Breaches by Asset Managers noted in SFC Inspections

In its annual report for 2011/12 (which covers the period 1 April 2011 to 31 March 2012), the SFC reported that it had conducted 252 (2010/11: 235) risk-based onsite inspections of licensed corporations. The annual report also included a table , which we have reproduced in part below, describing the types of breaches the SFC identified during the inspections with comparative data as well. (We have only included the more significant breaches relevant to asset managers.) 

We have set out below our practical observations the SFC’s findings and the implications for clients.

1. Financial Resources Rules / Client Money and Securities Rules Breaches

The financial soundness of licensed firms and their custody of client assets where relevant, have been a focus of the SFC in many of their more recent inspections. The SFC also conducts stress testing separately to assess the financial risk exposure of licensed corporations.

2. Code of Conduct Breaches

The SFC has been and is likely to continue to monitor compliance with the new requirements in the June 2012 Code of Conduct, during on-site inspections.

3. Fund Manager Code of Conduct Breaches

The areas the SFC tends to focus on in inspections include best execution, order allocation and proper record keeping.

4. Non-Compliance with anti-money laundering guidelines

There was a big jump in the number of AML related breaches (up by more than 260% from the previous period), even though the AML Ordinance and the AML Guideline had not even come into effect during the relevant period (they only became effective on 1 April 2012). This means the number of breaches is likely to go up over the next financial year so clients should be ready for this scrutiny of their Compliance Manual (has it been updated since the announcement of the new requirements?), AML procedures ((have these been updated and has there been sufficient training on them so that they are being fully complied with) and records (are they complete and sufficient?).

5. Internal control weaknesses

Examples of internal control failings include insufficient management supervision over daily operations, a deficient compliance function, lacking operational policies and procedures.

Be prepared!

The annual report also mentioned that the SFC has organised a number of internal workshops on inspection skills, focusing on new joiners as well as sharpening the skills of existing staff. This is yet another signal that the SFC will be conducting more on-site inspections moving forward and that they want the inspections to be more rigorous. Again, it is important that licensed corporations are ready for the inevitable call when it comes.