The SFC has identified a growing number of arrangements and transactions involving dubious private funds or discretionary accounts during recent inspections conducted on asset managers, raising concerns that asset managers are simply following investor’s instructions when structuring private funds or discretionary accounts and effecting transactions, and turning a blind eye to potential red flags.
The SFC has issued a circular in response which is intended to provide detailed guidance to asset managers (the Guidance) to assist them in (i) identifying if a proposed private fund or discretionary account arrangement or transaction is dubious, and (ii) deciding if they should proceed with an arrangement or transaction that has been considered dubious. The Hong Kong Monetary Authority has also circulated the Guidance to Registered Institutions engaged in asset management.
The Guidance recommends that asset managers adopt a substance over form approach and take additional steps in vetting each proposed arrangement or transaction, including making further enquiries (where relevant) to reduce the risk of facilitating misconduct by their clients. Appendix 1 to the Guidance sets out detailed steps on each phase of the process (covering initial screening, enhanced due diligence, senior management assessment and documentation) that the SFC expects asset managers to incorporate into their vetting and decision making process. Asset managers are also encouraged to review the non-exhaustive list of potential “red flags” that may indicate the existence of a dubious arrangement or transaction (see Appendix 2 to the Guidance) and exercise caution over any arrangements or transactions which exhibit similar characteristics.
Please note that the Guidance does not apply to licensed corporations which provide discretionary account services as an ancillary part of their brokerage services for clients without any formal investment mandates.
The SFC also published a statement alongside the Guidance to remind listed companies of their disclosure obligations in respect of counterparties to a transaction. The statement, also aimed at tackling market misconduct, sets out a non-exhaustive list of circumstances where it may be appropriate for the listed issuer to disclose the identities of the actual controllers or beneficial owners of a counterparty to a transaction. A copy of the statement can be found here.