Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
The Securities and Futures Commission (SFC) recently published the final form of a new Fund Manager Code of Conduct (New FMCC). The new code will become effective in November 2018 and will regulate all intermediaries who are licensed/registered to carry on type 9 (asset management) regulated activity in Hong Kong. This briefing describes five key regulatory changes under the new code that asset managers should know about.
In November 2017, the SFC published consultation conclusions on changes to Hong Kong’s asset manager regulatory regime1. The consultation conclusions will affect the regulatory regime applicable to type 9 (asset management) licensed/registered intermediaries (asset managers). These regulatory changes will be implemented through an updated SFC New FMCC.
Asset managers should be aware of the following key regulatory changes under the New FMCC:
Changes to the regulations applicable to asset managers. Currently, discretionary account asset managers are regulated under the Code of Conduct for Persons Licensed by or Registered with the SFC (General Code). All other asset managers are regulated under the current FMCC. Under the New FMCC all asset managers will principally be regulated under the New FMCC and will also be required to comply with relevant requirements of the General Code. Discretionary account asset managers will be most affected by these changes. The New FMCC sets out in Appendix 1 specific requirements for discretionary account asset managers, including minimum content requirements for discretionary client agreements and the New FMCC provisions which will not apply to discretionary account asset managers. However, all asset managers will need to ensure they are compliant with both the New FMCC and the General Code.
Additional principles and standards for certain asset managers. The New FMCC imposes certain additional principles and standards on asset managers “responsible for the overall operation of a fund” (overall responsibility (OR) asset managers). Although the term OR asset manager is not expressly defined in the New FMCC, the SFC cites as examples instances where representatives of an asset manager constitute a majority of the fund’s board, or where an asset manager is intricately involved in setting up the fund. These additional requirements include enhanced disclosure obligations to fund investors. The additional requirements will also affect the appointment of custodians. The New FMCC lists specific factors OR asset managers should consider when appointing a fund custodian.
New policy and procedure requirements. The New FMCC will require asset managers to adopt market misconduct and risk management policies and procedures. Additional policies and procedures will need to be adopted by OR asset managers and asset managers who carry on securities lending business.
Disclosure to fund investors. The New FMCC will impose a new requirement to disclose certain information to “fund investors” (investors as a whole of a collective investment scheme (whether authorised or unauthorised) managed by the asset manager). The New FMCC will also include a general obligation for OR asset managers to disclose information for fund investors to be able to make an informed judgement about their investment in the fund (and an obligation to disclose material changes to such information). The specific information requiring disclosure includes summaries of a fund’s lending, repo and reverse repo transactions policy (where the asset manager conducts such business for the fund) and the risk management policy.
Reporting obligations to the SFC. Upon request, asset managers must provide appropriate information to the SFC, including regarding leverage, assets and liabilities. If the SFC deems it necessary in order to combat a systemic risk, an asset manager may also be required to provide such information on a periodic basis. These reporting obligations are in addition to asset managers’ existing SFC reporting obligations, in particular under the Securities and Futures (Licensing and Registration) (Information) Rules and the Securities and Futures (Financial Resources) Rules.
The New FMCC will become effective on 18 November 2018. Accordingly, asset managers have an approximate 10 month period to ensure they are compliant with the additional requirements set out in the New FMCC.
Asset managers would be well advised to start reviewing, updating and preparing relevant documentation to ensure compliance with the requirements set out in the New FMCC. In particular, asset managers should focus on: (i) ensuring discretionary account client agreements comply with requirements of the New FMCC; (ii) reviewing and updating their policies and procedures to ensure they address all matters covered under the New FMCC; and (iii) ensuring relevant fund investor documentation complies with the requirements of the New FMCC.
The consultation conclusions are set out in the SFC’s Consultation Conclusions on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency and Further Consultations on Proposed Disclosure Requirements Applicable to Discretionary Accounts. The consultation conclusions can be accessed at: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=17CP7
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