On 08 July 2019, the Securities and Futures Commission (SFC) published a circular (Circular) highlighting its concern with the lack of protection of client assets by intermediaries. The Circular specifically flagged that SFC is aware that standard terms and conditions (T&Cs) entered into between Managers and authorised institutions (AIs) for the opening of client asset accounts often grant AIs a right of set-off or lien. SFC’s view is that such rights are fundamentally incompatible with the requisite standards of protection which should be accorded to client assets under the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct).
Over recent years, the SFC has issued a number of regulations as well as guidance relating to the treatment and safeguarding of client assets. General Principal 1 of the Code of Conduct requires intermediaries licensed with the SFC to act honestly, fairly and in the best interests of their clients and the integrity of the market when conducting their business activities. General Principal 8 and paragraph 11(a) of the Code of Conduct further requires intermediaries to ensure that client assets are adequately safeguarded.
The Fund Manager Code of Conduct (FMCC) requires fund managers (Managers) to segregate fund assets from their own assets. An independent custodian may be appointed for the safeguarding of the client assets, and where the Manager opts for self-custody of the assets (ie hold these debts for the client), adequate policies, procedures and internal controls should be in place, and the applicable rules set out in the Securities and Futures (Client Securities) Rules (Client Securities Rules) and the Securities and Futures (Client Money) Rules (Client Money Rules) (collectively, SFO Rules) should also be complied with. The SFC often imposes a licensing condition on intermediaries prohibiting them from holding client assets.
The Circular introduces a standardised acknowledgment letter (Standard Letter) to be adopted on or before 31 July 2020. The Standard Letter, which shall prevail against any earlier conflicting T&Cs agreed with AIs, includes a prohibition on recourse against client assets by the AI and an acknowledgment by the AI of the intermediary’s obligation to segregate client assets.
This Oversight (i) provides a regulatory overview of the treatment of client assets under the Code of Conduct, the FMCC, the SFO Rules and the SFC licensing regime, (ii) addresses the Circular and the terms of the Standard Letter, and (iii) considers the practical implications of the Standard Letter for Managers and AIs.
Read this edition of Oversight in full.
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