Asset management regulations

Topic 3 is the heart of Paper 6: the SFC codes a fund manager works under every day. Expect questions that give you a dealing, custody, valuation or disclosure situation and ask what the Fund Manager Code of Conduct requires; how the SFC Handbook and the UT Code govern authorisation, investment limits, management companies and trustees of public funds; the OFC Code, the REIT Code and the PRF Code; the SFC's liquidity risk management and climate-related risk requirements; mutual recognition of funds; and the MPF product codes. Two habits win marks: check who a rule binds (every Fund Manager, or only the one responsible for a fund's overall operation), and learn which code governs which product.

40 min read19 sections

Checked against the SFC Fund Manager Code of Conduct (fifth edition, October 2024); the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (fifth edition, October 2024), Section I (Overarching Principles), Section II (UT Code para 10.12) and Section IV (SIP Code para 1.1); the Code of Conduct for Persons Licensed by or Registered with the SFC (January 2026) paras 13.1-13.2 and 15.2; and the SFO (Cap. 571) Sch. 1 Pt 1 s.1 and s.1A on e-Legislation, as at October 2026. Checked October 2026 against the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (fifth edition, October 2024), Section I (Overarching Principles) and Section II (UT Code); the SFC Advertising Guidelines Applicable to Collective Investment Schemes Authorized under the Product Codes (April 2013 edition); and SFO (Cap. 571) ss.103-105 on elegislation.gov.hk. Checked October 2026 against: Code on Open-Ended Fund Companies (September 2020); Code on Real Estate Investment Trusts (October 2024); SFC Handbook for Unit Trusts and Mutual Funds, ILAS and Unlisted SIPs, UT Code (October 2024); Fund Manager Code of Conduct (October 2024); SFC circulars on liquidity risk management (4 July 2016) and climate-related risks (20 August 2021); SFC MRF circulars (Mainland, effective 1 January 2025; Luxembourg, revised 28 February 2020); SFC lists of recognised jurisdiction schemes and acceptable inspection regimes (updated 23 July 2026); SFC Code on MPF Products (January 2019); Code on Pooled Retirement Funds (October 2024); Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A) Sch. 1, all on sfc.hk and elegislation.gov.hk. Independent prep, not endorsed by HKSI Institute or the SFC.

Must-know for the exam

FMCC staff dealing: holdings disclosed on joining and at least semi-annually; permission valid at most 5 trading days; 30-day hold; no IPOs available to funds, no cross trades with funds (para 2.1.1).
Cross trades: client to client needs best interests, current market value, reasons documented first and disclosure; house to client needs the client's prior written consent; staff to client is prohibited (FMCC 3.9).
SFC Handbook (made under SFO s.399, no force of law): Section I Overarching Principles apply to all products alongside the UT Code (II), ILAS Code (III) or SIP Code (IV).
Chapter 7: 10% per entity (securities, derivative underlying, OTC counterparty), 20% per group, 20% deposits, 15% unlisted, 30% per government issue, 10% borrowing, 50% net derivative exposure (UT Code).
Changes: trustee, manager, objectives and new fees need SFC prior approval; a fee rise within the disclosed maximum needs one month's notice; giving up authorisation needs three months' notice (UT Code 11.1-11.4).
Trustee: Type 13 or overseas-regulated, independent of the manager, retires only when replaced with SFC approval; holders of 50% in value can require the manager's removal (UT Code 4.2-4.7, 5.11).
REIT Code: borrowing up to 50% of gross asset value; development cap 10%, raisable to 25% with holders' approval; 90% of net income paid out; Principal Valuer rotates after 3 years.
Large Fund Managers manage CIS assets of HK$8 billion or more for any three months of the previous reporting year, excluding discretionary accounts (SFC circular, 20 August 2021).
Mainland funds under MRF: established over 1 year, at least RMB 200 million, not mainly investing in Hong Kong, Hong Kong sales up to 80% of assets (from 1 January 2025).

On this page · 19 sections

Traps that cost marks

Assuming the FMCC is only for SFC-authorised retail funds. It covers private funds and discretionary accounts too.
Treating an SFC code as criminal law. Breaching the FMCC goes to fitness and properness and discipline, not prosecution.
Believing that delegating the investment role delegates the responsibility. The task can move; the obligation to the fund stays.
Thinking outsourcing compliance outsources the liability. Only the activities can be delegated.
Reading 'where practicable' as an exemption. A small firm still needs the audit roles covered, by external auditors.
Mixing up the two staff-dealing numbers: permission lasts at most five trading days; the minimum holding period is 30 days.
Remembering 'annual' for holdings disclosure. The FMCC asks for disclosure on joining and at least every six months.
Treating a customary commission rate as enough. A connected-person trade must also be at arm's length and meet best execution standards.

The Fund Manager Code of Conduct: who it binds and what a breach means

The Fund Manager Code of Conduct (FMCC, fifth edition, October 2024) applies to every person licensed by or registered with the SFC whose business involves managing collective investment schemes, SFC-authorised or not, and/or discretionary accounts (an investment mandate or a pre-defined model portfolio), and to their representatives. Registered institutions are covered as well as licensed corporations. It supplements the Code of Conduct and the Internal Control Guidelines; a manager of SFC-authorised funds must also follow the SFC Handbook.

Some paragraphs bind only a Fund Manager responsible for the overall operation of a fund: liquidity management (except two duties), side pockets, termination, fund audit, valuation and NAV pricing (unless valuation is delegated to it), leverage disclosure, securities lending disclosure and custody selection. Where a Fund Manager is a delegate, its 'client' is the delegating manager and its 'fund' is the portfolio it runs.

Question	FMCC answer (Introduction)
Force of law?	No. It must not be read to override any law
Conflict with legislation or another code?	The more stringent provision applies
Effect of a breach	Reflects adversely on fitness and properness (absent extenuating circumstances); may lead to disciplinary action. Not an offence
How the SFC assesses a breach	Pragmatically: all circumstances, including the firm's size and compensatory measures by senior management

Trap: assuming the FMCC is only for retail funds, or that breaching it is a crime. It covers private funds and discretionary accounts, and a breach is a fitness-and-properness matter.

Premium

Every note. Every question. One pass.

17 more sections of this note are part of Premium.

Every section of every study note
Every question in every live HKSI paper
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈HK$49.83/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Back-office compliance for asset managers All study notes

← All study notes

LE Paper 6 · Topic 3

Asset management regulations

40 min read19 sections

Must-know for the exam

FMCC staff dealing: holdings disclosed on joining and at least semi-annually; permission valid at most 5 trading days; 30-day hold; no IPOs available to funds, no cross trades with funds (para 2.1.1).
Cross trades: client to client needs best interests, current market value, reasons documented first and disclosure; house to client needs the client's prior written consent; staff to client is prohibited (FMCC 3.9).
SFC Handbook (made under SFO s.399, no force of law): Section I Overarching Principles apply to all products alongside the UT Code (II), ILAS Code (III) or SIP Code (IV).
Chapter 7: 10% per entity (securities, derivative underlying, OTC counterparty), 20% per group, 20% deposits, 15% unlisted, 30% per government issue, 10% borrowing, 50% net derivative exposure (UT Code).
Changes: trustee, manager, objectives and new fees need SFC prior approval; a fee rise within the disclosed maximum needs one month's notice; giving up authorisation needs three months' notice (UT Code 11.1-11.4).
Trustee: Type 13 or overseas-regulated, independent of the manager, retires only when replaced with SFC approval; holders of 50% in value can require the manager's removal (UT Code 4.2-4.7, 5.11).
REIT Code: borrowing up to 50% of gross asset value; development cap 10%, raisable to 25% with holders' approval; 90% of net income paid out; Principal Valuer rotates after 3 years.
Large Fund Managers manage CIS assets of HK$8 billion or more for any three months of the previous reporting year, excluding discretionary accounts (SFC circular, 20 August 2021).
Mainland funds under MRF: established over 1 year, at least RMB 200 million, not mainly investing in Hong Kong, Hong Kong sales up to 80% of assets (from 1 January 2025).

On this page · 19 sections

Traps that cost marks

Assuming the FMCC is only for SFC-authorised retail funds. It covers private funds and discretionary accounts too.
Treating an SFC code as criminal law. Breaching the FMCC goes to fitness and properness and discipline, not prosecution.
Believing that delegating the investment role delegates the responsibility. The task can move; the obligation to the fund stays.
Thinking outsourcing compliance outsources the liability. Only the activities can be delegated.
Reading 'where practicable' as an exemption. A small firm still needs the audit roles covered, by external auditors.
Mixing up the two staff-dealing numbers: permission lasts at most five trading days; the minimum holding period is 30 days.
Remembering 'annual' for holdings disclosure. The FMCC asks for disclosure on joining and at least every six months.
Treating a customary commission rate as enough. A connected-person trade must also be at arm's length and meet best execution standards.

The Fund Manager Code of Conduct: who it binds and what a breach means

Question	FMCC answer (Introduction)
Force of law?	No. It must not be read to override any law
Conflict with legislation or another code?	The more stringent provision applies
Effect of a breach	Reflects adversely on fitness and properness (absent extenuating circumstances); may lead to disciplinary action. Not an offence
How the SFC assesses a breach	Pragmatically: all circumstances, including the firm's size and compensatory measures by senior management

Trap: assuming the FMCC is only for retail funds, or that breaching it is a crime. It covers private funds and discretionary accounts, and a breach is a fitness-and-properness matter.

Premium

Every note. Every question. One pass.

17 more sections of this note are part of Premium.

Every section of every study note
Every question in every live HKSI paper
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈HK$49.83/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Back-office compliance for asset managers All study notes

Organisation, management and staff dealing (FMCC paras 1-2)

Part I of the FMCC sets the firm's structure. A Fund Manager keeps adequate financial, human and technical resources, internal controls, a risk management function and professional indemnity insurance (para 1.2). Chinese walls separate fund management from group corporate finance, banking or broking (1.3). Front office is segregated from back office, compliance and audit have separate reporting lines, and investment decisions are delineated from dealing; a central dealing desk is encouraged but not mandatory (1.4).

Function	Rule	Small-firm fallback
Senior management (1.6)	Principally responsible for compliance; reviews the performance of funds managed at least annually	None
Compliance (1.8)	Effective function with a compliance officer, independent and reporting to senior management	Senior management assumes the compliance officer role; activities may be delegated to a qualified professional, responsibility may not
Audit (1.9)	Independent audit function where practicable, reporting to senior management or the audit committee	External auditors perform or review the audit roles
Delegation (1.10)	Care in selecting delegates and ongoing monitoring of their competence	The investment role may be sub-contracted; responsibilities to the fund may not
Withdrawal (1.11)	Promptly notify affected clients; keep safekeeping arrangements for client assets	None

Staff dealing (para 2.1) binds 'relevant persons': staff who make, take part in or get advance information on investment decisions, or make recommendations, and persons they control. The firm's internal rules or employment contracts must require:

•disclosure of existing holdings on joining and at least semi-annually after that;
•prior written permission from the compliance officer or a designated person, valid for no more than five trading days;
•no dealing on a day the firm has a pending fund order in the same investment until it is executed or withdrawn; no dealing within one trading day before (if aware) or after a fund trade or recommendation in it (senior management may relax this once fund orders are fully executed and conflicts removed);
•no cross trades between relevant persons and funds; no short-selling of securities recommended for purchase; no participation in IPOs available to the firm's or its connected persons' funds;
•a minimum holding period of 30 days unless compliance approves an earlier disposal;
•either dealing through the firm or a connected person, or compliance approval of outside broking accounts with copies of statements sent to compliance within a defined time; no delayed settlement.

Gifts and benefits (2.2): no inducement likely to conflict materially with duties to clients; a corporation keeps written guidelines with monetary limits and a register of benefits received above the limit.

Trap: mixing up the staff-dealing numbers. Permission lasts at most 5 trading days, holdings are disclosed at least every 6 months, and investments are held at least 30 days.

Takeaway: Delegate the task, never the responsibility. Staff dealing: 5 trading days' permission, semi-annual holdings disclosure, 30-day hold.