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The Securities and Futures Commission (SFC) today published the first issue of its SFC Compliance Bulletin: Intermediaries to provide guidance to intermediaries and market practitioners on the SFC's regulatory and supervisory priorities.
The bulletin is part of the SFC's efforts to enhance communication with Managers-In-Charge (MICs) of core functions of licensed corporations. Awareness of the responsibility of MICs to ensure compliance has increased since the SFC introduced the MIC regime late last year (Note 1).
The inaugural bulletin highlights the importance of managing conflicts of interest in selling practices and asset management using case studies identified in the SFC’s recent on-site inspections and off-site monitoring.
"The SFC is committed to ensuring the transparency, clarity and certainty of our rules and regulations," said Ms Julia Leung, the SFC's Executive Director of Intermediaries. "Through real life examples, we hope that the bulletin can be an additional tool for senior managers to understand our requirements."
The four cases cited in the bulletin show that conflicts of interest can arise in many situations and in different forms when intermediaries stand to benefit at the expense of clients. In one case, a manager of private funds did not have appropriate risk management policies to address concentration and liquidity risks. To meet margin calls, it arranged loans between different funds it managed on terms which were unfair to investors.
In another case, a fund manager received unusually large cash rebates from transactions made by a fund it managed, and the SFC was concerned that it might have traded more frequently than needed as a means to generate rebates. Separately, three retail clients bought the same bond with different annual coupon rates. The inverse relationship between the coupon rate and the placing commission earned by the licensed corporation posed a material conflict of interest.
The last case concerned conflicts of interest noted in the selling of so-called "in-house" products of large financial institutions, where related firms (such as licensed corporations within the group) were often selected as sources of products for sale to clients without a rigorous mechanism to compare quotes from external product providers. Not only was there insufficient disclosure to clients of these arrangements, in some cases client orders were not executed at the best prevailing price.
The bulletin is available on the SFC website where the public can subscribe to receive future issues electronically.
Notes:
- The SFC introduced the Manager-In-Charge regime in a circular issued to licensed corporations on 16 December 2016.
