Member Article

Chapter 10.2 of the SFC's Code on Unit Trusts and Mutual Funds (Code) requires that pricing errors for SFC authorised funds should be corrected as soon as possible and all necessary action should be taken to avoid errors occurring in the future. If the pricing error results in an incorrect price of 0.5% or more of the fund's NAV per share, it will be necessary to report the pricing error to the SFC, even if there are no Hong Kong investors in the fund concerned.

From experience, the SFC will focus on whether there are adequate internal controls and measures (existing and new) to prevent the recurrence of a similar pricing error. Therefore, when reporting a pricing error to the SFC it is worthwhile explaining any enhanced internal control procedures being adopted.

With respect to compensation, there is a HK$100 de minimis threshold. For example, if a Hong Kong investor redeemed his shares when the NAV was undervalued, and if the underpayment is greater than HK$100, then the fund would need to make a compensation payment to the Hong Kong investor concerned. If the amount of compensation due to a particular Hong Kong investor is less than HK$100, it would not be necessary to make compensation. Also, a Hong Kong investor would only be affected directly by a pricing error if he subscribed for or redeemed shares during the period the pricing error took place.

The fund must be compensated by the party causing the pricing error if the error has caused loss to the fund (for example where redeeming investors have been paid more than was due).

If the pricing error took place over an extended period of time - say 3 months for a fund with daily dealing - subject to the HK$100 threshold, the SFC would expect Hong Kong investors to be compensated even for days when the magnitude of the pricing error is less than 0.5% of the NAV. The SFC will assess whether compensation is required on a case by case basis.

The SFC would expect the fund manager to work with local distributors to identify if any Hong Kong investors need to be compensated and to determine the amount of compensation payable per investor.