On 28 Jan 2025, the SFC issued a circular detailing deficiencies in asset managers' handling of private funds and discretionary accounts, emphasizing breaches of existing FMCC and Code of Conduct requirements. The SFC identified critical failures in managing conflicts of interest, ensuring investment compliance, providing material disclosures, and applying proper valuation methodologies, with specific cases highlighting non-compliance in related-party financing, risk oversight, and investor transparency. The circular underscores that asset managers must implement robust policies to prevent conflicts, adhere strictly to investment mandates, disclose material information promptly, and maintain accurate valuations to safeguard investor interests.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Conflicts of Interest and Fair Treatment
On 28 Jan 2025, the Securities and Futures Commission (SFC) issued a circular highlighting deficiencies in asset managers' management of private funds and discretionary accounts, noting breaches of existing regulatory requirements. The SFC identified cases where asset managers engaged in transactions creating material conflicts of interest, such as using fund assets to provide financing to related entities at non-market rates (Cases A1/A2, B1), failing to justify higher interest charges, and prioritizing related entities' interests over fund investors. These breaches violated paragraphs 1.5, 3.8.1, and 3.8.2 of the Fund Manager Code of Conduct (FMCC), General Principle 6 of the Code of Conduct, and section IV.6 of the Internal Control Guidelines. The SFC emphasized that asset managers must implement effective policies to identify, prevent, manage, and monitor conflicts, ensure transactions occur at arm’s length on normal commercial terms, and provide specific disclosures about material conflicts to investors.
Risk Management and Investment Compliance
The SFC noted failures in risk management and investment adherence, including breaches of paragraphs 3.1, 3.11.1, and 3.14.1 of the FMCC. Asset managers invested beyond fund mandates (Case F1/F2), failed to conduct adequate due diligence on issuers (Case G1/G2/G3), and neglected liquidity risk assessments, resulting in significant concentration, liquidity, and credit risks. The SFC stressed that asset managers must ensure transactions align with stated investment objectives, implement robust risk management procedures covering market, liquidity, and credit risks, integrate liquidity management into investment decisions, and maintain proper records of risk assessments and investment processes as required under paragraph 5.1(a) of the FMCC and section IV.6 of the Internal Control Guidelines.
Disclosure Obligations and Valuation Practices
The SFC highlighted inadequate disclosures and improper valuation methodologies as critical deficiencies. Asset managers failed to disclose concentrated exposures (Case I1/I2/I3), significant events impacting fund value (e.g., defaults, redemption suspensions), and modified auditor opinions (Case J1), breaching paragraph 6.2 of the FMCC. The SFC mandated timely disclosure of material information, including concentrated positions, adverse events, and audit modifications, to enable informed investor decisions. Regarding valuations, asset managers improperly valued defaulted loans at cost (Case K1) and booked uncollectible receivables (Case K2), violating paragraphs 5.3.1 and 5.3.6 of the FMCC. The SFC reiterated that asset managers must establish appropriate valuation policies, apply consistent methodologies, and ensure third-party valuers are suitably qualified and periodically reviewed.
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