Hong Kong Securities and Futures Commission enforcement trends
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A front-loaded regulatory approach and the value of regulatory enforcement fines
The SFC appears to have regained some momentum in enforcement actions despite the Covid-19 pandemic. The number of section 179 inquiries increased by 35%, and there was a 3.6% increase in the number of investigations started by the SFC compared to the previous financial year. The value of the SFC’s fines rocketed to a historical high, with a combined value of fines levied of HKD2.81 billion.
A focus on combatting intermediary misconduct and corporate fraud
From April 2020 to early July 2021, the SFC’s disciplinary actions demonstrate a focus on combatting intermediary misconduct, including IPO sponsor failures, anti-money laundering (AML)-related breaches and deficient selling practices (such as internal control failures) as well as corporate fraud. The SFC obtained disqualification orders and other orders under section 214 of the Securities and Futures Ordinance, and commenced legal proceedings against certain listed companies and senior executives.
Market misconduct, including insider dealing, is one of the SFC’s main areas of enforcement
One of the SFC’s top priorities is to crack down on investment fraud and scams on online platforms. In this regard, in March 2021, the SFC conducted a joint operation with the Hong Kong Police Force against an active and sophisticated syndicate suspected of operating ramp and dump schemes.
In addition, it continues to pursue cases against those participating in insider dealing. During the 2020/2021 Period, the Market Misconduct Tribunal sanctioned four individuals for insider dealing.
This serves as a timely reminder. Although sanctions for insider dealing are typically pursued against individuals, licensed corporations and registered institutions should ensure they have sufficient internal training and policies in place against insider dealing by employees, and should report suspected insider dealing immediately upon it being detected.
Continued intervention in IPO applications
The SFC continues to seek information from, or express concerns with respect to, listing applicants using its regulatory powers under the Securities and Futures (Stock Market Listing) Rules. In the 2020/2021 Period, the SFC directly intervened in 27 applications (10.5% of the total number of listing applications) where it was aware of potentially serious disclosure or public interest issues. This is a slight drop in percentage from 2019/2020, where the SFC directly intervened in 11.6% of the total number of listing applications, but we can expect the SFC to continue to intervene in the capital markets over the coming months.
A preference for pursuit of civil enforcement measures over criminal prosecution?
The number of individuals and corporations subject to ongoing civil proceedings continues to increase while the number of criminal charges decreased from 2015 to 2020. Nevertheless, there was an increase in criminal charges of 13.3% in the 2020/2021 Period as compared to 2019/2020. Whether that represents a change in enforcement strategy is for the moment unclear.
A strong emphasis on senior management accountability
For many years, regulators across the globe have been extolling the importance of proper culture and senior management accountability for financial institutions. The SFC’s focus on senior management accountability in Hong Kong remains clear – it regularly brings disciplinary action against members of senior management for their failure to ensure compliance with regulatory obligations by their licensed corporations. For example:
- The SFC banned a former responsible officer (RO) from re-entering the industry for 12 months as a result of not taking any steps to rectify the licensed corporation’s internal control deficiencies, to escalate the relevant regulatory breach to other members of the senior management, or to ensure the licensed corporation’s staff adhered to its internal compliance manual. The RO’s conduct fell short of the standard required.
- Similarly, a former RO, director and head of dealing of a brokerage company was banned from re-entering the industry for 12 months for failing to discharge her duties, which resulted in AML and counter-financing of terrorism regulatory breaches by the licensed corporation.
- In July 2021, an individual was reprimanded and fined HKD400,000 for failures to comply with AML requirements. The SFC found that the securities company’s own breaches were attributable to the individual’s failures to discharge his duties as a member of the senior management.
The SFC continues to focus its enforcement efforts on cases that have the potential to harm investors and cause serious reputational damage to Hong Kong. This priority will continue.
That said, intermediaries must not get complacent regarding smaller breaches as the SFC continues to pursue action in relation to AML, internal control failures and regulatory breaches. In the current environment, with numerous issues arising from Covid-19, it is important that intermediaries ensure strict compliance with regulations in order to prevent misconduct or failure to observe regulatory requirements and internal controls.
Read our full commentary on the SFC’s enforcement trends to find out more.