The Securities and Futures Commission (SFC) published its Consultation Conclusions on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency and Further Consultation on Proposed Disclosure Requirements Applicable to Discretionary Accounts (Conclusions) in November last year, which adopted important proposals to strengthen Hong Kong’s fund manager supervisory regime. The amended Fund Manager Code of Conduct (FMCC) will come into effect on 17 November 2018. Fund managers should carefully consider how these changes will impact the way they operate their businesses, and how they interact with clients, investors, and third party service providers, and implement the necessary measures now to ensure compliance by November 2018.

Scope of the FMCC

The amended FMCC will apply to licensed or registered persons whose business involves the management of:

  • authorised collective investment schemes (e.g., public fund managers)
  • unauthorised collective investment schemes (e.g., private fund managers)
  • discretionary accounts (in the form of an investment mandate or pre-defined model portfolio)

Key Actions

1. Ascertain your role and responsibilities

Whether certain provisions in the amended FMCC apply to you will depend on your role, and the responsibilities with which you have been tasked. Specifically, you will need to determine if you are:

  • a fund manager responsible for the “overall operation of a fund”
  • a fund manager tasked/delegated with a specific function that is subject to enhanced requirements
  • a discretionary account manager
  • a general fund manager who is not responsible for the overall operation of a fund

If you perform one or more of these roles, you will be subject to all requirements relevant to that role.

A fund manager responsible for the ‘overall operation of a fund’ is a new concept in the revised FMCC. Whether you fall within this category is a question of fact. The SFC’s intention is to ensure that a fund manager which in substance is responsible for the day-to-day operation and management of the fund, will be caught by the new requirements. The SFC issued FAQs in November 2017 to provide some additional guidance as to what this means in practice. Notably, a fund manager may still be responsible for the overall operation of the fund despite the governing body of the fund (such as the board of directors or trustee) having the final decision-making power on key matters. In other words, a fund manager will not be able to point to the governing body’s obligations to avoid its own responsibilities under the FMCC, if in substance those responsibilities extend to the overall operation of the fund.

2. Identify the enhanced obligations and/or new requirements that are applicable to you

There have been many amendments throughout the FMCC. Set out below are some of the key changes or enhancements that may apply depending on your role and the operation/strategy of the fund.

Risk management

As an elaboration of the SFC’s requirements on risk management for both the fund manager and the fund that it manages, it is made clear that a fund manager should implement adequate risk management procedures to identify, measure, manage and monitor appropriately all risks relevant to each investment strategy, and to which each fund is or may be exposed. The FMCC also provides suggested risk-management control techniques and procedures for funds that a fund manager is expected to take into account.

Liquidity risk management

A fund manager which is responsible for the overall operation of a fund is required to:

  • establish, implement and maintain appropriate and effective liquidity management policies and procedures to monitor the liquidity risk of the fund, and review and update such policies periodically
  • integrate liquidity management in investment decisions
  • regularly assess the liquidity of the assets of a fund
  • regularly assess the liquidity profile of the fund’s liabilities
  • regularly conduct assessments of liquidity in different scenarios, including stress testing
  • make appropriate disclosures

In addition, all fund managers are required to integrate liquidity management in investment decisions and regularly assess the liquidity of the assets of a fund.

The above requirements apply to all types of funds, whether open-ended or closed-ended. That said, the SFC recognises that the extent of application of liquidity management principles will depend on the nature, liquidity profile and asset-liability management of the fund.

Custody of fund assets

A fund manager which is responsible for the overall operation of a fund is required to:

  • ensure that the fund assets are properly safeguarded and segregated
  • exercise due skill, care and diligence in the selection, appointment and ongoing monitoring of any third party custodian and ensure that a formal custody agreement is entered into
  • put in place policies, procedures and internal controls to ensure the independence of the custodial function in circumstances where self-custody is adopted

The FMCC also specifically imposes disclosure requirements in relation to custodial arrangements.

Fund portfolio valuation

A fund manager which is responsible for the overall operation of a fund is required to:

  • establish appropriate valuation police and procedures for proper and independent valuation of fund assets, and have such policies and procedures periodically reviewed by a competent and functionally-independent third party
  • where third party valuation services are to be appointed, exercise due skill, care and diligence in the selection of the third party
  • value all fund assets on a regular basis, at frequency that should be appropriate to the fund assets and the dealing frequency of the fund
  • make appropriate disclosures

Securities lending and repos:

A fund manager which engages in securities lending, repo and reverse repo transactions on behalf of the funds it manages, is required to put in place:

  • a collateral valuation and management policy
  • an eligible collateral and haircut policy
  • a cash collateral reinvestment policy

A fund manager who is responsible for the overall operation of the fund is also subject to enhanced disclosure requirements to investors.

Further details of these requirements are set out in the revised FMCC, along with additional guidance on what to consider when designing the above policies, as well as the minimum disclosures expected.


A fund manager which is responsible for the overall operation of a fund is required to disclose:

  • the expected maximum level of leverage it may employ on behalf of the fund
  • the basis of calculation of leverage

The SFC recognises that there is currently no general consensus as to the calculation method of leverage, and hence, the SFC has not prescribed any methodology of calculation at this stage. However, the calculation methodology a fund manager chooses should be easy for its investors to understand and the basis of calculation should be clearly explained and prominently disclosed.

3. Identify obligations that are applicable to a discretionary account manager

A discretionary account manager needs to observe the general principles and requirements that apply to a fund manager under the FMCC as described above (subject to a number of exceptions), to the extent relevant to its functions and powers.

In addition, a discretionary account manager is required to:

  • enter into a written discretionary client agreement with minimum content requirements
  • undertake performance review at least biannually (unless otherwise agreed)
  • provide valuation reports to clients monthly basis or as prescribed in the client agreement

A further consultation is currently underway regarding the disclosure options for discretionary accounts relating to both monetary benefits (explicit and non-explicit remuneration arrangements) and non-monetary benefits. The SFC has not yet released its Conclusions.

4. Take steps

The changes to the FMCC are extensive. We suggest that fund managers take the following steps to ensure that they are in the position to comply with the revised FMCC before the end of the year:

  • Policies and procedures: perform gap analysis to identify gaps, and make revisions to ensure gaps are addressed.
  • Disclosure documents (where applicable): review disclosure documents to identify if updates are required, and make revisions to comply with requirements.
  • Third party relationships (e.g., delegates, security lending agents, custodian) (where applicable): review third party relationships to ascertain if contractual provisions are sufficient, and if policies and procedures, and internal controls are adequate, and put in place additional measures.
  • Client agreement (for discretionary account managers): review the existing discretionary client agreement to identify gaps, and amend the client agreement where appropriate.
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