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SFAT Affirms SFC Decision to Fine Investment Advisor and Suspend the Licence of Its Responsible Officer
17 February 2023
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In July 2021, the Securities and Futures Commission (“SFC”) determined that Cardinalasia Consulting Limited (“Cardinalasia”), investment advisor of five investment funds, acting through Lee Shiu Lun Edward (“Edward Lee”), its sole shareholder and responsible officer, had failed to act in the best interests of some of the funds in certain loan arrangements and cross trades between the funds.
Cardinalasia had failed to advise the funds to enter into transactions that would not have created conflict between the funds and further failed to ensure that each of the funds that had entered into those transactions was fairly treated. The SFC publicly reprimanded Cardinalasia and imposed on it a fine of HK$1.5 million and suspended Edward Lee’s licence for seven months.
In August 2021, Cardinalasia and Edward Lee applied to review the SFC’s determination and the sanctions imposed. On 27 January 2023, the Securities and Futures Appeals Tribunal (“Tribunal”) upheld the SFC’s determination and lengthened the suspension of Edward Lee’s licence to nine months. The rest of the sanctions remained unchanged.
This decision highlights the importance of ensuring that the investment advisory agreement accurately defines the duties and responsibilities of the investment advisor. If it were not for the fact that the investment advisory agreements entered into by Cardinalasia rendered it responsible for advising the funds on the use of monies, it (and consequentially Edward Lee) may not have been culpable for failing to properly advise and act in the best interests of the funds in respect of the loan arrangements.
Further, the investment advisor should always be alive to the possibility of conflicts of interest arising between the funds it represents and properly document and record its decisions and the underlying rationales. In all cases, the investment advisor should seek to avoid conflict. Where this is not possible, the investment advisor should ensure all the funds are fairly treated and no fund’s interests are favoured over or to the detriment of the interests of the other funds.
Last but not least, licenced persons should also be mindful that applications to the Tribunal for review are heard
, which means that the Tribunal may increase the sanction that has been imposed. Decisions to make an application for review should therefore only be made after careful consideration.
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