Hong Kong Regulator Scrutinises Private Funds, Discretionary Accounts

Hong Kong's securities regulator has vowed to take action against private equity funds and discretionary accounts involved in "improper activities" amid increased market scrutiny by authorities and investors in the financial hub.

The Hong Kong government and regulators are growing increasingly concerned that a series of company scandals have tarnished the territory's reputation as a financial center.

The Securities and Futures Commission ("SFC") said late on Monday, 31 August, it had found a number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments that had "irregular features".

A discretionary account is an investment account that allows a broker to buy and sell securities without the client's consent. "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, 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."

The warning comes weeks after Hong Kong's second board plumbed record lows, led by falls in shares that had been included in a report by activist shareholder David Webb titled "The Enigma Network".

Many of the stocks that plunged had thin turnover, small public floats, high shareholding concentrations and multiple relationships between different companies and listed brokerage firms.

The SFC said in its circular it had found discretionary account holders held sizeable concentrated stock positions in their accounts and asset managers acted solely at the direction of their clients without exercising investment discretion.

The securities regulator said some cases were also found to involve related-party acquisition or disposal of listed company shares.

In another case, a director of an asset manager was also a director or chief executive officer of listed companies in which funds under the management of the asset manager were invested.


Anne Marie Roantree is the Reuters Bureau Chief in Hong Kong.