Investment manager

SFC reprimands and fines investment manager for failure to manage private funds

The Securities and Futures Commission (“SFC”) reprimanded and fined CES Capital International (Hong Kong) Co., Limited (“THESE”) HK$3.2 million for his failure to perform his duties as an investment manager between February 2015 and July 2017.

CES was nominated by Worldwide Opportunities Fund SPC (“WOF”) as investment manager of two funds. The two funds managed by CESHK have invested substantially all of their assets in two underlying companies incorporated in Cayman (“CPU”).

Pursuant to the PPMs and the Investment Management Agreement between WOF and CES, CES has been vested with the functions of managing and investing the assets and investments of the funds on a discretionary basis. CES was also responsible for monitoring the performance of the funds’ investments and analyzing the evolution of the funds’ investments.

Since the funds are invested exclusively in CUs, CES’ obligations to manage the funds’ assets and monitor their performance should include performing due diligence on the CUs to understand their track record and investments. and underlying assets, as well as continuous monitoring of CUs. ‘ performance and risk exposure, since the value of the funds would depend entirely on the performance and risk associated with the CUs.

During the relevant period, the SFC found that:-

  1. Decisions on when to invest for the funds were made by WOF instead of CES which was responsible for managing and investing the funds’ assets.
  2. The CES considered that its main role was to ensure that the assets of the funds were substantially invested in the UC and considered that it had no obligation to verify the investments and the underlying assets of the UCs. .
  3. CES performed minimal due diligence on the UCs and had limited information about the investments and underlying assets of the UCs. There was also no evidence that CES had taken any steps to verify the assets, investments and liabilities in the UC portfolios.
  4. Although it received valuation reports prepared by the fund administrator, CES did not know on what basis the CUs were valued, nor did it provide analysis on the impact of market data on UA and/or funds in its monthly reports.

The SFC is of the view that CES has failed to (i) perform sufficient due diligence and monitoring of the underlying investments of the funds and take adequate risk management measures to identify, quantify and manage the risks to which the funds were exposed, and (ii) maintain an appropriate audit trail of the due diligence and monitoring allegedly performed on the Funds and their underlying investments, in breach of:

  1. Paragraph 1.2(d) of the Code of Conduct for Fund Managers, which requires a fund manager to maintain adequate risk management procedures commensurate with its business; and
  2. Section VIII of the Management, Supervision and Internal Control Guidelines for Persons Licensed or Registered with the Securities and Futures Commission, which requires a licensed person to establish and maintain effective policies and procedures to ensure the proper management of risks to which the company is exposed.

The failure of CES casts doubt on its ability to competently carry out regulated activities and calls into question its ability and ability to maintain its license.