Dechert Advises Hong Kong Asset Managers To Heed Compliance Policies

US-based law firm Dechert LLP (Dechert) is advising asset managers in Hong Kong to review their compliance policies after the city’s market regulator released guidelines to tackle irregular practices of fund houses’ discretionary accounts.

The Securities and Futures Commission (SFC) issued a circular on July 31 outlining how asset managers should address conflict of interest between private funds and separately managed accounts, and avoid practices that undermine market integrity.

Michael Wong, a partner at Dechert, says boards and senior management of asset management companies are expected to maintain adequate oversight of their business activities in the wake of the guidelines.

Failure to act in the best interest of market integrity, failure to act fairly and to avoid conflict of interest, and improper risk taking are considered to be “irregular” under the guidelines.

“Asset managers should not accept questionable arrangements and transactions proposed by their clients that seem to lack commercial substance,” Mr. Wong says in a report on October 10.

“If necessary, asset managers should perform proper due diligence and avoid engaging in market misconduct or practices that conceal shareholdings of fund investors or discretionary accountholders in listed companies.”

“To avoid potential conflicts of interests, asset managers should exercise due care when investing in stocks where their fund investors, discretionary account holders, directors or their own key personnel may be privy to material non-public, price-sensitive information,” he adds.

Sally Wong, chief executive officer of Hong Kong Investment Funds Association, tells Asia Asset Management that most asset managers in Hong Kong are very careful about compliance.

“Hong Kong’s asset managers, especially the global players,” view compliance with conflict of interest policies as a “ fundamental” part of their operations, she says. They already have strong compliance practices in place, and as such, are not expected to take specific action in response to the SFC’s move, she adds.

In his report, Mr. Wong says asset managers should also maintain effective risk management policies to control the risk exposure of their discretionary accounts.

“An important aspect is the management of liquidity risk, as asset managers should endeavour to ensure that they are able to meet investors’ redemption requests in accordance with the terms set out in the funds’ offering documents,” he writes.

Source: AAM