The SFC highlights concerns over listed companies’ use of private funds for proprietary transactions

The Securities and Futures Commission (SFC) recently issued a statement (the Statement) on the disclosure of actual controllers or beneficial owners of counterparties to transactions entered into by listed entities in Hong Kong. The Statement was issued in conjunction with a circular warning asset managers against engaging in dubious transactions and arrangements involving private funds and discretionary accounts which may be used to facilitate market and corporate misconduct, including the use of “nominee” and “warehousing” arrangements to evade regulatory requirements.

Back in 2018, the SFC also issued a circular to intermediaries on the use of “nominees” and “warehousing” arrangements in market and corporate misconduct, highlighting its concerns and the obligations and standards intermediaries are expected to adhere to.

In the Statement, the SFC emphasised that listed issuers must ensure that announcements, statements, circulars and other documents made or issued by them or on their behalf must not include materially false, incomplete or misleading information regarding their counterparties in a transaction. The SFC noted that in the announcements of certain corporate transactions, the identities of the issuers’ counterparties in such transactions were not disclosed or were limited to names of the entities without disclosure as to the controllers or beneficial owners of these entities. The SFC also highlighted concerns over the use of special purpose entities and/or “nominees” and “warehousing” arrangements to facilitate or engage in illicit activities, market misconduct and to circumvent laws, rules and regulations such as the Securities and Futures Ordinance, the Code on Takeovers and Mergers and Share Buy-backs and the Listing Rules.

The SFC warns licensed intermediaries not to disregard “red flags” in dubious private fund and discretionary account transactions and arrangements which may be facilitating clients or other entities in avoiding or contravening laws. Examples of practices noted to have been employed by listed issuers through private fund structures include the following:-

• a listed issuer being the sole investor in or providing the majority of the capital for a private fund;

• a listed issuer being one of a handful of investors in a private fund investing exclusively in a single investment or company;

• a listed issuer subscribing to a number of private funds managed by different persons, with each private fund investing all or the majority of its capital in an underlying investment, and in aggregate, holding 100% of such investment;

• the listed issuer subscribing to a private fund, which through multiple tiers of other private funds, invests in a wholly-owned subsidiary of such listed issuer; and

• a listed issuer disposing of an asset to a private fund which in turn is majority-owned by the listed issuer itself.

A number of the arrangements may involve private funds managed by the listed issuer itself or a connected person of the listed issuer and certain arrangements or transactions appear to have no conventional commercial rationale or are unduly convoluted.

As licensed intermediaries, asset managers and their senior management are reminded that they have ongoing obligations under the SFC’s Code of Conduct and should remain vigilant not to engage in dubious private fund and discretionary account transactions. Where asset managers fail to detect dubious arrangements and transactions, or they are engaged in facilitating illegal or improper conduct due to inadequacies in procedures and controls, the SFC will take appropriate action.

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