COVID-19: SFC extends deadlines and signals focus on transparency, market integrity and controls

This article was written by Urszula McCormack and Evan Manolios.

Further to its press release on 5 February 2020, the Securities and Futures Commission (SFC) has released a suite of guidance to intermediaries in response to the effects of the COVID-19 pandemic.  The guidance seeks to provide greater regulatory flexibility and certainty for intermediaries while ensuring that market integrity and investor protection principles are still maintained during COVID-19.  The guidance takes the form of two key documents:

• A circular to intermediaries extending certain deadlines and specifying order recording expectations.
• A set of FAQs addressing how routine compliance obligations should be met and the need for transparency with the SFC on COVID-19 issues.

This alert provides a summary of the key points.

Extended deadlines

First, the SFC has helpfully recognised that implementation lead times are longer as firms grapple with their remote, hybrid or otherwise disrupted work environments.  

The deadlines for implementation of the following SFC initiatives have been extended by 6 months to afford intermediaries greater flexibility as they face unprecedented levels of business disruption arising from COVID-19:

In relation to the use of external electronic data storage, we continue to work closely with LCs, leading industry associations and external data storage providers on regulatory record-keeping obligations, intra-group arrangements, the prescribed undertaking, and contractual addenda to cater for the new regime. 

The SFC has also enacted a temporary level of flexibility on the location of regulatory records.  More on this below.

Order recording requirements

COVID-19 has prompted many institutions to invoke their business continuity plans (BCPs) (see here for our earlier article on BCPs and regulatory compliance amidst COVID-19).  This often involves certain staff working from home or different locations.  Fully equipped alternative sites are not always available, and paper-based systems and usual procedures require re-thinking.  Communications and systems access all need to be calibrated.

However, market integrity and investor protection remain essential.

Against this backdrop, the SFC has reminded intermediaries that the order recording requirements set out in paragraph 3.9 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures (Code of Conduct) can still be complied with through alternative order receiving and recording options even though their staff may not work from their usual place of business. 

Intermediaries are able to adopt the following alternative options as appropriate to meet their needs:

• Instant messaging. Intermediaries may receive client orders through instant messaging where the requirements set out in the SFC's circular dated 4 May 2018 in relation to record keeping, security and reliability, compliance monitoring and establishing internal policies and procedures are observed (IM Circular).

• Mobile phones. Where orders are accepted by mobile phones outside the trading floor, trading room, usual place of business where orders are received or usual place where business is conducted, intermediaries' staff members should immediately call back to the intermediaries' telephone system and record the time of receipt and the order details.[1] This is subject to compliance with the IM Circular.

• Manuscript and other records. The use of other formats (eg in writing by hand) to record details of clients' order instructions and time of receipt can be used if the intermediaries' telephone recording system cannot be accessed.[2]

Careful implementation of control measures must be implemented by intermediaries to ensure alternative measures comply with order recording requirements and SFC expectations.

Reconfiguring staffing arrangements – SFC expectations and support

The SFC has set out its expectations on LCs and licensed individuals (LI) fulfilling their ongoing SFC obligations in light of COVID-19 specific circumstances.  Key aspects of this guidance are as follows:   

• SFC requires COVID-19 transparency. For example, the LC should notify the SFC immediately if staff infection impacts the LC's operations, if the LC's BCP is triggered or the LC must close is premises as a result of staff infection or government lockdown (including overseas office premises that affect the LC's operations).  

• Oversight functions must remain with the LC, namely confirmation that LCs remain responsible for the regulated activities performed on its behalf by a LI who is temporarily located overseas due to the COVID-19 pandemic.

• Routing offshore may be possible. The SFC permits the trading desk of an LC to route orders to an overseas affiliate where its back-up office is temporarily shut down, subject to approval from the SFC and any applicable overseas authorities.

• Temporary flexibility on record-keeping premises. The SFC allows regulatory records to be kept temporarily on unapproved premised due to staff working at home or in overseas offices, on the condition that the LC sends such records back to the approved premises of the LC as soon as possible.

• Flexible signing for licensing applications - flexibility for overseas licence applicants who cannot signed pages of their licence application.

• Extensions for submission of audited accounts and more flexible CPT requirements - extensions for the provision of audited accounts where there are anticipated COVID-19 related difficulties or delays, and greater flexibility for licensed persons to satisfy mandatory continuous professional training requirements.

Key takeaways

The flexibility afforded by these announcements will certainly be welcome, both in terms of the greater flexibility and the guidance on ongoing compliance.  This will allow intermediaries and their compliance staff to focus on other more pressing matters. 

At the same time, the message is clear that compliance requirements cannot go out the window merely because of market turmoil or operational disruption. 

With potentially prolonged disruptions, but increasing familiarity with new routines and remote capabilities, now is a good time to:

1. consider what workarounds you need (or would help you);
2. document alternatives, and the rationale for how they still comply;
3. use the flexibility afforded by regulators, but implement carefully; and
4. speak to regulators if you need more latitude, or have hit a potential grey area. The SFC has expressly signalled that case managers are willing to discuss any issues.

Many firms are also now taking the opportunity to update their internal compliance and operational manuals, rectify any issues such as delayed notifications, conduct training online and innovate more generally for their clients.  This time will pass.  For those intermediaries experiencing a downturn in activity, it is a useful opportunity to "fix the roof" or simply "spring clean" to ensure readiness as markets bounce back in due course. 

We have a wealth in dealing with regulators, helping businesses increase their digital capability and building strong compliance programs – we would be happy to discuss as needed.

The authors gratefully acknowledge the contributions of Rachel Yu and Jessica Kelly to this alert.

*Any reference to "Hong Kong" or "Hong Kong SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".

[1] Notes to paragraph 3.9 of the Code of Conduct.

[2] Notes to paragraph 3.9 to the Code of Conduct.