Hong Kong's Value Partners has been reprimanded for allowing two of its funds to exceed their authorised share capital – an incident that could harm its ability to compete for institutional mandates.
The city's Securities and Futures Commission said today (January 25) that it had fined the asset manager HK$2 million ($257,818). The firm's China Greenchip Fund and its Greater China High Yield Income Fund had each issued stock that exceeded their authorised share capital levels, said the SFC, and the company did not report this until six months after the breaches were uncovered.
Value Partners, with $13.3 billion under management as of June 30, alerted the SFC to the issue in April 2016.
Compliance experts and observers said the apparent oversight was an unusual error, but one that raised questions over its internal compliance systems.
The funds were relatively unusual in that they were structured as corporates, which meant they had issued a set amount of shares and all existing shareholders had to approve any issue of further shares due to potential issues of dilution.
Subscriptions to the two funds were suspended from April 2016, but started again on September 1, 2016 after the authorised share capital issues were rectified, said a spokeswoman for Value Partners. “Since then, the fund flows have normalised.”
She declined to say whether anyone had been fired for the oversight and did not respond to emailed questions about why the firm took six months to report the issue to the SFC.
For one chief investment officer at a big Asian asset owner, the mistake did not appear to be particularly major. “It sounds very serious, but I suspect it wouldn’t be a major issue for shareholders in the fund,” he told AsianInvestor. “It’s not up there in terms of things that can go wrong.”
However, he said the SFC censure could affect Value Partners’ ability to compete for investment mandates. “It might make it harder for institutions to appoint them as an external manager, although I doubt it would affect their retail funds,” he noted.
“When you fill out external mandate paperwork, due diligence is a standard section, and a typical question is: ‘In the past five years have you had any reprimands from regulators and if so what was the outcome?’
“Typically answering yes to that question would exclude them from the search,” said the CIO. “For an institution like us, it would likely disqualify them.”
Might such an incident also raise questions for fund selectors at distribution platforms?
One asset management executive, who was previously a senior product executive at a private bank, said: "All regulatory matters are an important consideration for the due diligence of funds and counterparties. It would always be taken seriously and merit a deeper understanding of the underlying issues, controls and implications."
Asked to comment on the suggestion that Value Partners’ ability to pitch for mandates could be affected, the spokeswoman said the issue was an administrative and operational oversight that was resolved. It was “an isolated incident which was rectified and we have learnt from it”, she added.
“We have taken a proactive and transparent [approach] in communicating with our clients about the incident,” she continued. “We will continue to win the confidence of our institutional clients through demonstrating our commitment to the improvements of our internal controls and operations, as well as solid investment performance.”
The spokeswoman added that Value Partners had appointed KPMG as an independent auditor to conduct a thorough review of its internal control systems, and that it had found “no further material issues”.
The company has over the past several months worked to improve its compliance systems to prevent any further such mishaps, added the spokeswoman.
“Since this happened we’ve taken actions to strengthen our internal controls,” she noted. “For example, we’ve increased the authorised share capital of both funds substantially to ensure it won’t get over the authorised limit in the near future.”
The spokeswoman said Value Partners had hired Roger Hepper as group chief operations officer in August from JP Morgan Asset Management and had added IT systems that warn when new shares being issued by a fund breach 80% of its registered share capital and block a fund from issuing shares over 100% of its authorised capital.
She also pointed to the December hire of “seasoned professional” Au King-Lun from Eastspring as chief executive. He replaced Timothy Tse, who left the firm in November.
She did not respond to an emailed question about whether Value Partners had lost any client assets as a result of this incident.
This is not the first time Value Partners has run afoul of the Hong Kong financial regulator for its internal compliance practices. Back in 2004 the SFC prosecuted Value Partners for not initiallly disclosing its 10.78% interest in Bright International Group. Before that, in 2000, the regulator admonished the fund manager and its then-dealing director (and now chairman) Cheah Cheng Hye for placing buy orders for five stocks in December 1998 that led them to close at a higher value.
The SFC noted at the time: "A number of inadequacies in Value Partners’ internal procedures and breaches of various regulatory requirements were also discovered" during its investigation.
Josephine Chung, director at Hong Kong-based consultancy Compliance Plus, was sanguine about the impact of the latest reprimand on Value Partners and its clients. “It’s just a single incident,” she told AsianInvestor, although she admitted that the share oversight was “unusual”.
Chung added that SFC compliance demands for asset managers had become very onerous, which has forced companies to add resources into these areas.