The Securities and Futures Commission (SFC) publicly reprimanded and fined Industrial Securities International Asset Management Limited (ISIAM) HK$6.8 million on Monday, July 27, for failing to fulfill its duties as the fund manager of a private fund between August 2019 and September 2020.

The SFC's investigation revealed that ISIAM established the fund for Hong Kong authorized insurer Tahoe Life Insurance Company Limited (Tahoe Life) and acted as its manager. At the request of Tahoe Life's Chief Investment Officer, ISIAM executed a series of investment arrangements for the fund. These included purchasing structured notes linked to debt securities issued by Tahoe Life's related companies, and subsequently transferring those structured notes to another fund managed by a different fund manager.

The SFC described these arrangements as overly complex, generating additional costs and increasing risk, while lacking clear commercial rationale. The regulator expressed concern that these actions potentially concealed asset flows or related-party transactions.

Asset management companies are expected to have procedures and controls to identify and assess whether proposed private fund arrangements or transactions are suspicious. If such an arrangement or transaction is deemed suspicious, the company should only proceed after being satisfied that its concerns have been adequately addressed.

However, despite multiple warning signs indicating the questionable reasonableness or appropriateness of these investment arrangements, ISIAM failed to exercise independent investment discretion, did not conduct adequate due diligence, and failed to identify and address the warning signals. The SFC also found that ISIAM did not ensure the fund's investments complied with its stated investment restrictions or aligned with its investment objectives. Furthermore, the company lacked effective measures to identify, manage, and monitor the risks faced by the fund.

The SFC considered that ISIAM's failures constituted a breach of multiple regulatory requirements applicable to asset management firms. Mr. Michael Duignan, Executive Director of Enforcement at the SFC, stated: "Asset management companies must remain vigilant and cannot allow their services to be used as a channel to facilitate misconduct. Before proceeding with any proposed fund arrangement, asset managers should carefully assess any investor-led proposals for warning signs and ensure all reasonable concerns are properly addressed. Failure to make reasonable inquiries may lead to serious regulatory consequences."

In determining the penalty, the SFC considered all relevant circumstances, including that ISIAM's failures could have enabled misconduct or other improper activities by its client or other entities, potentially undermining public confidence and market integrity; that ISIAM collected approximately HK$1.9 million in management fees from the fund between August 2019 and September 2020; the company's remedial actions, including updating its policies and procedures on risk management and handling suspicious investment arrangements, and providing compliance training for its senior personnel and employees; ISIAM's cooperation with the SFC in addressing the regulator's concerns; and the company's clean disciplinary record prior to this incident.

Notes:

1. ISIAM has been licensed under the Securities and Futures Ordinance to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities since April 27, 2012, and Type 5 (advising on futures contracts) since June 3, 2013.

2. The SFC's investigation originated from an assistance request by the Insurance Authority (IA) regarding information on certain investments by Tahoe Life, and subsequent SFC inspections of several licensed fund management firms. These inspections revealed that certain assets held by Tahoe Life were transferred into financial instruments linked to its mainland Chinese related companies. The SFC had already taken disciplinary action against another licensed fund manager involved in December 2023.

3. On September 2, 2025, the IA announced that it had publicly reprimanded Tahoe Life and imposed a HK$10 million fine, payable from its shareholder fund, for conducting related-party transactions with Tahoe Group Global (Co.) Limited between July 2019 and April 2020 without the IA's prior consent.

4. Asset management companies should refer to the SFC's circulars on identifying and handling suspicious private fund arrangements or transactions, including the November 21, 2019 circular and the October 9, 2024 circular outlining deficiencies and substandard conduct found in managing private funds and discretionary accounts.

5. Relevant regulatory provisions are detailed in the Statement of Disciplinary Action.