The Securities and Futures Commission of Hong Kong has reprimanded and fined HSBC Investment Funds (Hong Kong) Ltd and HSBC Global Asset Management (Hong Kong) Ltd HK$3.5 million (US$440,000) for breaking its cash-management rules.

In contravention of Paragraph 10.10 of the Code of Unit Trusts and Mutual Funds and of Paragraph 3.9 of the Fund Manager Code of Conduct, the two sister-firms failed to ensure that the funds’ cash that they had deposited with their affiliates (known as connected persons) received interest at a rate not lower than the prevailing commercial rate for a deposit of that size and term between 2010 and 2016, which was the period in question.

The SFC says that they contravened General Principle 4 of the Overarching Principles Section of the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes  and Unlisted Structured Investment Products, which states that that product providers (a category which includes management companies of unit trusts), counterparties and service providers have to avoid being placed in situations where there are conflicts of interest that may undermine the interests of the investors in this-or-that product.

An investigation by the SFC revealed that some of the funds maintained cash deposits in “instant access cash accounts."  Although these accounts bore interest, most of the deposits did not receive any during the relevant period.

Last year, checkers discovered that HSBC Investment Funds and HSBC Global Asset Management had had a well-established process by which to manage cash on a "day-to-day requirements" basis during the period of 2010-16. The two firms prepared a daily report to identify cash balances of more than 3% of each fund’s net asset value (NAV). The threshold was meant to act as a "monitoring trigger" to enable both firms to consider taking action, where necessary, to ensure that actual cash levels in the “instant access cash accounts" did not exceed 5%. However:

• although the daily cash balance reports were circulated to the portfolio managers and to the chief investment officer, there were few documents to describe the reasoning behind various decisions to transfer or not to transfer such cash and earn potentially better returns on the market;
• the two firms only exercised this control on 10 of the 53 funds; and
• procedures for the daily monitoring of cash balances were not to be found in any lists of policies and procedures.

In August 2016, the firms decided to monitor cash levels using a 2% NAV threshold every week, the idea being to act as another "monitoring trigger" to enable them to stop actual cash levels from exceeding 5% of NAV. Again, the control did not cover all 53 funds.