Hong Kong: SFC Highlights Deficiencies In Asset Management Industry

Key Points

  • The SFC has identified nine common areas of non-compliance in managing funds and discretionary accounts.
  • The SFC urged licensed corporations to review their existing internal control procedures and operational capabilities to avoid non-compliant practices or implication in associated market misconduct.

Further to general concerns raised in a circular issued by the Hong Kong Securities and Futures Commission ("SFC") in late July 20171, the SFC issued a further circular on September 15, 2017, specifically directed at SFC-licensed asset managers (the "Circular")2.

The Circular was based on findings from recent routine inspections of 250 licensed corporations. Further, the Circular addressed a number of issues identified as part of the SFC's supervision of licensed asset managers and their management of private funds and discretionary accounts. The Circular provided illustrative examples of non-compliance observed by the SFC.

The examples highlighted by the SFC provide a useful insight into key "problem areas" that are of particular concern to the SFC.

Non-compliance Issue 1: Inappropriate receipt of cash rebates giving rise to apparent conflicts of interest

The SFC highlighted the practice of managers receiving and retaining cash rebates from execution brokers.

The SFC considered the retention by managers of broker rebates as a potential or perceived conflict of interest. This is due to the risk that such rebates may incentivize a manager to trade more frequently with the broker than (i) might be consistent with the fund's investment strategy; and/or (ii) might otherwise be in the best interests of that fund.

The SFC highlighted a situation that it found where rebates had amounted to 7 percent of the net asset value of the relevant fund.

To address the conflicts of interest inherent in cash rebate practices, fund managers should ensure that specific consents have been obtained from their clients3.

Non-compliance Issue 2: Failure to ensure suitability of funds or discretionary account mandates when making solicitations or recommendations of funds under their management or providing discretionary account management services to clients

As part of the amendments to the SFC's Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the "Code") adopted in March 20164 for licensed corporations, the Code now requires a full investor suitability analysis in respect of all high-net-worth individuals and unsophisticated corporates.

Accordingly, when intermediaries are recommending or soliciting a product to such categories of investors, such intermediaries are required to ensure that the suitability of the recommendation or solicitation for the client is reasonable in all circumstances.

Furthermore, intermediaries are now required to include mandatory wording in client agreements, confirming that (i) where a financial product is solicited or recommended, that financial product must be reasonably suitable for the client having regard to the client's financial situation, investment experience and investment objectives; and (ii) no other provision of the client agreement or any other document signed by the client may derogate from the suitability clause. The requirement for a written client agreement containing the foregoing clause cannot be waived by high-net-worth individuals or unsophisticated corporates.

The SFC cited examples of managers who had inappropriately waived Code requirements. The previous provisions of the Code that permitted the waiver of certain obligations under the Code by investors who are high-net-worth individuals or which are unsophisticated corporates have been removed.

The inclusion of this point in the Circular serves as a reminder to asset managers that the SFC views the suitability requirement as being applicable to asset managers.

Non-compliance Issue 3: Failure to put in place a proper liquidity risk management process to ensure that liquidity risks of funds and discretionary accounts under management are adequately addressed

The SFC issued a circular in late 2016 outlining liquidity risk management procedure requirements for management companies of SFC-authorized funds.

In the Circular, the SFC reiterated that asset managers managing SFC authorized funds should ensure that policies and procedures are supported by strong and effective governance and operational capabilities.

In addition, as part of the SFC's ongoing consultation process for the SFC's Fund Manager Code of Conduct ("FMCC")5, the Circular proposed to enhance the requirements relating to liquidity risk management for asset managers.

The SFC cited examples of managers who had not exercised due care, skill and diligence in assessing the liquidity profile of certain funds' assets and liabilities. These managers simply relied on information shown on the portfolio management system and made assessments that did not take into account the historical and expected redemption pattern of a fund or were based on a single quantitative metric or qualitative factor.

Non-compliance Issue 4: Deficiencies in setting up a proper governance structure and implementing comprehensive policies and procedures for fair valuation of assets

The Circular serves as a reminder to asset managers of the duty to ensure the proper valuation of fund assets. SFC-licensed asset managers are subject to the general requirement to ensure that fund assets are valued on a regular basis, in accordance with the constitutive documents of the fund and to disclose to investors the basis for the valuation6.

The Circular highlighted instances in which managers did not have proper governance structures in place and had implemented valuation policies that were deemed to be deficient in light of requirements under the Code and under the SFC's separate circular issued on July 20, 20157. Examples given include:

  • for suspended bonds and stocks, no assessment of whether historical values reflect the fair value of such assets;
  • a valuation policy lacking appropriate policies to determine whether fair value adjustments are necessary; and
  • a valuation policy imposing too high a trigger for escalating fair valuation issues to the internal valuation committee.

Non-compliance Issue 5: Deficiencies in systems and controls for ensuring best execution

The SFC noted deficiencies in the systems and controls of some asset managers in relation to best execution.

SFC-licensed asset managers are required to execute client orders on the best available terms, taking into account the relevant market at the time for transactions of the kind and size concerned8.

Asset managers should put in place adequate systems and controls and should take into account factors such as price, costs, speed, likelihood of execution and settlement, size and nature of the trade, and other relevant considerations.

The SFC highlighted operational deficiencies in terms of allocation of trades by managers (i) to brokers offering the best soft-dollar arrangements; (ii) other than in accordance with the results of broker evaluation scoring; and (iii) without specifying a minimum number of quotations required for the transaction.

The SFC generally noted that asset managers should be mindful of potential conflicts of interest arising when directing trades to execution brokers.

Non-compliance Issue 6: Failure to safeguard fair order allocation

The SFC also identified deficiencies in fair order allocation arrangements among some asset managers.

The FMCC imposes a requirement on all fund managers to:

  • ensure that all client orders are allocated fairly
  • make a record of the intended allocation before a transaction is effected
  • ensure that an executed transaction is allocated promptly in accordance with the stated intention, except where the revised allocation does not disadvantage a client and the reasons for the re-allocation are clearly documented9.

The SFC provided examples of asset managers that managed multiple funds and discretionary accounts, and failed to ensure compliance with the requirements of the FMCC, due to (i) failure to maintain the required records; (ii) failure to demonstrate fair allocation between accounts (in particular, between a house account and a client account); and (iii) failure to properly match pricing with order input.

The SFC reiterated the need for asset managers managing multiple funds to implement proper governance structures, policies and procedures to govern order allocation; maintain clear records of the basis of allocation; and ensure that any deviation from internal policy is clearly documented and subject to senior management review and approval.

Non-compliance Issue 7: Inadequate systems and controls in relation to protection of client assets

The SFC observed that, contrary to the duty under the FMCC10 to ensure that client assets are properly safeguarded, some asset managers had failed to implement adequate systems and controls to properly protect the assets of the funds and discretionary accounts to which they have been entrusted.

The SFC highlighted the following commercial practices as being inadequate to meet the safeguarding requirement imposed under the FMCC:

  • appointment of a sole authorized signatory (with no secondary signatory) to effect non-trade transfers of fund assets in and out of brokerage accounts or custodian accounts
  • failure to demonstrate regular reconciliations of cash and investment holdings with external service providers in order to detect omissions, errors or missing assets.

The SFC reiterated the need for asset managers to implement appropriate and effective controls and procedures in order to protect client assets from potential theft, fraud and other acts of misappropriation, and to ensure the proper safeguarding of assets under their management.

Non-compliance Issue 8: Inadequate systems and controls for ensuring compliance with investment restrictions and guidance

The SFC highlighted failures by asset managers to impose proper and adequate systems and controls so as to ensure that investments were compliant with investment restrictions and guidelines. Examples of inadequate practices include:

  • ability for a trader to override system-generated violation alerts without proper justification
  • failure to properly implement automated pre-trade and post-trade investment restrictions checking and, in particular, failure to carry out post-trade investment restrictions checking.

The SFC reiterated the need for asset managers to implement effective systems in order to ensure that all transactions performed with respect to a fund are carried out in accordance with that fund's stated objectives, restrictions and guidelines. The SFC particularly highlighted the need to ensure that automated investment restriction checks are properly verified.

Non-compliance Issue 9: Inadequate systems and controls to address the risk of market misconduct

Market misconduct is addressed in Parts XIII and XIV of the Securities and Futures Ordinance ("SFO") and covers the criminal and civil offences of "insider dealing," "false trading," "price rigging," "disclosure of information about prohibited transactions," "disclosure of false or misleading information inducing transactions" and "stock market manipulation."11 The SFC considers market misconduct offences as particularly grave.

The SFC reiterated the need for asset managers to implement adequate internal systems and controls in order to prohibit and prevent market misconduct.

Such systems and controls would ordinarily be documented in a dedicated chapter in the asset manager's compliance manual, dealing with monitoring, identification, escalation, and, where necessary, investigation and discipline. In addition, the SFC expects that asset managers will ensure that relevant staff receives proper training so that they are familiar with the correct protocols. Examples of inadequate policies and procedures include:

  • failure to implement proactive measures to identify irregular trades (notwithstanding the existence of internal policies governing the reporting of insider information)
  • absence of procedures for the appointment and monitoring of external "expert network" firms as part of the research process for securities.


The Circular highlights areas of particular concern to the SFC, and it is in line with the Enforcement Division's objective of signaling to the asset management industry regarding issues about which it is dissatisfied.

In light of the issuance of the Circular, all SFC-licensed asset managers would be well advised to revisit their internal governance structures and operational policies and procedures in order to ensure that these are compliant with applicable standards and requirements.

In particular, SFC-licensed asset managers would be well advised to ensure that their firms do not exhibit any of the deficiencies highlighted in the Circular.

The Circular is also a reminder that the SFC is a vigilant regulator and carefully monitors asset managers in order to ensure compliance with standards imposed by the SFO, the Code, the FMCC and the various circulars, guidelines and FAQs issued by the SFC from time to time.


1 Circular to Licensed Corporations Engaged in Asset Management Business: Irregularities and Deficiencies in Managing Private Funds and Discretionary Accounts

2 Circular to Licensed Corporations Engaged in Asset Management Business: Common Instances of Non-Compliance in Managing Funds and Discretionary Accounts

3 See Section 13.1 of the Code of Conduct for Persons Licensed by or Registered with the SFC (June 2017)

4  As covered comprehensively in the separate client alert, SFC Publishes Circulars and Updates FAQs on the Triggering of, and Compliance with, Suitability Obligations (January 2017) - https://www.akingump.com/en/news-insights/sfc-publishes-circulars-and-updates-faqs-on-the-triggering-of.html

5 See SFC Consultation Paper on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency (November 2016) - http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP5

6 See Paras. 5.3 and 5.4 of the SFC Fund Manager Code of Conduct

7 See SFC Circular to Management Companies and Trustees/Custodians of SFC-authorized Funds – Relating to Fair Valuation of Fund Assets" issued on July 20, 2015

8 See Para. 3.2 of the SFC Fund Manager Code of Conduct

9 See Para. 3.4 of the SFC Fund Manager Code of Conduct, which addresses order allocation. See also Para. 3.11 of the SFC Fund Manager Code of Conduct, which addresses dealing for house accounts

10  See Para. 4.1 of the SFC Fund Manager Code of Conduct

11 See Section 245 of the Hong Kong Securities and Futures Ordinance (Cap. 571)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.