SFC Fund Manager Code of Conduct Updates: Portfolio Valuation and Conflict of Interest Management

On 14 August 2024, the Securities and Futures Commission (SFC) published its revised Code of Conduct for Licensed Corporations and Registered Institutions (the “Fund Manager Code of Conduct” or “FMCC”), introducing the most significant set of obligations for fund managers in a decade. The update directly responds to enforcement outcomes and market feedback collected over the past five years, particularly concerning portfolio valuation and the management of conflicts of interest. For any firm managing SFC-authorised funds or discretionary accounts, compliance with the revised FMCC is not a matter of choice—it is a condition of licence. The SFC has signalled that it expects full implementation by 1 January 2026, giving the industry approximately 18 months to overhaul internal policies, systems, and controls. This article breaks down the key changes in the FMCC, focusing on the new requirements for portfolio valuation and the enhanced framework for managing conflicts of interest, and provides actionable steps for compliance officers and fund managers.

Portfolio Valuation: From Principle to Prescription

The most notable shift in the revised FMCC is the move from high-level principles to prescriptive, mandatory requirements for portfolio valuation. Previously, the Code merely required that valuations be performed “fairly and consistently.” The 2024 update, however, sets out explicit standards.

Step 1: Establish a Written Valuation Policy

The FMCC now mandates that every fund manager must have a written valuation policy. Paragraph 16.1 of the Code requires this policy to be approved by the board of directors (or an equivalent governing body) and reviewed at least annually. The policy must cover, at a minimum:

• The valuation methodology for each asset class.
• The frequency of valuation.
• The use of independent pricing sources.
• Procedures for handling hard-to-value assets, including illiquid securities and private placements.
• The process for challenging and resolving valuation disputes.

Step 2: Independent Price Verification

A critical new requirement is the obligation to perform independent price verification (IPV). Under Paragraph 16.2, the fund manager must ensure that portfolio valuations are verified by a function independent from the portfolio management team. This can be an internal team (e.g., a risk or compliance unit) or an external third-party valuer. The SFC has made clear that IPV is not a one-off exercise; it must be conducted on a periodic basis, and the frequency should be proportionate to the risk and complexity of the assets. For example, for funds holding significant positions in OTC derivatives, daily IPV may be expected.

Step 3: Fair Value Hierarchy and Disclosure

The FMCC now explicitly references the fair value hierarchy under IFRS 13. Paragraph 16.3 requires fund managers to classify assets into Level 1, Level 2, and Level 3 inputs. The fund manager must document the basis for each classification and disclose the hierarchy in the fund’s offering documents. This aligns Hong Kong’s requirements with the global standard set by the International Organization of Securities Commissions (IOSCO) in its 2023 report on asset valuation.

Conflict of Interest Management: A Structural Overhaul

The revised FMCC introduces a new, dedicated section on conflicts of interest (Part 7), replacing the previous, more general provisions. The SFC’s 2023 thematic inspection of 20 fund managers found that 40% had inadequate conflict-of-interest controls. The new rules are designed to close those gaps.

Step 1: Mandatory Conflicts Register

Paragraph 7.1 requires every fund manager to maintain a conflicts register. This register must identify all actual and potential conflicts of interest that arise in the course of the business. Examples include:

• Personal account dealing by staff.
• Cross-trades between funds under management.
• Allocation of investment opportunities between client accounts.
• Receipt of third-party commissions or soft-dollar arrangements.
• Relationships with connected persons (e.g., parent companies, affiliates).

The register must be updated quarterly and reviewed by the compliance officer. The SFC has the power to request a copy of the register during an on-site inspection.

Step 2: Independent Committee for Material Conflicts

For material conflicts that cannot be avoided or effectively managed through standard controls, Paragraph 7.2 mandates the establishment of an independent committee. This committee must include at least one independent director (or an equivalent person with no management role in the fund manager) and must approve any transaction or arrangement that gives rise to the conflict. The committee’s decisions must be documented in writing, including the rationale for approving the transaction.

Step 3: Enhanced Disclosure to Investors

The FMCC now requires that conflicts of interest be disclosed to investors in a clear and prominent manner. Paragraph 7.3 states that the disclosure must be made before the investor subscribes to the fund, and must include:

• The nature and extent of the conflict.
• The steps the fund manager has taken to manage or mitigate the conflict.
• Any residual risk to the investor.

This is a significant change from the previous practice of burying conflict disclosures in long offering documents. The SFC expects the disclosure to be in plain language and placed in a prominent location, such as the fund’s key facts statement.

Compliance and Enforcement: What to Expect

The SFC has made clear that the revised FMCC is not a guidance document—it is a binding code of conduct. Non-compliance can result in disciplinary action, including fines, suspension, or revocation of the fund manager’s licence.

The SFC’s Enforcement Track Record

Between 2020 and 2024, the SFC took enforcement action against 12 fund managers for failures related to valuation and conflicts of interest. In 2023 alone, the SFC fined three firms a total of HK$18 million for inadequate valuation controls. The SFC’s 2024-2025 enforcement priorities, published in its annual report (March 2024), specifically identify “portfolio valuation integrity” and “conflict-of-interest management” as top areas of focus.

The 18-Month Implementation Window

Firms have until 1 January 2026 to fully comply. The SFC has indicated that it will not grant extensions. The compliance officer must therefore treat the next 18 months as a structured implementation project, not a soft transition period.

Actionable Takeaways

1. Draft or update your written valuation policy immediately to include the mandatory elements required by Paragraph 16.1, and ensure it is approved by the board before the end of Q1 2025.
2. Establish an independent price verification function by either creating an internal risk unit or contracting an external valuer, and document the frequency and methodology of IPV for each asset class.
3. Create a formal conflicts register that captures all actual and potential conflicts, and assign a senior officer to update it quarterly.
4. Form an independent committee to approve material conflicts, and ensure its members are free from management duties and conflicts themselves.
5. Revise your offering documents and subscription materials to include prominent, plain-language disclosures of conflicts of interest, and ensure these are provided to investors before subscription.

This does not constitute legal advice. Consult a solicitor for your specific case.