By Rachel Armstrong 

SINGAPORE, Aug 3 (Reuters) - Hong Kong's Securities and Futures Commission has a reputation as a tough enforcer but its muscular approach has irked many in the city's legal world who feel the SFC is running roughshod over them and others in the financial industry. 

 

That means Ashley Alder, the 52-year-old British lawyer who takes the helm of the SFC in October, may have to embark on a charm offensive to repair the strained relations and reassure those it regulates that it is not just tough, but fair. 

 

"He's going to have his hands full, primarily because he's inherited a situation where the SFC is offside with many sectors of the industry," one Hong Kong lawyer said, asking not to be named given the sensitivity of the issue. 

 

A number of recent court cases, most notably the SFC's attempt to ban hedge fund Tiger Asia from dealing in Hong Kong, have drawn critical comments from judges who said the regulator is using its powers inappropriately. 

 

In the Tiger Asia case, a judge agreed with the defendants that the SFC's approach was an "abuse of process" because it would have required the court to rule on whether the fund had engaged in insider dealing when the court did not have the jurisdiction to do so.

 

"The SFC has been given a clear message to 'do your job and act robustly, but ensure that you act fairly and judiciously'," said James Wadham, a partner in Clifford Chance's litigation practice in Hong Kong. 

 

The SFC has also faced criticism for its handling of the sale of structured products, or minibonds, linked to Lehman Brothers.  

 

Some retail investors criticised the watchdog for failing to properly regulate the sale of the products, while banks argued the SFC's approach to recouping investor money meant some of them were unfairly punished for the regulator's own shortcomings. 

 

The appointment of Alder is seen by some as an attempt to help address these issues. 

 

"At other regulators around the world there's a pattern that people with business backgrounds tend to be appointed when there's an upward trajectory and all is well. Lawyers go in when there's a problem," said the Hong Kong lawyer who asked not to be named. 

    

 

Few people doubt that Alder, currently head of law firm Herbert Smith's Asia practice, has the ability to build bridges while retaining the SFC's reputation as a regulator to be reckoned with. 

 

Having worked in Hong Kong for more than 20 years, including a three-year term as the SFC's head of corporate finance from 2001 to 2004, those who know him say he has the experience and sense of independence needed for the job. 

 

"He must be taking a substantial cut in income to rejoin the SFC, so he is clearly not doing it for the money, but for the challenge," said activist shareholder David Webb in a statement following Alder's appointment.  

 

"He should be able to stand up to pressure from the government and tycoons and make decisions based on what is best for the market as a whole rather than any special interest group," he added. 

 

Efforts to reach Alder for comment were unsuccessful. 

 

During Alder's previous tour of duty at the SFC, he helped oversee the introduction of tougher rules for listing prospectuses. When he becomes chief executive, it's expected he may go one step further and make the sponsors of IPOs liable for the contents of listing prospectuses.  

 

The SFC is already due to consult on the issue and Alder signalled to Reuters before his appointment was announced that he thinks it could be a good idea given the high proportion of foreign companies listed on the city's exchange.

 

"Because it is undoubtedly harder to exercise the same regulatory oversight over these companies as domestic companies, there may be a greater emphasis on sponsors as gatekeepers," he said in June. 

    

 

Lawyers also say Hong Kong's government may decide during Alder's tenure to give statutory backing to the Hong Kong Exchange's listing rules, meaning the SFC would take responsibility for overseeing them instead of the bourse itself. 

 

"That would mean that the SFC's scope of regulation would be expanded quite significantly as they'll be policing the listed company disclosure matters, which are currently policed by the stock exchange," said Antony Dapiran, a corporate finance lawyer at Davis Polk & Wardwell in Hong Kong. 

 

"That would likely necessitate a bigger staff at the SFC to deal with the new workload," he added. 

 

Another challenge facing Alder at the start of his job is the increased focus on accounting scandals at listed Chinese companies.  

 

Hong Kong has escaped the scale of the problems seen in the United States, but the fraud allegations levied at the management of China Forestry and Hontex International Holdings have raised concerns about the ease with which company executives can avoid justice by remaining in mainland China. 

 

"China has been something of a black hole for the SFC to take effective action against listed company management, so a more effective relationship with the China Securities Regulatory Commission has got to be a priority," said Clifford Chance's Wadham.  

 

(Additional reporting by Denny Thomas in HONG KONG; Editing by Matt

Driskill)  ((rachel.armstrong@thomsonreuters.com)(+65 68703835)(Reuters Messaging: rachel.armstrong.thomsonreuters.com@reuters.net))