SFC consults on asset management regulation and point-of-sale transparency

The Securities and Futures Commission (SFC) launched a three-month consultation on 23 November 2016 on proposed enhancements to the Fund Manager Code of Conduct (FMCC) and the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) as part of the SFC’s objective to ensure that the regulatory regime for the asset management industry is in line with international regulatory developments.

Who is affected?

All SFC Type 9 licensed / registered fund managers (managing either public or private funds or discretionary accounts) and their representatives (Managers) and SFC licensed intermediaries are affected. Managers of public funds are generally already subject to more stringent requirements.

What does it affect?

Enhancements proposed to the FMCC address four areas, listed below. They will impact all Managers. Managers with responsibility for overall fund operation (or de facto control of the fund’s oversight and operation) (Controlling Managers) must assume additional responsibilities. 

1. Securities lending and repos: all Managers will be required to implement prescribed policies (collateral valuation and management, eligibility, haircuts and reinvestment) and client reporting. Controlling Managers face additional disclosure obligations. When using third party agents, Managers will be required to ensure there is sufficient flow of information to achieve compliance.
2. Custody of fund assets: all Managers will be required to ensure safekeeping, segregation and identification of fund assets. Controlling Managers should diligently select and contractually appoint a functionally independent custodian, ensure ongoing monitoring and disclose key custodial arrangements, risks and conflicts policies to investors. Private funds with self-custody arrangements must ensure a similar level of functional independence through policies, procedures and controls.
3. Liquidity risk management (LRM): all Managers will be required to ensure effective LRM policies are in place. Controlling Managers should maintain, implement and periodically review the LRM policies, including stress testing, by reference to the fund’s nature and dealing cycle. Suitable contingency plans and escalation protocols to a responsible committee (or senior management) should be implemented. LRM tools should only be used with investors’ interests in mind. The existence and material terms of any side letter(s) should be disclosed.
4. Leverage disclosure: Controlling Managers should disclose a fund’s maximum leverage in its offering document. There is no prescribed calculation methodology provided that it is reasonable, prudent and reflects international best practice.

There are other miscellaneous updates, the main ones are (i) requiring Controlling Managers to schedule independent audits; (ii) clarification of the requirements on the use of side pockets; (iii) enhanced SFC reporting; and (iv) trades when aggregating house and client orders. 

Proposed changes to the Code of Conduct enhance point-of-sale transparency for potential conflicts of interest arising out of inducements and commissions received by intermediaries from sale of investment products. The Consultation’s two pronged approach is:

1. Intermediaries’ conduct when representing themselves as “independent” or providing “independent advice”: this will only be permissible if the intermediary does not receive fees, commissions, or any direct or indirect monetary or non-monetary benefits from other parties in the distribution of an investment product to clients.
2. Enhanced disclosure of monetary benefits, received or receivable by the intermediary which are unquantifiable, at or before point-of-sale on a per transaction basis:  the existence and nature of any such benefits, the annualised range of monetary benefits received and the maximum annual dollar amount of monetary benefits receivable must be disclosed in a prescribed form. This should facilitate fee comparison and conflict identification across the fund management industry.

The updated Code of Conduct will also clarify that it and its general principles apply to all Managers. The SFC did consider, but decided to keep under review (i) manager remuneration and alignment of manager and investor interests; and (ii) unbundling of research from broker commissions.

What next?

The SFC invites interested parties to submit comments on or before 22 February 2017.

Key Contacts

Jeremy Lam

Partner | Financial Services

Email or call +852 2825 9732