Consultation Paper on Fund Manager Code of Conduct

TABLE OF CONTENTS

CONSULTATION PAPER

FUND MANAGER CODE OF CONDUCT :

INTRODUCTION

I. ORGANISATION AND STRUCTURE

1. Organisation and Management Structure

2. Staff Ethics

II. FUND MANAGEMENT

3. Fund Management

4. Custody

5. Operations

III. DEALING WITH CLIENTS

6. Dealing with Clients

7. Marketing Activities

8. Fees and Expenses

APPENDIX 1

Minimum Content of Discretionary Client Agreement

FUND MANAGER CODE OF CONDUCT

CONSULTATION PAPER

Introduction

The Securities and Futures Commission (SFC) wishes to release, for a period of consultation, the attached Fund Manager Code of Conduct.

Background

The Fund Manager Code of Conduct (FMCC) has its origins in a series of developments over the past year. Firstly, in February 1997 the Hong Kong Investment Funds Association (HKIFA) released guidelines on personal account dealing which they recommended their members to follow. However, the HKIFA is not a self-regulatory body, and expressed the wish that the SFC give their rules some kind of regulatory backing.

This issue was considered in the light of other areas on which fund managers had requested further guidance. It was then agreed with the HKIFA that a fund manager-specific code of conduct would be developed, and a team of experienced industry compliance officials was tasked to work with the SFC to draw up this code.

Application of the FMCC

The SFC has produced, over the years, a number of Codes and guidelines applicable to all categories of licensed person. The most significant of these are the Code of Conduct, released in February 1994, and the Management, Supervision and Internal Control Guidelines released earlier this year. These requirements apply to all types of licensed or registered person, which include brokers, merchant banks, leveraged forex traders, commodities dealers and advisers, financial planners and fund managers. A limitation of the existing Code of Conduct is that it must of its nature be general, as it is intended to apply to everyone.

The FMCC has two main objectives. Firstly, it supplements existing Codes and guidelines by expanding upon certain requirements with fund manager-specific detail about the SFC's expectations. Secondly, it highlights existing requirements applicable to fund managers. The reason for the latter is essentially to assist compliance officers keeping track of the volume of legislative and other requirements relevant to their business. Thus the FMCC draws together references from some 14 pieces of legislation, codes and guidelines.

The SFC recognizes that small fund management companies may not be in a position to comply with all requirements, and the introduction to the FMCC makes it clear that the size of a firm will be taken into account in considering its application. As with the Internal Control Guidelines, the SFC will adopt a pragmatic approach taking into account all relevant circumstances, including compensatory measures implemented by management.

Contents of the FMCC

As explained above, much of the proposed FMCC is simply a consolidation of existing legislative and regulatory requirements, with reference to the existing requirements highlighted in the second column. The main new requirements are set out below.

Designated Compliance Officer [1.6]

The FMCC would require each firm to have a designated person appointed by senior management to be responsible for compliance with all relevant requirements. Where a firm is so small it would not be viable to have a separate person perform this function, the FMCC specifies that senior management should assume this responsibility directly. This concept was originally put forward by the HKIFA in their guidelines issued in February.

Personal account dealing rules [2.1]

These are derived from, although somewhat less stringent than, the HKIFA guidelines. The version in the FMCC is shorter and, in parts, more relaxed than the original, in order to accommodate the practices of different types of firms. Comment is specifically sought as to whether the original HKIFA guidelines should be adopted, or whether more flexibility should be introduced.

Fund management [Part II]

This section of the FMCC elaborates on the general principles of fairness, client priority and avoidance of conflicts of interest. Detailed rules are given for such fund manager-specific matters as order allocation, participation in IPO's, cross trades and house accounts. Where the details are new, the requirements are generally consistent with international best practice. This part also contains more detailed requirements on custody arrangements.

Consultation Period

Comments should be addressed to the Investment Products Division of the Securities and Futures Commission, 12th floor, Edinburgh Tower, 15 Queens' Road, Central, The Landmark, Hong Kong, or e-mail to ip@sfc.hk, and should reach the SFC before 15 October 1997.

Securities and Futures Commission

1 September 1997

FUND MANAGER CODE OF CONDUCT

INTRODUCTION

Persons to whom this Code applies

This Code sets out conduct requirements for persons registered with the Securities and Futures Commission (SFC) whose business involves the discretionary management of collective investment, including unit trusts and mutual funds (whether authorised or unauthorised), pension and provident funds (Fund Managers). These guidelines apply to all registered persons acting as Fund Managers, including, as appropriate, their registered representatives.

Purpose of this Code

This Code aims, firstly, to supplement Codes and guidelines applicable to all categories of registered person with guidance in respect of the minimum standards of conduct specifically applicable to Fund Managers. It does not replace any legislative provisions, Codes or guidelines issued by the SFC. Secondly, it highlights existing requirements applicable to Fund Managers. Further reference should however be made to the legislation, Codes and guidelines, and in the case of any inconsistency, the more stringent applicable provision will be applied. This Code does not have the force of law and should not be interpreted in a way that would override the provisions of any law.

Effect of breach of this Code

Breach of any of the requirements of this Code will, in the absence of extenuating circumstances, reflect adversely on the fitness and properness of a Fund Manager and may result in disciplinary action. When considering a person's failure to comply with this Code, SFC staff will adopt a pragmatic approach taking into account all relevant circumstances, including the size of the company, and any compensatory measures implemented by senior management.

I. ORGANISATION AND STRUCTURE

..............Derivation/comment

1. Organisation and Management Structure[see key ]
Incorporation and registration

1.1 A Fund Manager should ensure that its business is properly incorporated and its employees properly registered in accordance with all applicable statutory requirements.

CO Pt 1
SO Pt VI & VIA
CTO, FPC
Statement of existing requirements
Organisation and Resources

1.2 A Fund Manager should maintain:

(a) financial resources in accordance with all applicable statutory requirements.

(b) sufficient human and technical resources and experience for the proper performance of its duties. This would be expected to vary depending on the amount of assets under management by the firm, and the type and nature of the assets and markets in which the firm invests. The functions of the firm including fund management, operations, compliance and audit should only be performed by qualified and experienced persons, who should receive appropriate training on an ongoing basis.

(c) satisfactory internal controls and written compliance procedures which address all applicable regulatory requirements;

(d) satisfactory risk management procedures commensurate with its business;

(e) adequate professional indemnity insurance cover commensurate with its business.

CC 4.1, 4.2 , UTC, SO Pt VI , FRR , CTO , ICG III , FPC

Statement of existing requirements

Existing requirements in UTC, FPC. Some additional fund manager-specific detail.

Statement of existing requirements (UTC, ICG)

Existing requirements (ICG VIII;

App B. 37)

Functional Separation

1.3 Where a Fund Manager is part of a group of companies which undertake other financial activities such as corporate finance, banking or broking, it should ensure there is an effective system of functional barriers (Chinese Walls) in place to prevent the flow of information that may be confidential and/or price sensitive between the different areas of operations. There should be physical separation between the activities, different staff employed and written procedures to document the controls, unless this is impossible given the size of the firm. If physical separation is impossible, the firm should prohibit dealing in price sensitive or confidential information.

ICG App A

Existing requirements in ICG: more fund manager-specific

Segregation of Duties

1.4 A Fund Manager should ensure that key duties and functions are appropriately segregated, unless this is impossible given the size of the firm. In particular:

(a) front office functions (which include making investment decisions, marketing and dealing in collective investment schemes, and placing orders to deal with brokers) should be physically segregated from back office functions (which include receiving broker confirmations, settling trades, accounting and reconciliation, valuing client portfolios and reporting to clients) and should be carried out by different staff with separate reporting lines;

(b) compliance and audit functions should be separated from operational functions;

(c) the investment decision making process should be clearly delineated from the dealing process.

ICG II

Elaboration on existing ICG requirement with fund manager-specific examples

Existing requirement [ICG App A. 2(d)]

Responsibilities of Management

"Senior management" means the Managing Director of a company or its Board of Directors, Chief Executive Officer or other senior operating management personnel in a position of authority over the firm's business decisions.

1.5 The senior management of a Fund Manager should:

(a) be principally responsible for compliance by the Fund Manager with all relevant requirements under this Code;

(b) maintain clear reporting lines with supervisory and reporting responsibilities assigned to qualified and experienced persons;

(c) ensure that all persons performing functions on behalf of the firm are provided adequate and up-to-date information about the firm's policies and procedures applicable to them;

(d) ensure that the performance of Fund Managers in managing client accounts is reviewed on at least an annual basis.

CC 4.2/3, 12.4 , ICG 1

Derived from existing requirements in ICG

New fund manager-specific requirement

Compliance

1.6.1 A Fund Manager should:

(a) maintain an effective compliance function, including a Designated Compliance Officer, within the firm to ensure that the firm complies with its own internal policies and procedures, and with all applicable legal and regulatory requirements, including this Code;

(b) ensure that the compliance function possesses the technical competence and experience necessary for the performance of its functions.

1.6.2 The compliance function and Designated Compliance Officer should be independent of all operational functions and report directly to the firm's senior management, unless this is impossible given the size of the firm. Where there is no separation of functions, the firm's senior management should assume the role of Designated Compliance Officer.

1.6.3 The Designated Compliance Officer should maintain sufficiently detailed compliance procedures to give senior management reasonable assurance that the firm complies with all applicable requirements at all times.

Audit

1.7 Where practicable, a Fund Manager should maintain an independent and objective audit function to report on the adequacy, effectiveness and efficiency of the firm's management, operations and internal controls. The audit function should:

(a) where practicable, be free from operating responsibilities, with a direct line of communication to senior management or the audit committee, as applicable;

(b) follow clearly defined terms of reference (including monitoring the timeliness and accuracy of all operational functions) which set out the scope, objectives, approach and reporting requirements;

(c) adequately plan, control and record all audit work performed, and record the time involved, findings, conclusions and recommendations;

(d) report to management on all matters highlighted in the audit report, which should be resolved satisfactorily and in a timely manner.

Where the size of the firm does not justify a separate internal audit function, the relevant roles and responsibilities should be performed or reviewed by the external auditors.

CC 9.4, 12.1
ICG V

Existing requirements for compliance; new requirement for Designated Compliance Officer

ICG VI

Statement of existing requirements in ICG

Delegation

1.8 Where functions are delegated to third parties, there should be ongoing monitoring of the competence of delegates, to ensure that the company's accountability to its clients is not diminished. Although the investment management role of the company may be sub-contracted, the responsibilities and obligations of the company to its clients should not be delegated.

UTC

Statement of existing requirements in UTC

Withdrawal from Business

1.9 A Fund Manager who withdraws from business should ensure that any affected clients are promptly notified and that proper arrangements remain in place for the safekeeping of client assets. Where a company is being wound up it should comply with the all applicable statutory requirements.

CC 9.4,
CO

Statement of existing requirements

2. Staff Ethics

Personal account dealing

"Relevant persons" means any employees or directors of a Fund Manager who:

  • in their regular functions or duties make or participate in information decisions, or obtain information, prior to buying or selling a security on behalf of a client;
  • whose functions relate to the making of any recommendations with respect to such buying or selling;

or any affiliates over whom they exercise control and influence.

2.1.1 A Fund Manager should ensure that it has internal rules or provisions in its contracts of employment for relevant persons as follows:

(a) that relevant persons are required to disclose existing securities and derivatives holdings upon joining a Fund Manager and at least annually thereafter;

(b) that relevant persons are required to obtain prior written permission for personal account dealing from the Designated Compliance Officer or other person designated by senior management. The permission should be valid for no more than 5 trading days, and be subject to the following constraints:

(i) that relevant persons may not buy or sell an investment on a day in which the Fund Manager has a pending "buy" or "sell" order in the same investment until that order is executed or withdrawn;

(ii) that relevant persons may not buy or sell an investment for their personal account within 5 trading days before (if the relevant person is aware of a forthcoming client transaction) or after trading in that investment on behalf of a client;

(iii) that relevant persons may not buy or sell an investment for their personal account within 5 trading days before (if the relevant person is aware of a forthcoming recommendation) or after a recommendation on that investment is made or proposed by the Fund Manager;

(iv) that cross trades between relevant persons and clients be prohibited;

(v) that short-selling of any securities recommended by the Fund Manager for purchase be prohibited;

(vi) that relevant persons should be prohibited from participating in initial public offers reserved for clients of the Fund Manager or its affiliates, and should not use their positions to gain access to IPO's for themselves or any other person;

(c) that relevant persons are required to hold all personal investments for at least 30 days, unless prior written approval of the Designated Compliance Officer or other person designated by senior management is given for an earlier disposal;

(d) that relevant persons are required to hold their personal accounts with the Fund Manager and place all deals through the Fund Manager, if such facility is available. If no such facility is available, relevant persons must obtain approval from the Designated Compliance Officer for outside broking accounts;

(e) that relevant persons should ensure that copies of transaction records and statements are submitted to the Designated Compliance Officer.

2.1.2. A Fund Manager should maintain appropriate procedures to distinguish personal transactions for relevant persons from other transactions, and to ensure that such transactions are properly approved and there is an adequate audit trail of such approval and the transaction [see 5.1(a)].

2.1.3. A Fund Manager should not permit relevant persons to delay settlement of personal transactions beyond the normal settlement time for the relevant market.

2.1.4. A Fund Manager who is a relevant person should comply with the provisions set out in (2.1) above.

CC 9.1-3 , 12.2

Existing general provision in CC: new detailed requirements derived from IFA guidelines:

some provisions less stringent than IFA guidelines given the non-voluntary nature of the Code

Receipt or Provision of Benefits

2.2 A Fund Manager:

(a) should not offer or accept any inducement which is likely to significantly conflict with the duties owed to clients;

(b) in the case of a firm, should maintain:

(i) written guidelines, including monetary limits, about the acceptance by staff members of gifts, rebates or other benefits received from clients or business contacts, to give effect to (a);

(ii) a register of benefits received above the specified limit.

PBO

Derivation from PBO; new specific requirement for a register

II. FUND MANAGEMENT

3. Fund Management

Investment within Client Mandate

3.1 A Fund Manager should ensure that transactions carried out on behalf of a client are in accordance with the portfolio's stated objectives, investment restrictions and guidelines, whether in terms of asset class, geographical spread or risk profile.

CC 6.3

Derivation from CC: more fund manager-specific

Best execution

3.2 A Fund Manager should execute client orders on the best available terms, taking into account the relevant market at the time for transactions of the kind and size concerned.

CC 3.2

Derivation from CC: more fund manager-specific

Prohibition on Insider Dealing

3.3 A Fund Manager should not effect or cause to be effected any transaction based on confidential price sensitive information or when otherwise prohibited from dealing by statutory restrictions on insider dealing, and should have procedures in place to ensure that staff are aware of such restrictions.

SIDO

Statement of existing requirements

Order Allocation

3.4 A Fund Manager should:

(a) ensure that all client orders are allocated fairly;

(b) make a record of the intended basis of allocation before a transaction is effected;

(c) ensure that an executed transaction is allocated promptly in accordance with the stated intention, except as permitted below.

An allocation may be made that is not in accordance with the stated intention where the revised allocation does not disadvantage a client and the reasons for the re-allocation are clearly documented.

CC 3.3 , ICG

Derivation from CC: more fund manager-specific

Portfolio Turnover

3.5 A Fund Manager should not trade excessively on behalf of the client portfolio, taking into account the portfolio's stated objectives.

New: Derivation from fiduciary principles (no absolute standard therefore cannot define further)
Underwriting

3.6 Unless specifically permitted in the Client Agreement or client mandate, a Fund Manager should not participate in underwriting activities on behalf of a client. Where underwriting is undertaken on behalf of a client, all commissions and fees received under such contract should be credited to the client account.

UTC

Derivation from CC/ UTC: more fund manager-specific

Participation in Initial Public Offers

3.7 Where a Fund Manager participates in an initial public offering on behalf of clients, it should ensure that:

(a) the allocation of stock received in the offering provides for a fair and equitable allocation amongst clients;

(b) preferential allocations are prohibited;

(c) the reasons for all allocations are documented.

New: derivation from UTC and general fiduciary principles
Transactions with Connected Persons

3.8 A Fund Manager should not carry out any transaction on behalf of a client with an affiliated company unless such transaction is carried out on arm's length terms, consistent with best execution standards, and at a commission rate no higher than the market institutional rate. In the case of an authorised collective investment scheme, total transactions with connected persons should not exceed 50% of the scheme's transactions in value in any one financial year of the scheme, except with the approval of the SFC.

3.9 A Fund Manager should not deposit or borrow funds on behalf of a client with an affiliated company unless:

(a) in the case of a deposit, interest is received at a rate not lower than the prevailing commercial rate for a deposit of that size and term; and

(b) in the case of a loan, interest charged and fees levied in connection with the loan are no higher than the prevailing commercial rate for a similar loan.

UTC, ICG ,
CC 10

Statement of existing requirements

Derivation from existing requirements (UTC)

Cross Trades

3.10.1 A Fund Manager should only undertake sale and purchase transactions between client accounts (cross trades) where:

(a) such activity is permitted in the client agreement or mandate;

(b) the sale and purchase decisions are in the best interests of both clients and fall within the investment objective and policies of both clients;

(c) the trades are executed on arm's length terms at current market value;

(d) the reason for such trades is documented prior to execution.

3.10.2 Cross trades between house accounts and client accounts should only be permitted with the prior written consent of the client, to whom any actual or potential conflicts of interest should be disclosed. Cross trades between staff personal accounts and client accounts should be prohibited.

ICG App A

Derivation from CC/ ICG: more fund manager-specific

House accounts

"House account" means an account owned by a Fund Manager or any of its affiliates over which it can exercise control and influence.

3.11 When dealing for a house account, a Fund Manager should:

(a) give priority to satisfying a client order. If orders for a client and the house are filled or partly filled by near simultaneous orders, the client's transaction must take priority and if the orders are filled at different prices, the better prices must be allocated to the client;

(b) not deal in accordance with a recommendation, research or analysis to be published to clients until the clients have had a reasonable opportunity to act on the information;

(c) except with the prior written consent of the Designated Compliance Officer, not deal ahead of any transaction to be carried out on behalf of a client, or, where the house account and a client have invested in the same investment, only dispose of its holdings following, or together with, the disposal of holdings on behalf of a client. The Designated Compliance Officer should properly document the reasons for any consents given.

CC 9.1

Derivation from CC: more fund manager-specific

4. Custody

Safety of client assets

4.1 A Fund Manager should ensure that the assets entrusted to it are properly safeguarded. This means:

(a) if permitted by the terms of its license, it may retain the responsibility for safekeeping in a segregated trust account; or

(b) it should arrange for the appointment of a custodian (see below), taking all reasonable steps to ensure that the custodian is properly qualified for the performance of its functions. On an ongoing basis, a Fund Manager should satisfy itself as to the continued suitability and financial standing of any appointed custodian.

SO s. 81, 83 &84 , CC 11 , UTC, ICG VII
Derivation from CC and fiduciary principles: more fund manager-specific
Appointment of Custodian

4.2 A custodian appointed by a Fund Manager should be either:

(a) a registered trust company;

(b) a licensed banking institution (including a deposit-taking institution or restricted-license bank) or the subsidiary of such a bank; or

(c) another appropriately qualified entity appointed with the prior written consent of the client.

UTC

Derived from UTC

5. Operations

Records Required to be Kept

5.1 A Fund Manager should keep its accounts and records properly and in line with all applicable statutory requirements. Proper record keeping includes:

(a) maintaining an audit trail of all transactions effected by the Fund Manager, all information relating to client accounts produced by third parties and all relevant internal reports.

(b) keeping all relevant documents such as contract notes from third party brokers, client registers, accounting/ securities ledgers, registers of securities, records of investment decisions and asset allocation process;

(c) maintaining appropriate procedures for the safekeeping, retrieval and storage of documents and records; and

(d) in the case of a registered dealer, complying with the provisions of Part IX of the Securities Ordinance.

SO, s. 67,83 , FRR, CO, s. 121-129 , SO Pt IX. CTO Pt V, ICG IV

Statement of existing requirements

Auditors and Audited Accounts

5.2 A Fund Manager should appoint a firm of auditors to perform an audit of the financial statements of the firm on at least an annual basis. The audited accounts should be filed in accordance with the applicable statutory requirements and be made available to clients upon request.

SO s.87-94 & 96 , CO s.131-141 , ICG VI

Statement of existing requirements

Portfolio Valuation

5.3 All assets held by a Fund Manager on behalf of clients should be valued on a regular basis and the basis of valuation disclosed to clients. Unless otherwise agreed with a client, valuation should be made in accordance with the following general principles:

(a) listed securities should be consistently valued at a price representative of either the daily opening, mid, closing or average price for that security at the stock exchange or market on which that security is listed or traded as indicated by an automatic price feed or other independent pricing source;

(b) unlisted or unquoted securities should be valued at cost price subject to adjustment by reference to:

(i) comparable third party transactions in the same investments, taking into consideration the cost of the investments;

(ii) any appraisals of the relevant investments or issuer of the investments undertaken by qualified accountants or appraisers. Where necessary the Fund Manager should seek independent confirmation of the valuation from a suitably qualified person; and

(iii) any information generally about the relevant investments or issuer of the investments that is or becomes known to the Fund Manager from independent sources.

(c) units or shares in collective investment schemes should be valued at the latest quoted price as indicated by the published price for that scheme;

(d) any listed securities which are not actively traded or have been suspended from trading should be identified and the price at which that security is valued should be monitored. In this case, a Fund Manager should maintain procedures to:

(i) demonstrate that it will actively seek independent confirmation of the appropriate price for the security from suitable brokers or market makers;

(ii) identify when such a security will be written down or written off in the valuation of a client account; or

(iii) whether it will in appropriate situations transfer the security to its own account and if so, at what price the client account will be compensated for the transfer.

UTC

Derived from UTC / best practice - new details

Net Asset Value Calculation and Pricing

5.4 In connection with a collective investment scheme, a Fund Manager should ensure that a valuation is carried out, in accordance with the constitutive documents of the scheme, to calculate accurately the net asset value of the scheme at each required valuation point.

UTC

Derived from UTC

Reconciliations

5.5 A Fund Manager should arrange to carry out reconciliations of the firm's internal records against those issued by third parties e.g. clearing houses, banks, custodians, counterparties and executing brokers, to identify and rectify any errors, omissions or misplacement of assets, as follows:

(a) Reconciliations should be performed at least monthly;

(b) Reconciliations should be prepared from an asset register that is maintained and used to update client asset ledger accounts.

ICG VII

Elaboration on existing ICG requirement with fund manager-specific detail

Disclosure of Interests

5.6 A Fund Manager should disclose all interests in securities as required by all applicable statutory requirements and have procedures in place to ensure that staff are aware of such requirements.

SDIO

Statement of existing requirements

III. DEALING WITH CLIENTS

6. Dealing with Clients

Providing information about firm

6.1 A Fund Manager should:

(a) provide clients with adequate information about its firm including its business address, relevant conditions or restrictions under which its business is conducted, and the identity and status of persons acting on its behalf with whom the client may have contact;

(b) disclose the financial condition of its business to a client upon request.

CC 8.1,8.4

Statement of existing requirements

Confidentiality

6.2 A Fund Manager should maintain proper procedures to ensure confidentiality of client information.

PDPO

Statement of existing requirements

Account Opening Procedures/ Information about clients

6.3 A Fund Manager should:

(a) take all reasonable steps to establish:

(i) the client's full and true identity, including the identity of the actual beneficiaries, where appropriate, and verify that identification where required;

(ii) the client's financial situation, investment experience, and investment objectives; and

(b) maintain written procedures to comply with all relevant legislation against money laundering.

CC 5.1 - 3 , MLG

Statement of existing requirements

Client agreements (Discretionary Services)

6.4.1 A Fund Manager should ensure that a written agreement (Client Agreement) is entered into with a client before any services are provided to or transactions made on behalf of that client. A Client Agreement should contain at least such information set out in Appendix 1 and be provided in a language understood by the client.

6.4.2 Notwithstanding the above, in the case of a collective investment scheme:

(a) where a Fund Manager is providing services to a collective investment scheme, a written management agreement in accordance with the rules of the collective investment scheme may be regarded as a Client Agreement;

(b) where a Fund Manager is acting as distributor of a collective investment scheme on a non-discretionary basis, an authorised offering document and application form in accordance with the Code on Unit Trusts and Mutual Funds may be regarded as a Client Agreement.

CC 6.1-2
CC 7

Statement of existing requirements, except for some details in Appendix 1, now more fund-manager-specific

New: relaxation for collective investment schemes

Reporting: periodic statements

6.5 A Fund Manager should provide each client with a regular statement of account, at least quarterly, of the client's portfolio and transactions undertaken on his behalf.

CC 8.2-3 ,
SO s.75

Statement of existing requirements

Valuations and Performance Reviews

6.6 A Fund Manager should:

(a) review the performance of each client's account against any previously agreed benchmark, either in writing to the client or by way of meeting, at least twice a year;

(b) provide written portfolio valuations to the client at least as regularly as provided in the Client Agreement. The report should, as a minimum, include the following:

(i) the date at which the report is made;

(ii) the contents and value of the client portfolio at that date including income received;

(iii) movements in the value of the client portfolio;

(iv) any open positions in relation to derivative transactions.

UTC,
ICG App A
Complaints

6.7 A Fund Manager should maintain:

(a) procedures to ensure that:

(i) complaints from clients relating to its business are handled in a timely and appropriate manner;

(ii) steps are taken to investigate and respond promptly to a complaint by a person other than an individual directly concerned with the subject of the complaint, or by the Designated Compliance Officer;

(iii) if a complaint is not remedied promptly, the client is advised of any further steps which may be available to the client under the regulatory system;

(b) a register of complaints to give effect to (a) above. This should be reviewed by senior management on a regular basis.

CC 12.3

Derivation from CC; more specific detail; new specific requirement for a register

7. Marketing Activities

Representations by firm or employees

7.1 A Fund Manager should ensure that any representations made and information supplied to a client is accurate and not misleading.

PIO s. 3 - 5 ,
SO s. 72 & 78 , CC 2.1 , UTC

Statement of existing requirements

Issue of Marketing Materials

7.2 A Fund Manager should ensure that all advertisements and marketing materials are authorised as required by the SFC before issue. Where such materials are not required to be authorised, a Fund Manager should nonetheless ensure that marketing materials are accurate and not misleading and that any performance claims can be verified.

PIO s. 8,
UTC

Derivation from existing requirements

Calls

7.3 A Fund Manager should comply with all applicable statutory requirements regarding the offer of investments.

SO, s. 73-4

Statement of existing requirements

8. Fees and Expenses

Disclosure of Charges

8.1 A Fund Manager should disclose to the client the basis and amount of its fees and charges.

CC 6.2 (e)

Statement of existing requirements

Fair and reasonable charges

8.2 All charges, fees and mark-ups affecting a client should be fair and reasonable in the circumstances, and be characterised by good faith. In connection with mark-ups levied on transactions on behalf of a client, where the Fund Manager is:

(a) acting as agent, such mark-ups should be prohibited:

(b) acting as principal, the circumstances should be disclosed in the Client Agreement and transactions reported in periodic statements.

CC 2.2

Derivation from CC: more fund manager-specific

Rebates and Soft Commission

8.3 In connection with an authorised collective investment scheme, a Fund Manager should comply with [s. 6.24] of the Code on Unit Trusts and Mutual Funds, and in connection with other clients with the Code of Conduct 13.1 to 13.4.

CC 13.1-4 ,
UTC

Statement of existing requirements

APPENDIX 1

Minimum Content of Discretionary Client AgreementCC ref.
(a) Full name and address of client;6.2(a)
(b) Full name and address of Fund Manager business, including its registration status;6.2(b)
(c) Undertakings to notify the other in the event of material changes;6.2 (c)
(d) Authorisation for discretionary management;derived from 6.2(d)
(e) Statement of the client's investment policy and objectives, including any limitations or prohibitions on asset classes and markets (e.g. use of derivatives) or geographical spread, performance benchmark and/or attitude to risk;
(f) All fees to be paid by the client, whether to the Fund Manager or a third party (e.g. custody, brokerage) in connection with the account;derived from 6.2(e)
(g) Any necessary consents in relation to cash rebates and soft commissions, if applicable
(h) Risk disclosure statement as required by the Code of Conduct.6.2(j)
(i) Details of custody arrangements;
(j) Details of periodic reporting to be made to client.

Key

CO Companies Ordinance

SO Securities Ordinance

CTO Commodities Trading Ordinance

PIO Protection of Investors Ordinance

PBO Prevention of Bribery Ordinance

SDIO Securities (Disclosure of Interests) Ordinance

SIDO Securities (Insider Dealing) Ordinance

PDPO Personal Data (Privacy) Ordinance

UTC Code on Unit Trusts and Mutual Funds

CC Code of Conduct for Persons Registered with the SFC

FRR Financial Resources Rules

FPC Fit and Proper Criteria

ICG Management, Supervision and Internal Control Guidelines

MLG Guidance Notes on Money Laundering

Published by
Securities and Futures Commission
12th Floor, Edinburgh Tower
The Landmark, 15 Queen 's Road
Central
Hong Kong
Tel : 2840 9222
Fax : 2521 7836
SFC e-mail address : enquiry@sfc.hk
SFC Internet Website : http://www.sfc.hk

 



Page last updated : 1 Aug 2012