In a busy Christmas week of disciplinary activity, the SFC reprimanded and fined Fidelity Investment Management (Hong Kong) HK$3.5m ($450,000) for unlicensed dealing in futures contracts and a delay in reporting the breach to the regulator, as well as submitting incorrect information during a fund application
The SFC found that between August 2007 and July 2018, Fidelity executed 6,738 trades in futures contracts for its overseas affiliates with an approximate value of $40bn without a required Type 2 licence.
The US asset manager spotted the suspected breach in a review it conducted between May and June 2018, but only reported the incident to the SFC in August 2018 after it had obtained external legal advice, according to a media release by the SFC.
Fidelity has been licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 9 (asset management) regulated activities since 29 March 2005.
However, the firm only obtained a Type 2 (dealing in futures contracts) licence on 30 May 2019.
The SFC also found that Fidelity submitted an out-of-date information checklist when applying to the SFC for a new fund authorisation in March 2017, which meant that some necessary information was not provided in the form submitted to the SFC.
An internal investigation and independent review uncovered “deficiencies and weaknesses in [Fidelity’s] internal controls and systems”, according to SFC statement.
“Fidelity International takes all matters relating to regulatory compliance very seriously and we are naturally very disappointed that the lapses in controls occurred,” a Fidelity spokeswoman told FSA.
The SFC justified the leniency of its sanctions by noting that Fidelity’s failures weren’t intentional, that clients didn’t suffer any financial loss, and that the firm had hired a independent review, took remedial actions and cooperated with the SFC — as well as having an otherwise clean disciplinary record in Hong Kong.
“We reported the licence issue to the SFC and we have cooperated fully with them during their investigation. We have taken all steps necessary to improve our internal controls,” the Fidelity spokeswoman said.
Non-disclosures
Separately, the SFC hit Hong Kong-based Adamas Asset Management with a HK$2.5m fine for failing to disclose notifiable interests in eight companies’ shares listed on the Hong Kong stock exchange (SEHK) between February 2013 and March 2016
The percentage level for notifiable interests is 5% and the level for changes to notifiable interests is 1%. Notification should be given to the SEHK and the listed corporation within three business days after the day on which the event occurs.
Adamas, which has a strategic partnership with China insurer Ping An, had applied to the Securities and Futures Appeals Tribunal for a review of the SFC’s sanction last September, but subsequently ended its application and was ordered to pay costs.
As with its judgement on Fidelity, the SFC’s sanctions took into account Adamas’s self-reporting of its failure, remedial actions taken and its previous good behaviour.
Boosting private funds
Meanwhile, the SFC launched a consultation five days before Christmas that will examine proposed changes to Hong Kong’s open-ended fund companies (OFC) regime.
The OFC regime, which was launched in July 2018, enables investment funds to be established in corporate form in Hong Kong, in addition to the current unit trust structure. However, there has been little take-up so far, partly because of the additional regulatory obligations required.
The changes to the regime would allow licensed or registered securities brokers to act as custodians for private OFCs, and expand the investment scope for private OFCs to include loans as well as shares and debentures of Hong Kong private companies.
Allowing brokers to act as custodians to private funds would meet complaints that both the fees charged by traditional custodians and their minimum fund size requirements are too high for many private funds, according to the consultation document.
The expanded investment scope is further designed to persuade offshore private funds to move onshore following Hong Kong’s unified profits tax regime for funds which took effect in April 2019.
“The proposed enhancements seek to encourage more private funds to set up in Hong Kong,” said Christina Choi, the SFC’s executive director of investment products, in a statement.
The SFC also wants to introduce a statutory mechanism for the re-domiciliation of overseas corporate funds to Hong Kong.
“Under the proposed statutory mechanism, an existing fund’s corporate identity, continuity and track record would be preserved. Not having to establish a completely new legal entity could save costs for the fund, such as those incurred for re-entering into contracts with key operators and financing arrangements with banks, and re-acquiring investments,” according to the consultation document.
OFCs would also need to keep a register of beneficial shareholders to improve anti-money laundering and counter-terrorist financing measures.
The deadline for submitting comments for all proposals is 20 February 2020.
