On 23 December 2024, the Securities and Futures Commission (SFC) banned a fund manager (Ng) for life and fined him HK$1.7 million for mismanaging two private funds and window-dressing the financial resources of his asset management company (see the SFC’s Statement of Disciplinary Action). The SFC’s findings were primarily based on the deficiencies and substandard conduct outlined in its circular of 9 October 2024 (Circular). This article discusses:
- the SFC’s findings on fund mismanagement referencing the standards set out in the Circular; and
- the key takeaways for SFC licensed fund managers.
SFC’s findings on fund mismanagement
Ng was a responsible officer, director, manager-in-charge and the sole owner of a corporation (Agg) licensed for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance. Agg was a delegated sub-manager of two Cayman funds (the Funds) that invested substantially in debentures issued by companies controlled by Ng.
The SFC found Agg mismanaged the Funds primarily based on the following deficiencies and substandard conduct and so Ng is liable for his neglect in discharging his senior management responsibility in managing Agg’s business:
1. Conflicts of interest: After one of the Funds (Fund A) invested in debentures of a company controlled by Ng, he withdrew a personal loan nearly equivalent to Fund A’s subscription amount from the company but only partially repaid the loan. Fund A subsequently could not receive the full amount of principals and coupons from the debentures, and Agg did not seek repayment for Fund A.
Agg was found failing to avoid conflicts of interest and properly manage the risks of Fund A, resulting in Ng diverting the Fund A investors’ subscriptions for his own personal benefit.
2. Improper valuation and insufficient risk management: Another debenture issuing company controlled by Ng agreed to repay a loan to Fund A, but around 75% of the repayment amount was a cancellable corporate committee fee that was booked into the Fund A’s year-end accounts to inflate Fund A’s net asset value (NAV). Fund A also settled its subscription into a debenture with the corporate guarantee provided by the debenture issuing company. Although this transaction did not involve any actual transfer of funds, Fund A included the corporate guarantee as a revenue in its monthly valuation reports. In addition, Agg was unable to provide documentation to support the valuation of another Fund (Fund B).
Fund A’s NAV was inappropriately inflated due to the inclusion of the corporate commitment fee and corporate guarantee in its books. Additionally, Agg failed to adequately manage the financial risks (including concentration risks and credit risks) that both Funds would face by investing substantially all of their assets in the debentures.
3. Failure to invest within mandate and safeguard fund assets: Fund B’s investment objective was to invest in technology and gaming companies without mentioning cryptocurrency mining. However, Fund B transferred investor subscription money to an investee company controlled Ng, who then used it to purchase computer hardware for cryptocurrency mining. Ng also transferred Fund B’s investment amount in the investee company to his personal bank accounts. He subsequently informed investors that Fund B ceased operations with no money left.
The SFC determined that Agg failed to ensure Fund B’s investments aligned with its stated investment objective and strategy and to property safeguard the assets entrusted to it.
Key takeaways for SFC licensed fund managers
In the Circular, the SFC emphasised that it will commence a thematic on-site inspection of private fund managers and will take decisive action against them and their management for misconduct and supervisory failure.
In light of the SFC’s enforcement action against mismanagement of funds, licensed fund managers should consider:
1. Reviewing their fund management process: Ensure investments align with the investment objectives and strategies outlined in the fund’s offering documents or discretionary account mandates.
2. Enhancing the investment process controls: Implement a check-and-balance mechanism, such as a compliance review, to avoid arbitrary investment decisions that may lead to non-compliance.
3. Maintaining good records: Document the investment decision-making process, including the justifications for investments made or abandoned, the information relied upon, and the individuals involved in the investment recommendations and approvals; and consult the fund’s administrator, custodian, and/or auditor before any changes to the fund’s valuation methodology or policy, and document the discussion and the basis for the changes.
4. Updating policies and procedures: Review and update the relevant policies and procedures to address the identified areas for enhancement.
