Paper for Legco Panel on Financial Affairs - Special Meeting on 3 September, 1996 to discuss the monitoring of the fund management industry and Jardine Fleming Investment Limited
Fund management companies and individual fund managers fall within the definition of investment advisers in the Securities Ordinance and are therefore licensed by the SFC. They are subject to the SFCs Fitness and Properness Criteria under the SFC Ordinance and the SFC Code of Conduct.
Principle 3.2 of the SFC Code of Conduct provides: "A registered person when acting for or with clients shall always execute client orders on the best available terms."
Principle 3.3 provides: "A registered person shall ensure that transactions executed on behalf of clients are promptly and fairly allocated to the accounts of the clients on whose behalf the transactions were executed."
These Principles also require fund management companies to have satisfactory supervision arrangements, resources and internal control procedures.
Principle 4.2 provides: "A registered person shall ensure at all times that he has adequate resources to supervise diligently and does supervise diligently his employees and persons appointed by him to conduct business for or with clients or other registered persons."
Principle 4.3 provides: "A registered person shall ensure at all times that he has satisfactory internal control procedures and financial and operational capabilities which can be reasonably expected to protect his operations, his clients and other registered persons from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions."
Any breaches of these principles will result in fund management companies and individual fund managers being subject to disciplinary proceedings, which may result in public censure, suspension or revocation of license.
The SFC is presently preparing a consultation paper on Internal Controls Guidelines which will aim to elaborate upon the principles in the SFC Code of Conduct to cover all licensed persons.
Where authorised funds are concerned, the fund management industry is subject to the SFC Code on Unit Trusts and Mutual Funds.
In order to monitor the fund management industry, the SFCs Intermediaries Supervision Division ("ISD") conducts regular audits of fund management companies. The ISD is stepping up its inspections of fund managers as a result of the Jardine Fleming case.
In relation to the case involving Jardine Fleming, the various press releases setting out all the facts and circumstances of the case are enclosed.
The following points may be noted.
Comparison of IMRO and SFC penalties
- IMRO imposed total fines of £700,000 on its regulated entities. The SFC has no power to fine.
- IMRO terminated the license of Jardine Fleming Asset Management Limited ("JFAM"), whereas the SFC publicly censured Jardine Fleming Investment Management Limited ("JFIM"). In fact, JFAM is only a "shell" company incorporated for the purpose of IMRO regulations and had, in fact, indicated to IMRO that it wished to surrender its registration. It had delegated all of its fund management activities to JFIM which are carried out in Hong Kong.
- JFIMs public censure by the SFC took into account :-
The voluntary payment of almost HK$150 million to disadvantaged funds and hence, investors. There are only a few other examples, in the world, of higher payments.
Improvements in JFIMs internal control systems and procedures including a complete overhaul of its compliance functions, upgrading of its management and its cooperation during the investigation.
A large number of innocent investors may have been seriously affected if JFIM had been suspended or had its license revoked.
- Both SFC and IMRO revoked the licenses of Mr. Robert Thomas, the former Managing Director of JFAM and JFIM, who accepted responsibility for supervisory deficiencies.
- The SFC revoked the license of Mr. Colin Armstrong, the former Senior Fund Manager of JFIM. This is the highest disciplinary penalty that the SFC has power to impose.
Joint SFC/IMRO Investigation
The main investigation in this case was carried out in Hong Kong by the SFC under Section 33 of the SFC Ordinance and Section 56 of the Securities Ordinance. The company agreed to the appointment of KPMG to assist the SFC in its investigation and the company paid for all of KPMGs costs. KPMG had up to 15 staff working on the investigation over the period and played a key role in uncovering the extent of the late allocation practices.
Last Updated on 18 Aug, 1998