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Hong Kong Securities and Futures Commission attributes corporate misconduct to Manager In Charge and Responsible Officer

Author
Matt Bower

Partner

Hong Kong

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Image of Sharon Li
Sharon Li

Professional Support Lawyer

Hong Kong

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20 December 2021

We consider the implications of the Hong Kong SFC’s recent suspension of a responsible officer (RO) and manager-in-charge (MIC) following its public reprimand and fine of Fulbright Securities Limited (Fulbright) for internal control failures relating to placing activities and recording of client order instructions.

The SFC relied on s193(2) of the Securities and Futures Ordinance (Cap 571) (SFO). Until now, there has been limited regulatory precedent of the SFC using s193(2) to publicly discipline those involved in the management of a licensed corporation. This recent action is however consistent with the SFC’s focus on making senior management accountable.  It serves as a reminder that the SFC will not hesitate to sanction MICs and ROs if they fail to discharge their responsibilities.

Attribution under s193(2)

Section 193(2) provides that where an intermediary is guilty of misconduct as a result of misconduct occurring with the consent or connivance of, or attributable to any neglect on the part of (i) a responsible officer or (ii) a person involved in the management of the business of a licensed corporation, the conduct shall also be regarded as misconduct on the part of that other person. A “person involved in the management of the business of a licensed corporation” includes MICs.

MIC and RO responsibility for corporate misconduct

The SFC reprimanded and fined Fulbright HK$3.3 million in November 2021 for internal control failures relating to (i) its role as a placing agent in the share placement of a Hong Kong listed company and (ii) failure to properly record client order instructions.

Specifically, Fulbright had failed to:

  • properly record and maintain order instructions for 580 client orders
  • effectively implement policies and procedures
  • diligently supervise its account executives to ensure client orders were handled in compliance with the applicable order handling regulatory requirements
  • establish and maintain appropriate and effective procedures for its telephone order recording compliance reviews
  • report immediately to the SFC after it became aware of its account executives’ breaches of the applicable telephone order regulatory requirements.

The SFC suspended Fulbright’s RO and MIC (Overall Management Oversight and Key Business Line) (the individual) for six months.

The SFC found that Fulbright’s failures were attributable to the individual’s failure to discharge his duties as a RO and a member of Fulbright’s senior management. The individual had failed to ensure that Fulbright maintained appropriate standards of conduct and adhered to proper procedures, thereby breaching General Principle 9 of the Code of Conduct and his conduct called into question his fitness and suitability to be a licensed person.

Aggravating factors included that the individual: (i) approved and signed the placement documents; (ii) should have been aware that Fulbright was not complying with the necessary telephone order regulatory requirements and (iii) took no steps to rectify the situation.

Insights regarding the SFC’s view on attribution of misconduct

What does this disciplinary action reveal about the SFC’s views on the overall application of s193(2) of the SFO?

The published disciplinary statement simply notes that the SFC considers that Fulbright’s failures were attributable to the individual’s failure to discharge his duties as an RO and a member of Fulbright’s senior management and that therefore Fulbright’s misconduct should be regarded as the individual’s misconduct under s193(2).

In April 2021, when the SFC revoked the licence of IDS Forex HK Limited (IDS) and imposed a life-time ban on its former co-chief executive officers, the SFC simply noted that IDS’s misconduct should be regarded as the officers’ misconduct because "it had occurred with their consent or connivance of, or was attributable to neglect on their parts". The SFC noted that the two individuals had reported directly about IDS’s business to its former sole shareholder who had perpetrated a fraudulent scheme.

Whilst the precise basis upon which the misconduct of the licensed corporation is attributed to a RO or senior management is not obvious from the statements of disciplinary action issued by the SFC, what is clear is that it will not hesitate to use s193(2) to hold senior management accountable for the actions of a licensed corporation.

Some guidance on when s193(2) may apply may be gained from use of the phrase “consent or connivance or attributable to” in s390 of the SFO that proscribes liability of officers of corporations for offences by corporations. Although there is no direct commentary from the SFC on the definition of connivance, recent case law directs that connivance requires: (1) knowledge of the wrongful act; and (2) a failure to stop the misconduct.

In SFC v C.L. Management Services Ltd & Another [2014] HKCU 1425, the Magistrate applied the dictionary meaning of “connivance”, namely that “to connive at somebody’s act, whether or not one agrees or disagrees with the act is not important, what is important is that one fails to stop it from happening knowingly.” (this was also adopted in HKSAR v Li Fung Ching Catherine [2012] 3 HKLRD 377).

Looking ahead

The SFC remains committed to bringing disciplinary action against senior individuals who are responsible for a licenced corporation’s misconduct.

MICs and ROs should be aware that in assessing whether s193(2) of the SFO could be engaged, the SFC will focus on whether such individuals: (1) have knowledge (or were on notice) of the licenced corporation’s wrongful act; (2) were in a position to prevent the wrongful act; and (3) knowingly failed to prevent the licenced corporation’s act from happening or be curtailed.

Senior managers should remain diligent, and, if misconduct is identified, take proactive steps (directly or otherwise) to ensure that conduct is curtailed and reported to the SFC promptly. Failure to do so may well contribute to their own accessory liability.

 

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