A law firm has pointed out how the asset management industry in Hong Kong is being warned to be compliant with new guidelines about avoiding abuses around discretionary accounts.

Asset managers in Hong Kong must check if they are ready to comply with new guidelines by regulators in the Asian jurisdiction aimed at curbing abuses among discretionary accounts, a US-based law firm says in a note.

"Asset managers should have in place and maintain effective risk management policies and procedures to identify and manage the risks to which each fund or discretionary account is or may be exposed," Dechert, the law firm said. "An important aspect is the management of liquidity risks, as asset managers should endeavor to ensure that they are able to meet investors’ redemption requests in accordance with the terms set out in the funds’ offering documents. Undue concentration of illiquid or interconnected stocks, especially if coupled with the use of leverage, should be carefully reviewed," it said.

The Hong Kong Securities and Futures Commission recently released a circular outlining its views on how asset managers should address certain conflicts of interest between private funds and separately managed accounts and avoid practices that undermine market integrity.

The SFC said there are particular failures to act to protect market integrity, such as where managed accountholders have investment discretion over the accounts and hold sizeable concentrated stock positions in such accounts. In these cases, asset managers act solely at the direction of their clients without exercising investment discretion, the SFC noted.

Another problem can arise when a director of an asset manager also acts as the director or chief executive officer of listed companies in which the asset manager invests funds, it said.

The regulator also noted cases of improper or inadequate risk management practices, such as where certain funds and discretionary accounts are heavily invested in concentrated positions in illiquid stocks and/or stocks issued by a network of smaller interconnected listed companies. For example, the SFC said it is particularly worried where an asset manager’s funds or accounts hold about 5 per cent of the issued shares of a listed company.