SFC identifies irregularities in private funds and discretionary accounts

31 Jul 2017



The Securities and Futures Commission (SFC) today issued a circular expressing its concerns about the management of some private funds (Note 1) and discretionary accounts. During the SFC’s supervision of licensed corporations engaged in the asset management business, a number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments were found to have irregular features.

Among the irregularities cited in the circular, 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. Additionally, some cases were found to involve related-party acquisition or disposal of listed company shares by bought and sold notes. 

The SFC also identified instances where fund investors or discretionary account holders were substantial shareholders, directors or affiliates of the listed companies invested by the funds or the discretionary accounts. In one case, a director of an asset manager was also a director or chief executive officer of listed companies in which funds under the management of the asset manager were invested.

The nature and commercial substance of the practices highlighted in the circular are questionable and may conceal shareholdings in listed companies. In addition, the SFC warns that undue concentration of illiquid or interconnected stocks may have a material adverse effect on the ability to meet investors’ redemption requests.

“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. “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.”

Asset managers are also reminded to report to the SFC (Note 2) any material breach, infringement or non-compliance with the market misconduct provisions of the Securities and Futures Ordinance which they reasonably suspect may have been committed by their clients. 

Investors are reminded to take precautionary measures before investing in a private fund (Note 3), including:

  • paying particular attention to the fund’s investment objective and strategies by reading its offering document and making appropriate enquiries with the asset manager;
  • fully understanding the fund’s nature and risks on top of considering its performance and return, eg, whether it has a heavy concentration of illiquid or interconnected stocks; and
  • matching the fund’s risk profile against their own personal circumstances to determine whether the investment suits them.

End

Notes:

  1. Private funds mainly refers to open-ended private funds whose investors could redeem from the fund anytime in accordance with the fund’s dealing frequency set out in the offering document.
  2. See paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
  3. For more investor education materials, please refer to the website of the Investor Education Centre, the SFC’s wholly-owned subsidiary.


Page last updated : 31 Jul 2017