SFC fined investment manager of private funds for due diligence and monitoring failures

An investment manager of private funds was recently reprimanded and fined HKD3.2 million by the Securities and Futures Commission (SFC) for its failures to perform sufficient due diligence and monitoring on the funds’ underlying investments, to undertake effective risk management measures, and to keep proper audit trail of due diligence and monitoring (including the relevant records of meetings).

In this case, the investment manager is a licensed corporation and was appointed by a segregated portfolio company under the Cayman Islands Companies Act (the SPC) to manage two segregated portfolios (the Funds). In the disciplinary action, the SFC took into account the duties of the investment manager as stated in the private placement memorandum of the Funds and the investment management agreement between the SPC and the investment manager, which include monitoring the performance of the Funds’ investments and performing analysis of the progress of all investments and assets of the Funds. The SFC concluded that the investment manager was in breach of the Fund Manager Code of Conduct and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission in relation to risk management policies and procedures.

The case reflects the SFC’s willingness and determination to take actions against asset managers for failure to comply with regulatory requirements in order to address the SFC’s regulatory concerns relating to private funds. Further, it is advisable for investment managers to regularly review and assess the effectiveness of their due diligence internal policies and procedures with a view to improving adequacy and strengthening the monitoring processes.

For further information about this case, please visit the SFC’s website here.

5 July 2022
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