Securities & Futures Commission of Hong Kong

Intermediary Failure

Q1:

Will I lose all investments in a fund if the respective fund manager / the trustee has financial problems?

A:

No, the fund manager cannot use assets in a fund to solve its own financial problems because it is the trustee, being independent of the fund manager, who is responsible for safekeeping the fund's assets. If the fund manager is in financial trouble or is no longer appropriate to manage the fund, the trustee should dismiss the fund manager and reappoint another one. The SFC should immediately be notified of the change and monitor the appointment of a new fund manager.

Furthermore, a fund's assets must be segregated from the assets of its trustee, who is also prohibited from using a fund's entrusted assets for its own benefits or debt repayments. The trustee owes a fiduciary duty to investors under trust law. If a trustee is in breach of the terms of the fund's constitutive documents (i.e. prospectus and/or trust deed), it may be liable to actions brought against them by fund holders or other parties.

Q2:

Can the SFC take over the fund management responsibility from a fund manager who has financial failure, or act on behalf of the fund holders to appoint another fund manager to manage the fund?

A:

The SFC is not empowered to act on behalf of the fund holders to take over the fund management responsibility or appoint another fund manager to manage the fund.

The trustee is obligated to decide whether to suspend/terminate the service provided by the fund manager and replace it with another fund manager to manage the fund. However, any decision to remove, replace or appoint a fund manager is subject to the prior approval of the SFC.

Q3:

If the fund manager or the trustee of my fund loses its clients portfolio holdings and transaction records, and delays the processing of my redemption request, will I get any compensation from my fund manager?

A:

The fund manager and the trustee should make every effort to obtain backup copies of the lost records and settle the redemption request as soon as possible. If the redemption payment is delayed, it is up to the fund manager and the trustee to decide whether compensation is required.

The SFC's role is to investigate complaints and take enforcement action if there is a breach of the law and SFC rules and regulations. The SFC will promptly investigate a complaint. However, it can give no assurance that every complaint will result in enforcement action and that compensation will be granted to the affected investors. The SFC does not have the power to order damages or compensation to the investors.

If the fund manager or the trustee is found to be in breach of SFC rules, the SFC may consider disciplinary actions and these may include: issuing a reprimand, revoking the licence of the fund operator, withdrawing the authorization status of the fund and/or the fund manager or the trustee.

Q4:

Given operational failure of my nominee company, can I contact the fund manager directly and ask it to help me to sell my fund?

A:

Yes, you may wish to contact the fund manager directly. However, units registered under nominees are legally owned by the nominee company despite that it is you who are the beneficial owner. The fund manager therefore may not have your personal particulars. It follows that should any emergency situation concerning the fund arise, it would be difficult for the fund manager to identify you and sell the units on your behalf.

Since you do not have any direct contractual relationship with the fund, it would be difficult for you to have direct recourse on the fund or the fund manager; you can only pursue claims through the nominee company.

However, since a nominee is an independent company, and strictly speaking, the business of this company is not under the oversight of the SFC, the SFC has only limited power over it. e.g. the SFC cannot inspect its accounts, and is also not empowered to restrict its businesses. Therefore, it is important to understand the risks involved in using nominee companies.

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