This article was written by Rachel Yu and Iris Shaw.
On 24 June 2020, the Securities and Futures Commission (“SFC”) published its latest Annual Report (the “Report”), and recapped its efforts in promoting regulatory compliance and ensuring market’s efficient and fair operation amidst increased volatility and challenging business environment stemming from, among others, the COVID-19 outbreak.
It is evident from the Report that the SFC has remained proactive in identifying and punishing market misconduct. Some highlights include:
- putting forward 8,767 requests for trading and account records from intermediaries resulting from untoward price and turnover movements;
- issuing 218 compliance advice letters to address regulatory concerns;
- commencing 197 investigations, among which 17 search warrants were executed, 10 criminal charges were laid and convictions against 3 persons were secured;
- seeking financial redress and other remedial orders against 158 individuals and corporations through civil actions;
- taking disciplinary actions against 24 persons and 20 corporations, resulting in fines totalling HK$479 million;
- forming a Market Misconduct Team by reorganising its market surveillance and investigation functions to facilitate investigation of market misconduct;
- entering into a tripartite Memorandum of Understanding with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China on access to audit working papers for Hong Kong-listed Mainland companies; and
- benchmarking internal technological capabilities against international counterparts and developing data analytic tools to deliver more effective enforcement outcomes.
In line with its front-loaded and focussed enforcement approach, the SFC has identified 3 key risk areas on which they will concentrate their resources:
- highly organised corporate fraud where individuals and firms collude to defraud investors;
- failures in handling conflicts of interest by listed company directors and licensed firms; and
- market misconduct using complex and sophisticated schemes.
The wave of enforcement activities against individuals in the past year shows that director misconduct and corporate governance issues have been on the SFC’s radar. Specifically, a number of former executive directors of listed corporations were disqualified for failing to exercise reasonable care and diligence or act in the best interest of the company. Insider dealing, market manipulation, and failure to disclose inside information, and failure to implement, comply or ensure compliance with a company’s internal control policies are also prevalent types of failures or misconduct spotted amongst senior executives by the SFC. In the Report, the SFC expressed that they will target and pursue individuals and directors at fault vigorously, in particular those involved in the above key risk areas.
The SFC has also been actively pursuing personal accountability against senior management of intermediaries for failing to properly supervise or ensure compliance of regulatory requirements by the intermediaries or its staff (see below). Among other things, the SFC emphasised that they would not hesitate to take regulatory action against asset managers and senior management if they fail to detect dubious arrangements or transactions or if they facilitate illegal or improper conduct due to inadequacies in their procedures and controls, which is responsive to its recent focus on reviewing intermediaries’ dealings with third party payments and margin financing activities.
Given the SFC’s broad powers, directors, senior management and any person with key gatekeeping roles of market players should remain vigilant and be mindful of compliance with their duties.
IPO sponsor failure
The crackdown on sponsor failures is also picking up over the past year. In March 2019, the SFC reprimanded and fined three leading investment banks over HK$700 million for various failures in their due diligence of a listing applicant. Later in May 2019, another IPO sponsor was disciplined for similar reasons.
Sponsors with a history of return or rejected listing applications, serious deficiencies or instances of non-compliance may be subject to close regulatory scrutiny when making future listing applications and should expect more frequent inspection visits and supervisory actions. It is therefore important for IPO sponsors to apply professional scepticism, resolve red flags when performing their duty as gatekeepers and of course keep proper record of such compliances.
Conflicts of interest and AML breaches by intermediaries
Conflicts of interest is a typical theme running across disciplinary actions against intermediaries. Recently, a prominent investment bank was fined HK$400 million by the SFC for overcharging clients over a 10-year period. In response to such actual or potential conflicts of interests between intermediaries and clients, in May 2020, the SFC has commenced concurrent thematic reviews of intermediaries’ spread charges and practices in relation to disclosure of trading capacity and monetary benefits.
It is also clear from the statistics that there has been exponential growth in anti-money laundering (“AML”) related breaches in recent years. In 2017-2018 and 2018-2019, 175 and 201 AML breaches were recorded respectively. However in 2019-2020, the recorded figure rocketed to a total of 331 cases, translating into a 65% increase in AML breaches from the previous year.
There is no doubt that responsible officers/ senior management play a pivotal role in ensuring a licensed corporation’s compliance with AML and other regulatory requirements. In addition to sanctioning intermediaries at the corporate level, the SFC also sought to hold the relevant responsible officers and management responsible. Over the course of last year, the SFC banned various responsible officers from entering the industry for substantial periods of time (one of which was a ban for life) for failing to ensure the firm’s AML compliance or worse, conspiring to commit money laundering.
As illustrated above, there is little question that the SFC is making deliberate efforts in promoting awareness of senior management obligations under the current regulatory regime and is therefore augmenting personal accountability of directors, senior management and persons with key gatekeeping roles in all aspects of the market. Directors, responsible officers and senior management are therefore reminded to be mindful and prudent in managing their corporations’ activities, complying with all regulatory requirements, putting in place all necessary internal control systems and keeping them under review from time to time, monitoring and ensuring compliance with such internal control systems by their staff, properly supervising, and keeping good records – please speak to us anytime if you need support.
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