Private Funds and Discretionary Accounts

On 31 Jul 2017, SFC issued the circular "Irregularities and Deficiencies in Managing
Private Funds and Discretionary Accounts" expressing its concerns about the management of some private funds and discretionary accounts. During SFC’s supervision of licensed corporations engaged in the asset management business, a number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments were found to have irregular features.

Among the irregularities cited in the circular, discretionary account holders held sizeable concentrated stock positions in their accounts and asset managers acted solely at the direction of their clients without exercising investment discretion. Additionally, some cases were found to involve related-party acquisition or disposal of listed company shares by bought and sold notes.

SFC also identified instances where fund investors or discretionary account holders were substantial shareholders, directors or affiliates of the listed companies invested by the funds or the discretionary accounts. In one case, a director of an asset manager was also a director or CEO of listed companies in which funds under the management of the asset manager were invested.

The nature and commercial substance of the practices highlighted in the circular are questionable and may conceal shareholdings in listed companies. In addition, SFC warns that undue concentration of illiquid or interconnected stocks may have a material adverse effect on the ability to meet investors’ redemption requests.

SFC's findings have revealed a novel type of market misconduct facilitated by asset management firms. It appears that some firms licensed for RA9 are not actually conducting a business of asset management, but operating a fraudulent scheme.