Can a fund manager, trustee or custodian utilise assets in a fund to solve its own financial problems?
No. An SFC-licensed or registered fund manager should ensure that the assets entrusted to it are properly safeguarded.
For funds with a trustee or custodian, it is the trustee's or custodian's responsibility to safekeep the fund's assets and it is their duty to ensure that the assets are properly safeguarded and segregated from its own assets.
Under the Financial Institutions (Resolution) Ordinance (FIRO), fund assets are safeguarded in the resolution of a fund manager, trustee or custodian. However, where the fund assets include securities issued by the fund manager, trustee or custodian (eg, shares issued by the fund manager) or its affiliates which are also in resolution, or include deposits held with a bank which is an affiliate and is also in resolution, these assets may be affected by the resolution regime. For example, the fund may suffer significant losses or even a total loss of its investments in such assets or deposits.
Can the SFC take over the management responsibility from a fund manager which fails financially, or act on behalf of fund holders to appoint another manager to manage the fund?
The SFC is not empowered to act on behalf of fund holders to take over management responsibility or appoint another manager to manage a fund.
The trustee or custodian of an SFC-authorised fund is obligated to decide whether to suspend or terminate the service provided by the fund manager and appoint another manager to manage the fund. However, any decision to remove, replace or appoint a fund manager is subject to the prior approval of the SFC.
Can the SFC take over the obligations and responsibilities of a trustee or custodian which fails financially, or act on behalf of fund holders to appoint another trustee or custodian?
The SFC is not empowered to act on behalf of fund holders to take over the obligations and responsibilities of a trustee or custodian or appoint another trustee or custodian. For SFC-authorised funds, any decision to appoint a new trustee or custodian is subject to the prior approval of the SFC, and the removal of the old trustee or custodian should only take effect at the same time as the new trustee or custodian takes up the role.
If a trustee or custodian is in resolution pursuant to FIRO, fund assets held by it may be transferred to another trustee or custodian. The transfer should not affect the interests of fund investors but assets which are securities issued by the trustee or custodian or its affiliates which are also in resolution, or deposits held with a bank which is an affiliate and is also in resolution, may be affected by the resolution regime. For example, the fund may suffer significant losses or even a total loss of its investments in such assets or deposits.
Will I get any compensation from my fund manager if either it or the trustee or custodian of my fund loses its client portfolio holdings and transaction records, and delays the processing of my redemption request?
Fund managers should at all times exercise due care, skill and diligence in managing the liquidity risk of funds under their management as well as in processing investors' redemption requests in accordance with the terms set out in the offering documents. In addition, they are required to keep proper records in conducting their business activities, which include an audit trail of all transactions effected by the fund manager and of all information relating to client accounts produced by third parties.
The SFC's role is to investigate complaints and take enforcement action if there is a breach of the law or the SFC's rules and regulations. The SFC will promptly investigate a complaint. However, it can give no assurance that every complaint will result in an enforcement action or that compensation will be granted to affected investors. The SFC does not have the power to order damages or compensation to the investors.
If the fund manager or the trustee or custodian is found to be in breach of the SFC's rules or regulations, the SFC may consider disciplinary and other actions which may include issuing a reprimand, revoking the fund manager's licence and withdrawing the authorisation status of an SFC-authorised fund.
Given an operational failure of my nominee company, can I contact the fund manager directly and ask it to help sell my fund?
You may wish to contact the intermediary who sold you the fund. You can also contact the fund manager directly. However, units registered under nominees are legally owned by the nominee company even though you are the beneficial owner. Should any emergency concerning the fund arise, it would be difficult for the fund manager to identify you and arrange for any sale or redemption of the units on your behalf as it may not have your personal particulars.
Since you do not have any direct contractual relationship with the fund, it would also be difficult for you to have direct recourse to the fund or the fund manager. You can only pursue claims through the nominee company.
However, since a nominee is an independent company whose business is not, strictly speaking, under the SFC's oversight, the SFC has only limited power over it. For example, the SFC is not empowered to inspect a nominee company's accounts or restrict its businesses. It is therefore important to understand the risk involved in using nominee companies. However, where a nominee company is an associated entity holding client assets of the intermediary which sold you the fund, it is subject to the SFC's regulation and is required to observe the applicable client assets-related rules and regulations.
Last update: 11 May 2009