Ashley Alder
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Hong Kong Securities and Futures Commission chief and former Herbert Smith Asia head Ashley Alder shook up the Asian financial capital last year when he called for holding investment banks criminally and civilly liable for the accuracy and reliability of initial public offering disclosures.
Banks are no doubt nervous about Alder’s proposals, which still need the approval of Hong Kong’s Legislative Council. But some law firms see a potential silver lining in tougher regulation of financial transactions.
In December, Davis Polk & Wardwell announced that it had recruited former Clifford Chance Asia disputes head Martin Rogers to launch a Hong Kong litigation practice. Rogers, one of the biggest names in Hong Kong financial regulatory practice, and James Wadham, another former Clifford Chance partner, will lead a 12-lawyer team when they come aboard at Davis Polk later this year.
Hong Kong has often been seen as having a more laissez-faire financial regulatory regime than the United States or the United Kingdom, with the SFC generally regarded as less aggressive than the U.S. Securities and Exchange Commission. But Bonnie Chan, a capital markets partner with Davis Polk, says regulatory compliance work in Hong Kong is clearly on the rise. "The demand for this type of work has grown a lot over the past few years," she says. According to Chan, a major part of the new Davis Polk practice will be representing banks in SFC investigations and other regulatory proceedings.
Indeed, Rogers is already working with Chan advising a group of 23 major banks on a possible response to Alder's proposals. "The objective is to achieve fair allocation of risks which is reflective of the collaborative nature of an IPO," she says.
For its part, Clifford Chance wasted little time replacing Rogers. Last month the British firm said it was relocating Matthew Newick, its London-based head of banking litigation, to Hong Kong. Clifford Chance Hong Kong litigation partner Donna Wacker agrees with Chan that recent SFC proposals will lead to more regulatory work in the region.
"The SFC's new recommendations on prospectus liability, along with the new code of conduct for sponsors, may result in banks seeking advice on their greater obligations to scrutinize their clients ahead of any listing application," she says. "Banks and other sponsors also have a new obligation to tell the regulator if a client is not following the rules, and we anticipate a lot of advice around the fulfilment of this obligation."
Still, not every firm sees the opportunity yet. Though SEC investigations are big moneymakers for firms in the U.S., SFC investigations have so far proven considerably less lucrative for firms.
"Regulatory work here is mostly related to SFC investigations, and that is not a great revenue driver," says Shearman & Sterling Asia managing partner Matthew Bersani, though he adds that such work is beneficial in building relationships with banks.
One issue is that the stakes of an SFC investigation have historically been far lower than those of an SEC one. In 2010 the U.S. regulator collected a $550 million fine from Goldman Sachs over a conflict of interest in marketing certain mortgage-backed investment vehicles to clients. Last November, BP Plc. agreed to pay the SEC $525 million for misleading investors about the scale of the Deepwater Horizon spill.
By contrast, the SFC issued its largest fine ever last April against brokerage Mega Capital for faulty due diligence as a sponsor in the 2009 IPO of Chinese textile marker Hontex International Holdings, which was ordered to buy back around $130 million in shares after the SFC found that it had overstated earnings in its prospectus. The total penalty for Mega was just a little over $5 million.
Chan says companies take both SEC and SFC investigations seriously because their reputations are at issue. She also thinks the SFC may start catching up when it comes to penalties. "The stakes have traditionally been higher in an SEC investigation, but the world is changing," she says.
When Davis Polk launched a Hong Kong capital markets practice two years ago, its competitors among Wall Street firms felt compelled to do the same. So far, though, there are few signs that others are following the firm into Hong Kong disputes practice.
Instead, many other firms are continuing to expand U.S. litigation practices in the region focusing on SEC or Foreign Corrupt Practices Act compliance. Kirkland & Ellis currently has a U.S. litigation partner, Samuel Williamson, leading an enforcement and investigations practices in Shanghai. David Eich, Kirkland’s Asia head, says the firm doesn’t yet see sufficient client demand to build a Hong Kong financial regulatory practice.
Latham & Watkins Hong Kong litigation partner Simon Powell says his firm is hoping to expand its local disputes practice from six lawyers currently to possibly ten in the next year. He says Latham is building a broader practice than Davis Polk. "It appears that Davis Polk intends to build a specialized contentious regulatory practice," he says.
Powell says his firm does handle some Hong Kong regulatory matters, but he says the firm cannot disclose any of its clients in the area for confidentiality reasons. "It is not a critical skill set [for international law firms], but it is an interesting and productive practice area," he says.
One obstacle to expanding into Hong Kong financial regulatory practice, says Bersani, is that there are only a handful of lawyers really well-known for it. "This market cannot support that many Martins," he says, referring to Rogers. "He has like 80 percent of the market share."
Not surprisingly, Davis Polk Asia head William Barron also thinks there is a dearth of top candidates to lead a financial regulatory practice in Hong Kong. "We would not have done this if we could not have attracted Martin and James," he says. "It's as simple as that."
Email: jseah@alm.com.
