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The SFC has issued a new circular flagging various deficiencies and substandard conducts. These weaknesses were identified during its supervision of asset managers engaged in managing private funds and discretionary accounts. The circular underscores the SFC’s expectations on the integrity of asset managers and can act as a useful guide to strengthen internal controls and ensure regulatory compliance.
The circular identified deficiencies on both asset managers and their senior management, highlighting cases involving misconducts and breaches of regulatory requirements. Areas covered in the circular ranged from conflicts of interest, risk management, investment within mandate, information for investors, and valuation methodologies. It also set out the existing obligations applicable to, as well as the SFC’s expectation on, asset managers in these circumstances.
Common deficiencies and misconduct
The SFC pinpointed several common deficiencies and instances of misconduct that it identified while supervising asset managers, which jeopardised the interests of investors, exposed them to significant risks and resulted in substantial losses:
- Conflicts of interest: failure to prevent and manage potential or actual conflicts of interest arising from transactions or practices.
- Risk management and investment within mandate: adequate risk management procedures or appropriate investment due diligence not implemented. This meant there was no guarantee that transactions carried out on behalf of clients were in accordance with their investment objectives and restrictions.
- Information for investors: investors weren’t provided with adequate information for them to make informed judgements.
- Valuation methodologies: adopting inappropriate valuation methodologies with an intention to hide investment losses of the funds under their management from investors.
The regulator’s requirements and expectations
To address these deficiencies, the boards and senior management of asset managers, particularly the Managers-In-Charge of Core Functions and Responsible Officers, are expected to critically review the areas of concern and give priority to strengthening their supervisory and compliance programmes. These actions include reviewing existing policies procedures, systems, and controls to ensure they comply with all applicable regulatory requirements.
Should an asset manager become aware of any material breach, infringement, or non-compliance, it’s important to report these to the SFC immediately. Initiatives to self-report will be taken into consideration during the process of determining any potential disciplinary action against you by the SFC. The regulator also expects that, where possible, an independent and objective audit should be conducted on an asset manager’s compliance with the existing obligations.
What’s next on the regulator’s agenda
The SFC will commence a thematic on-site inspection of asset managers in  private funds to detect any material breaches or non-compliance with applicable regulatory requirements. It’ll also continue to supervise asset managers’ compliance with applicable requirements through offsite monitoring, on-site inspections, and thematic reviews focused on the management of private funds and discretionary accounts.
How can Bovill Newgate help you strengthen your compliance setup?
Our team of dedicated and experienced consultants are well-equipped to help you navigate the regulatory expectations in Hong Kong by providing ongoing support. We regularly conduct thematic reviews on existing internal controls, make recommendations on enhancements, and assist with closing any gaps. We also tailor solutions to strengthen your policies and procedures, ensuring they remain compliant.
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