SFC Cautions Deficiencies and Misconduct in Asset Management Practices
The SFC's October 2024 circular highlights key concerns in asset management, including conflicts of interest, risk management, investment mandates, information accuracy, and valuation methodologies.
SFC Cautions Deficiencies and Misconduct in Asset Management Practices
On 9 October 2024, the Securities and Futures Commission (SFC) issued a circular addressing significant deficiencies and substandard conduct identified during its supervision of licensed corporations managing private funds and discretionary accounts.
Key Areas of Concern
- Conflicts of Interest: The SFC observed inadequate identification, management, and disclosure of conflicts, which may compromise investor interests.
- Risk Management and Investment Within Mandate: Some firms failed to implement robust risk controls or adhered strictly to investment mandates, increasing exposure to unauthorized risks.
- Information for Investments: Deficiencies were noted in the accuracy, completeness, and timeliness of information used to make investment decisions.
- Valuation Methodologies: The circular highlighted inconsistent or inappropriate valuation approaches, potentially affecting asset pricing and investor reporting.
Implications for Market Participants
The SFC's circular serves as a reminder for asset managers to strengthen governance frameworks, enhance transparency, and ensure compliance with regulatory standards. Firms are encouraged to review and improve their policies, controls, and disclosures to mitigate risks and protect investors.
Next Steps and Recommendations
- Conduct comprehensive internal reviews focusing on conflict of interest management and risk controls.
- Ensure investment decisions strictly comply with client mandates and documented strategies.
- Enhance data quality and due diligence processes supporting investment activities.
- Adopt consistent and transparent valuation methodologies aligned with industry best practices.
- Engage proactively with the SFC to address any identified issues and demonstrate commitment to compliance.
Conclusion
The SFC's circular underscores the regulator's ongoing commitment to safeguarding investor interests and maintaining market integrity. Asset managers should treat these findings as an opportunity to elevate their operational standards and foster greater trust in Hong Kong's asset management sector.
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