The Securities and Futures Commission in Hong Kong (“SFC”) issued a hard-hitting circular to licensed asset managers last month,¹  prompted by deficiencies they had identified in their inspections and investigations.

Under Hong Kong’s regulatory regime, asset managers require what is known as Type 9 licence²  and are subject to SFC supervision. Key amongst the licensed asset manager’s obligations is compliance with the SFC’s codes and guidelines,³   which include obligations and best practices in dealing with conflicts of interests, managing investments, and providing adequate disclosure to investors.

In the Circular, the SFC noted that there were significant breaches of the required conduct in the market and have provided detailed examples of the deficiencies that they have uncovered. These include:

• Managers receiving monetary benefits from fund transactions;
• Unfair allocation of trades to the benefit of the manager’s personnel;
• Use of fund assets to finance connected entities of the manager;
• Priority being given to connected parties in redemption; and
• Overcharging on rates of finance provided to managed funds.

 

The SFC has reminded licensed managers that, specifically under paragraph 1.5 of FMCC, detailed provisions already exist concerning the handling of potential conflicts of interest and the applicable disclosures to be made. As is clear from the Circular, these provisions have been disregarded by some of the managers who they have inspected.

On a related issue the SFC noted cases where the valuation methodologies adopted by managers also fail to comply with FMCC, especially in relation to illiquid assets. ⁴

The Circular is a clear indication of a “zero tolerance” approach being adopted by the SFC towards asset managers who disregard their responsibilities in these areas of concern. The licensed regime under the SFO has justifiably earned respect for the stringent supervision that it provides to intermediaries and the Circular also underlines that the SFC has no intention to “let the foot off the pedal”. Responsible Officers and Managers-In-Charge of licensed activities should be particularly aware of the fact that the SFC will be monitoring these areas very closely and now is the time that they should consider a health check on these areas of their operations.

 

Robertsons offers a comprehensive range of regulatory services in the areas of Fintech, Regulatory Investigations & Proceedings, and Licensing & Compliance. The firm's Regulatory Investigations team handles inquiries and investigations by key regulatory bodies in Hong Kong, including the SFC, the Hong Kong Monetary Authority, the Hong Kong Stock Exchange and the Confederation of Insurance Brokers. Our Licensing & Compliance team assists clients in navigating complex regulatory requirements in Hong Kong's financial services sector, helping with licensing applications, compliance matters, and ongoing regulatory support for various financial institutions and listed companies in the region

Chris Lambert