Sharing an Important and Insightful Circular from the HKMA, Which References a Previous SFC Circular Issued in October 2024

📢 IMPORTANT NOTICE: SFC Circular on Deficiencies in Private Fund & Discretionary Account Management 📢

📅 Date: 28 January 2025
🏛 From: Hong Kong Monetary Authority (HKMA)
📜 Subject: Circular issued by the Securities and Futures Commission (SFC)

The Securities and Futures Commission (SFC) has issued a circular highlighting serious deficiencies and substandard conduct in the management of private funds and discretionary accounts by licensed corporations. These violations pose significant risks to investors and undermine the integrity of Hong Kong’s asset management industry.

📌 Reference: Read the full SFC circular here
SFC Circular on VATP Compliance

🔹 Key Issues Identified by the SFC:

⚠️ Conflicts of Interest:
🔸 Some asset managers misused fund assets to provide financing to related entities.
🔸 Unjustified higher fees were charged for financing arrangements, favoring the asset manager’s interests.
🔸 Unfair trade allocations prioritized internal staff or related parties over fund investors.
🔸 Asset managers received monetary benefits from fund transactions without proper disclosures.
🔸 Unfair redemption handling, where internal staff redemptions were prioritized over external investors.

⚠️ Inadequate Risk Management & Investment Misconduct:
🔸 Failure to implement adequate risk management frameworks.
🔸 Investment decisions breached fund mandates or exposed investors to high-risk, concentrated, or illiquid positions.
🔸 Asset managers failed to assess credit risks properly, resulting in substantial losses for investors.

⚠️ Lack of Transparency & Investor Disclosures:
🔸 Failure to inform investors about significant financial risks, including concentrated holdings and large investment losses.
🔸 Delayed notifications on suspension of fund redemptions and critical market events.
🔸 Non-disclosure of modified auditor opinions or delays in releasing audited financial statements.

⚠️ Questionable Valuation Methodologies:
🔸 Some asset managers manipulated valuations to hide investment losses.
🔸 Defaulted assets were overvalued or recorded at cost, misleading investors on the fund’s true financial health.

📌 Immediate Actions Required by Asset Managers:

✅ Review & Strengthen Compliance & Risk Management
🔹 Firms must critically assess their policies, procedures, and internal controls in light of the SFC’s findings.
🔹 Adequate documentation must be maintained to demonstrate regulatory compliance.

✅ Enhanced Senior Management Oversight
🔹 Board members, Responsible Officers (ROs), and Managers-In-Charge (MICs) are accountable for ensuring regulatory compliance.
🔹 Firms should independently audit their operations to detect deficiencies.

✅ Proactive Self-Reporting of Violations
🔹 Asset managers must immediately report any material breaches or non-compliance to the SFC.
🔹 Self-reporting will be considered in regulatory actions and penalties.

✅ Fair Treatment of Investors
🔹 Asset managers must ensure proper disclosure of conflicts of interest, investment risks, and significant events.
🔹 Investors should receive timely, accurate, and transparent information about fund performance and risks.

🚨 Regulatory Consequences & Enforcement Actions:

🔹 Thematic On-Site Inspections – The SFC will conduct focused inspections on asset managers handling private funds.
🔹 Stronger Enforcement & Harsher Penalties – The SFC will escalate disciplinary actions against asset managers violating regulations.
🔹 Potential Disciplinary Actions – This includes fines, license suspensions, and banning of responsible individuals for serious misconduct.