Internal Controls
November 2025: The SFC suspended an RO, a director, and a MIC for over three months for allowing the unauthorized sale and transfer of client assets totaling over US$3 million. The MIC had neglected her duties to protect client assets from theft or fraud by processing instructions from a bogus email address and ignoring red flags (including the rejected telegraphic transfers). The licensed corporation was separately reprimanded and fined over US$116,000 for its internal control failures.
December 2025: The SFC reprimanded and fined a Swiss private bank over US$1.4 million for systemic internal control failures that included (among others) inadequate product due diligence for 322 bonds that meant customers did not receive sufficient information and warnings for certain complex products.
Unauthorized Personal Trading
January 2026: A former account executive was suspended for seven months for facilitating unauthorized personal trading by an external broker in a client’s account. The external broker was also suspended for 27 months for concealing from his employer his use of the client’s account (held in the name of his relative) for personal trading.
Miscellaneous: Life Bans
January 2026: A former licensed representative of a well-known bank was banned for life following her criminal conviction for theft of more than US$198,000. She had retained the ATM card and PIN to make unauthorized withdrawals from a client’s bank account.
