The Securities and Futures Commission (“SFC”) has reprimanded and fined CES Capital International (Hong Kong) Co., Limited (“CES”) HK$3.2 million over its failure to discharge its duties as an investment manager between the period of February 2015 and July 2017.
CES was appointed by Worldwide Opportunities Fund SPC (“WOF”) as the investment manager of two funds. The two CESHK-managed funds invested substantially all their assets in two Cayman-incorporated underlying companies (“UCs”).
Pursuant to the PPMs and investment management agreement between WOF and CES, CES was vested with the duties to manage and invest the funds’ assets and investment on a discretionary basis. CES was also responsible for monitoring the performance of the funds’ investment and performing analysis of the progress of the investments of the funds.
As the funds invested exclusively in the UCs, CES’s duties to manage the funds’ assets and to monitor their performance must include the performance of due diligence on the UCs to understand their background and underlying investments and assets, as well as ongoing monitoring of the UCs’ performance and risk exposure, since value of the funds would entirely depend on performance and risk associated with the UCs.
During the relevant period, the SFC found that:-
- The decisions on when to invest for the funds were made by WOF instead of CES who was responsible for managing and investing the funds’ assets.
- CES considered its main role was to ensure the funds’ assets were invested substantially in the UC and considered it did not have the obligation to ascertain the UCs’ underlying investments and assets.
- CES performed minimal due diligence on the UCs and had limited information on the UCs underlying investments and assets. There were also no evidence that CES had taken any steps to ascertain the assets, investments and liabilities in the UCs’ portfolios.
- Despite receiving valuation reports prepared by the funds’ administrator, CES did not know the basis on which the UCs were valued, nor did they provide any analysis on how market data would impact the UCs and/or the funds in its monthly reports.
The SFC is of the view that CES has failed to (i) perform sufficient due diligence and monitoring on the funds’ underlying investments and undertake satisfactory risk management measures to identify, quantify and manage the risks to which the funds were exposed, and (ii) keep proper audit trail of the due diligence and monitoring allegedly performed on the Funds and their underlying investments, in breach of:
- Paragraph 1.2(d) of the Fund Manager Code of Conduct, which requires a fund manager to maintain satisfactory risk management procedures commensurate with its business; and
- Section VIII of the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission, which requires a licensed person to establish and maintain effective policies and procedures to ensure the proper management of risks to which the firm.
CES’s failure casted doubt on its ability to carry on regulated activities competently and call into question its fitness and properness to remain licensed.
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