In an effort to strengthen Hong Kong’s status as a leading asset management centre, on 23 November 2016 the Securities and Futures Commission (SFC) launched a three-month consultation into proposals to amend the Fund Manager Code of Conduct (FMCC) and the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct).
The FMCC applies to persons who are licensed or registered with the SFC to carry on Type 9 (asset management) regulated activity in respect of collective investment schemes. The Code of Conduct applies to all other persons that are licensed or registered with the SFC. Relevantly, in its consultation paper, the SFC also notes that persons who are licensed or registered with the SFC to carry on Type 9 (asset management) regulated activity in respect of discretionary accounts should generally observe similar requirements to those applicable to managers of collective investment schemes under the FMCC.
Since the global financial crisis, regulatory bodies have made reforms to areas which affect the asset management industry, such as systemic risk, shadow banking, liquidity and risk management. These changes have been made to increase financial stability and improve investor outcomes. Following suit, the SFC has conducted a review of the existing regulatory framework governing the asset management industry in Hong Kong and sets out a series of proposed reforms in its two-part consultation paper.
In the first part of the paper, the SFC sets out its proposals to update the FMCC in the following areas:
- securities lending and repurchase agreements – requiring fund managers to adopt policies relevant to such business and to make relevant disclosures in fund offering documents;
- custodian / safe custody of fund assets – imposing additional requirements to better safeguard fund assets and, where a fund manager is responsible for the overall operation of a fund, an express requirement to appoint a custodian that is functionally independent of the fund manager;
- liquidity risk management – where a fund manager is responsible for the overall operation of a fund, the adoption of liquidity management policies and procedures; and
- disclosure of leverage – where a fund manager is responsible for the overall operation of a fund, disclosure on the maximum level of leverage that may be employed for the fund.
In the second part, the SFC sets out its proposals to amend the Code of Conduct in two ways, by:
- governing the conduct of ‘independent’ intermediaries – restricting intermediaries from representing that they are independent if they receive money or non-monetary benefits from other parties, including product issuers; and
- improving the disclosure of benefits received prior to or at the point of entry into a transaction – imposing additional disclosure requirements in respect of monetary benefits received by an intermediary where such benefits are non-quantifiable prior to or at the point of entry into a transaction.
Interested parties are invited to submit their comments to the SFC by 22 February 2017.
The SFC will publish its consultation conclusions following the end of the consultation period. The SFC’s consultation conclusions will set out the changes that will be made to the FMCC and the Code of Conduct and the timing for these changes to come into effect.
Further detail and the consultation paper can be found on the SFC website.