The Securities and Futures Commission (SFC) has reprimanded and fined Hang Seng Investment Management Limited (HSIM) $3 million for its failure to comply with regulatory requirements on cash management involving SFC-authorized funds (Note 1).

The SFC’s disciplinary action followed an independent review jointly agreed by the SFC and HSIM.  The review found that, from 2010 to 2016, these HSIM-managed funds maintained substantial cash deposits with connected persons, but the interest received on some of these cash deposits was at a rate lower than the prevailing commercial rate (Notes 2 & 3).

The amount of interest involved was approximately $875,648. HSIM has agreed to make a voluntary payment of the equivalent amount to the affected funds.

The review also found that although HSIM had procedures in place to check the interest rate offered by other banks, it did not apply the procedures to deposits placed in the funds’ current accounts maintained with The Hongkong and Shanghai Banking Corporation Limited as it had inadvertently and mistakenly presumed that those accounts were non-interest bearing.  The misconception lasted until July 2016 when HSIM communicated with the funds’ trustees to confirm the nature of the current accounts, only then did the trustees indicate that those current accounts were in fact interest bearing, even though the interest rate at that time was 0%.

The SFC considers that HSIM’s internal controls and procedures on cash management of the funds at the relevant period were inadequate and it failed to manage and minimize the conflicting interests between the funds’ investors and its connected persons.

In deciding the sanctions, the SFC took into account all the circumstances, including that HSIM:

  • engaged an independent reviewer to conduct the review;
  • agreed to make a voluntary payment equivalent to the amount of interest involved to the affected funds to rectify the financial impact of its failures;
  • took remedial actions to strengthen its internal systems and controls;
  • undertook to provide the SFC with a report prepared by an independent reviewer within nine months confirming all the identified concerns are properly rectified;
  • cooperated with the SFC in resolving its concerns; and
  • had no previous disciplinary record with the SFC.

End

Notes:

  1. HSIM is licensed under the SFO to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
  2. In September 2017, the SFC and HSIM jointly engaged an independent reviewer to review HSIM’s cash management process in relation to a total of 39 SFC-authorized funds managed by HSIM from 1 January 2010 to 31 December 2016.
  3. Under paragraph 10.10 of the Code on Unit Trusts and Mutual Funds (UT Code) and paragraph 3.9 of the Fund Manager Code of Conduct, a fund manager should not deposit cash forming part of the fund’s assets with a connected person unless interest is received on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term.