In a recent disciplinary action, the Securities and Futures Commission (SFC) has suspended an individual who was the former responsible officer (RO) of a Types 1, 4, and 9 licenced asset management company (Company), which was the investment manager of a Cayman-incorporate fund (Fund) for 12 months over fund management failures.
At the relevant time, the individual was the manager-in-charge (MIC) of various core functions and the RO of the Company. The SFC found that this individual failed to discharge his duties as an RO and a member of the senior management of the Company to ensure that the Company acts in the best interests of the Fund and its investors.
The SFC’s action against this individual was partly related to the SFC’s earlier sanction against another individual who was the sole shareholder, director, and the other RO of the Company (Sole Shareholder). The Sole Shareholder was also the sole owner and a director of the manager of the Fund (Manager). The Company was under the delegation of the Manager to be the investment manager of the Fund.
The Company caused the Fund to subscribe for debentures issued by the Manager and another company of which the Sole Shareholder was also the sole owner and a director. These subscriptions appeared to have been constructed for the purpose of inflating the Fund’s net asset value (NAV), and have given rise to conflicts of interest as the Sole Shareholder was able to make all the investment decisions relating to the companies controlled by him and caused the Fund to invest substantially all of its assets in debentures issued by these companies. Further, the SFC found that the Company failed to properly manage the financial risks involved, including risks of conflicts of interest, concentration risks and credit risks.
Although it was the Sole Shareholder who had made the investment decisions and was primarily responsible for these failures, this individual was fully aware of these transactions and that the Fund has subscribed for debentures issued by companies wholly owned by the Sole Shareholder.
Despite his knowledge, this individual did not raise any concerns which he ought to have raised as an RO and MIC of Compliance of the Company. The SFC was of the view that this individual was guilty of misconduct and not fit and proper to remain licensed.
This case serves as a reminder that the senior management of licensed entities can be individually accountable for management failures of the corporation. They must observe their own duties and provide independent checks and balances within the organisation, instead of acquiescing in or rubber-stamping decisions that are being presented to them.
For further information, please contact:
Ming Chiu Li, Partner, Deacons
mingchiu.li@deacons.com
