Hong Kong’s SFC flags up funds “irregularities”

An unspecified number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments are operating with “irregular features”, Hong Kong’s Securities and Futures Commission (SFC) has said.

In a circular distributed to all “licensed corporations engaged in asset management business”, the SFC expressed “concern” over such irregularities.

Irregularities mentioned in the circular included instances where discretionary account holders held sizeable concentrated stock positions in their accounts and asset managers acted solely at the direction of their clients without exercising investment discretion.

Other cases involved related-party acquisition, while yet other instances related to the use of bought and sold notes for the disposal of company shares.

‘Extremely poor corporate governance’

Alarmingly, the SFC uncovered examples of extremely poor corporate governance and possible conflicts of interest, with fund investors or discretionary account holders also substantial shareholders, directors or affiliates of the listed companies into which those funds or discretionary accounts had invested.

It cited the example of an asset manager’s unnamed director was also a senior executive was also a director or senior executive of listed “companies” (note the use of the plural) in which funds “under the management of the asset manager” were invested.

The SFC describes these practices as “questionable”, saying they “may conceal shareholdings in listed companies”.

The other risk, aside from any ethical or regulatory concerns comes, says the SFC, over the funds’ abilities to effect redemption since, it points out, “undue concentration of illiquid or interconnected stocks may have a material adverse effect on the ability to meet investors’ redemption requests.”

In a carefully worded reminder to asset managers of their duties under the law, the SFC pointed out that the law requires then to notify the SFC if they suspect “any material breach, infringement or non-compliance with the market misconduct provisions of the Securities and Futures Ordinance” that has been committed by their clients.

“If private funds or discretionary accounts are found to be used to fund or conceal improper activities at the expense of investors, the SFC will not hesitate to take action against the asset managers and their senior management for failing to comply with regulatory requirements,”  said Ms Julia Leung, the SFC’s Executive Director of the Intermediaries Division (pictured above). “In particular, asset managers must not turn a blind eye to dubious arrangements and transactions proposed by their clients and should avoid being implicated in any market misconduct or other illicit activities.”

Finally, the SFC also reminds would-be investors of best practice before choosing to invest in a fund, namely: to familiarise themselves with a funds objectives and strategies by reading the offering document and questioning the asset manager; understanding the fund’s nature and risks, such as whether it has a high percentage of illiquid or interconnected stock; and finally, matching the fund’s risk profile against their own personal circumstances to determine whether the investment suits them.



Eugene Costello
Eugene Costello has been a journalist for some 20 years, and has written for a wide variety of UK and international newspapers and magazines.

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