SFC vows tough action on private equity funds and discretionary accounts involved in ‘improper activities’
SFC will act swiftly if they have reasonable suspicions if private equity funds and discretionary accounts are involved in malpractices via investment funds.
The Securities and Futures Commission has vowed to take action on some private equity funds and discretionary accounts, which may be conducting “improper activities,” according to a circular issued by the regulator late on Monday.
The SFC fired the warning in a statement after an investigation found a number of them accounts with “concentrated, illiquid and interconnected investments” which the regulator considered to have “irregular features”.
“If private funds or discretionary accounts are found to be used to fund or conceal improper activities at the expense of investors, the SFC will not hesitate to take action against the asset managers and their senior management for failing to comply with regulatory requirements,” said Julia Leung Fung-yee, the SFC’s executive director of the intermediaries division.
“In particular, asset managers must not turn a blind eye to dubious arrangements and transactions proposed by their clients, and should avoid being implicated in any market misconduct or other illicit activities.”
Leung identified the irregularities as including discretionary account holders holding large concentrated stock positions in their accounts, while fund managers were not making investment decisions solely at the instruction of their clients
This is in contrast to normal practise, which requires fund managers to be making the best investment choices.
In some cases, the SFC found that private equity funds were found to involve related-party acquisitions or disposals of listed company shares.
The watchdog also found some cases where private fund investors or discretionary account holders were invested in certain listed companies, while they were are also substantial shareholders, directors, or chief executives of the listed companies in which the funds were invested.
The regulator considered the nature of these investments as “questionable and may conceal shareholdings in listed companies”.
The fact these funds are investing in illiquid stocks also raises questions if they meet with investors’ redemption requests, the SFC said.
The SFC said fund managers have a duty to report to the commission if they have reasonable suspicions their clients may have been involved in malpractices, via investment funds.
Gordon Tsui, the managing director of Hantec Pacific, said most private equity funds work properly.
“It’s only a small number of private equity funds that have such problems. The SFC is taking the right step to address these funds, which are alleged to have improper behaviour in a bid to ensure the quality of the market,” Tsui said.