Five common themes from our asset manager health checks

We have summarised in this article our observations from the compliance “health checks” our Deacons health check team has conducted on asset management firms over the past 12 months. These health checks involve on-site operational reviews and interviews, and are conducted to help get clients ready for an SFC routine inspection. Over the next few months we will be doing separate articles focussing on hedge fund managers, PE managers and private placement agents specifically so if you miss any of these please do not hesitate to contact us and we would be pleased to send them to you.

1. 

Records of basis of investment decisions not kept. Some clients do not keep documentation or any records substantiating the investment decision-making process. During SFC routine inspections, the SFC often asks for documentary evidence of the investment decision-making process so asset managers need to ensure that such records are kept in an easy to find and easy to follow manner.

2. 

No regular reviews and updates of policies / procedures. The revised Fund Manager Code of Conduct (effective November 2018) has not been incorporated into the policies and procedures of some asset managers. The SFC is likely to ask for the Compliance Manual and other policies/procedures during its onsite inspection so firms need to keep these updated to ensure they reflect the latest regulatory requirements.

3. 

Inadequate risk management. Some asset managers do not have comprehensive risk management procedures in place whilst others do not have an independent risk management function. Risk management is clearly moving up the regulatory agenda so firms need to review their risk management processes and tools.

4. 

Best execution deficiencies.Some asset managers are unable to provide records showing that they periodically evaluate broker performance, whilst others fail to consider all of the relevant factors impacting best execution. Asset managers need to consider both qualitative and quantitative factors when reviewing the performance of execution brokers and keep copies of the minutes of best execution meetings so that these can be provided to the SFC on request.

5. 

Proper records of suitability assessments not kept. Some asset managers which do their own capital raising still do not keep proper records explaining why the funds they manage are suitable for their fund investors in the circumstances of each such client. The SFC has continued to remind licensed companies of the importance of compliance with the suitability obligations and the SFC is likely to look at the written suitability assessments during its routine inspections.