The SFC Fund Manager Code of Conduct: What Asset Managers Must Get Right

The FMCC is organised around the life of a fund. A useful way to approach it is to ask, for each area, “what would an inspector ask to see?”

1. Organisation and structure

The firm must have the people, systems and money to do what it says it does. That means:

• Adequate resources (1.2). Staff with the competence for the strategies you run, and enough of them. A one-person investment team running a complex strategy with no back-up is a recurring concern.
• Separation of functions (1.4). Investment decisions, dealing, operations, valuation and compliance should not sit unchecked with one person. Where a small firm cannot fully separate them, expect to explain the compensating controls.
• Conflicts of interest (1.5). You must identify, prevent, manage and, where material, disclose conflicts, including between funds, between clients, and between the firm or its staff and clients. A written register that is reviewed and updated is far more persuasive than a generic policy.
• Risk management (1.7, 3.11). A framework that covers market, liquidity, counterparty, operational and climate-related risk, and that is actually used in decisions.
• Compliance (1.8). A real compliance function with access to management, not a name on an organisation chart. Compliance work can be outsourced, but the responsibility cannot.
• Delegation (1.10). Due diligence before appointing a delegate, ongoing monitoring afterwards, and a clear plan if the arrangement ends.

This area links directly to the Managers-in-Charge regime, because the people accountable for risk, compliance and operational control are the ones who answer for these controls.

2. Staff ethics

The FMCC expects firms to control personal account dealing and the giving and receiving of gifts and benefits (2.1, 2.2). The rules are specific: holdings declared on joining and at least every six months, written pre-clearance valid for no more than five trading days, and a minimum 30-day holding period. Inspectors typically test the process, not the policy: pre-clearance records, holdings declarations, restricted lists, and a gifts register that shows what was received, from whom, and who approved it. Gaps tend to be a policy that requires pre-approval with no evidence that anyone asked for it.

3. Managing the fund

This is the core of the FMCC. Key expectations:

• Invest within the mandate (3.1). Offering documents set limits on strategy, concentration, leverage and instruments. Monitoring must be systematic and breaches must be recorded, escalated and corrected, with investors told where required.
• Climate-related risks (3.1A). Since August 2022, managers must identify relevant and material climate-related risks and take them into account in the investment process. Where a manager concludes they are irrelevant or immaterial, it should be able to show how it reached that view.
• Best execution (3.2). You must take reasonable steps to obtain the best outcome for the fund when trading, and be able to show how brokers are selected and reviewed.
• Fair allocation of orders (3.4). Where one order covers several funds or accounts, allocation must be fair and recorded before the trade, with a written policy and a record of exceptions. Post-trade reallocation that favours one account is a classic red flag.
• Cross trades (3.9). Trades between funds or accounts managed by the same firm are only acceptable with strict safeguards: they must be in the interests of both sides, at current market value, documented before execution and disclosed to both clients. Cross trades between staff accounts and client accounts are prohibited.
• Leverage and liquidity (3.12, 3.14). The firm must manage the fund’s liquidity so that it can meet redemptions on the terms investors were offered, and must monitor and limit leverage, disclosing the expected maximum level to investors. Liquidity risk management has been a stated SFC priority, so expect questions on stress testing and on how redemption terms match the underlying assets.

4. Custody, valuation and operations

• Safekeeping of assets (4). Fund assets must be held by an appropriate, functionally independent custodian, with arrangements that protect them from the manager’s own creditors and from misuse.
• Independent valuation (5.3). Assets must be valued fairly and consistently, with a process that is independent of the people who benefit from higher valuations. Price overrides must be documented and independently reviewed, and the valuation policy must itself be reviewed and tested at least annually by a competent, functionally independent party. Where assets are illiquid or hard to price, the valuation policy, model inputs and approvals are what the SFC wants to see.
• Side pockets (5.4). If you use them, the criteria for moving assets in and out, the valuation approach and the investor disclosure must be clear and consistently applied.
• NAV calculation (5.5). Errors will happen. What matters is that you detect them, correct them, compensate investors where appropriate and learn from them, with a record of each.
• Reconciliations and records (5.1, 5.6). Reconciliations against custodian, broker and bank records at least monthly. Records must be complete, retrievable and kept for the required period. A missing trade rationale or approval is hard to fix after the event.

5. Dealing with investors

• Information and disclosure (6.2, 6.2A). Investors must receive accurate, timely information about the fund’s strategy, risks, fees, valuation, conflicts and material changes, including how the manager governs and manages climate-related risks.
• Marketing (7.2). Marketing material must be fair, balanced and consistent with the offering documents. Performance claims need a verifiable basis.
• Fees and expenses (8). Charges must be disclosed and calculated in line with the documents. Expenses charged to the fund should be ones the documents allow.
• Complaints (6.4). A clear process to receive, investigate, respond to and record complaints, with root causes fed back into the business.

6. Reporting to the SFC

The FMCC requires firms to identify material non-compliance, report it to the SFC on a timely basis where appropriate and remedy it promptly (3.15). The SFC may also request information at any time, such as leverage, illiquid assets and securities lending activity, and everything provided must be complete and not misleading (9.1). Establish who owns this, what triggers a report, and how quickly the decision is made. Late or incomplete reporting is itself a conduct issue.