Disciplinary action highlights the responsibilities of a compliance MIC and the reporting duty of a licensed corporation

View PDF

Authored by: Rebecca Yip and Victoria Ka

The Securities and Futures Commission (SFC) has recently reprimanded and fined a licensed corporation (the LC) HK$1.75 million and also its former Head of Compliance and Operations and Manager-in-Charge of Compliance (the MIC) for two months. This case is significant as it highlights SFC’s application of various provisions under the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).

Summary of facts

1. The LC is licensed under the Securities and Futures Ordinance to carry on type 9 (asset management) regulated activity.
   
2. The Financial Conduct Authority in the United Kingdom (FCA) found that the LC had breached the European Union’s short selling regulation (EU Regulation) for failing to make notifications to the FCA and public disclosures of its net short position a London Stock Exchange-listed company (the Listed Company), and was fined £873,118.
   
3. The SFC conducted an investigation against the LC as a result of the FCA’s enforcement action.

The LC’s compliance failures and internal control deficiencies                                   

The SFC found the LC had breached the Code of Conduct by failing to:

1. implement adequate measures to ensure compliance with the EU Regulation;
   
2. seek legal advice on its reporting obligations under the EU Regulation before entering into swap transactions and establishing a short position in the Listed Company even though it was unfamiliar with the EU market; and
   
3. report to the SFC immediately upon becoming aware it had materially breached the EU Regulation, in breach of paragraph 12.5 of the Code of Conduct.

The MIC’s compliance failures

The SFC found that the LC’s failures were attributable to the MIC’s neglect in discharging his responsibilities as the LC’s Manager-in-Charge of Compliance and a member of its senior management. In particular, Wong failed to:

1. implement adequate systems and controls to ensure the LC’s compliance with the EU Regulation; and
2. seek legal advice on the reporting obligations for the LC’s short position in the Listed Company.

Key reminders to licensed intermediaries and MICs

This disciplinary action is significant and serves as a reminder to licensed corporations and MICs of the following:

1. the SFC can take disciplinary action against a licensed corporation for failing to comply with regulatory requirements in a foreign jurisdiction;
   
2. a licensed corporation is required to seek legal advice on licensing or regulatory requirements before venturing into any new jurisdictions or new products, and on any matters which it is not familiar with, in order to ensure its compliance with the latest and the relevant regulatory requirements;
   
3. report to the SFC immediately upon the occurrence of a material breach, infringement, or non-compliance with the requirements of any regulatory authority (including any foreign regulatory authority as demonstrated by this case) or when it suspects such breach, infringement or non-compliance; and
   
4. MICs and members of senior management of a licensed corporation need to assume the duties and bear the responsibilities for ensuring their licensed corporation maintains the appropriate standards of conduct and adherence to proper procedures. They also need to properly manage the risks associated with the licensed corporation’s business.