SFC enforcement action against internal control failures resulting in lapses in disclosure of interests

The Securities and Futures Commission (SFC) has recently fined and reprimanded Adamas Asset Management (HK) Limited (Adamas) for its failure to implement adequate measures to ensure notifiable interests in shares of corporations listed on The Stock Exchange of Hong Kong Limited (SEHK) held in client portfolios it managed were properly disclosed in compliance with the applicable regulatory requirements. The SFC’s statement of disciplinary action is accessible here.

By way of background, according to the disclosure of interest regime under Part XV of the Securities and Futures Ordinance (SFO) in Hong Kong, an investment manager is taken to have an interest in the shares of an SEHK-listed corporation held in the funds and client portfolios such investment manager manages, if it is entitled to exercise any right conferred by the holding of the voting shares or control the exercise of any such right. Where such interests in the shares in the listed corporation reach the notifiable threshold, or when a relevant event prescribed under the SFO occurs pertaining to these interests, a duty of disclosure arises.

Therefore, Adamas, which is licensed by the SFC to carry on Type 9 (asset management) regulated activity, was required to prepare and file disclosure notices in respect of its notifiable interests in Hong Kong listed shares. However, from the period between February 2013 and March 2016, Adamas failed to properly disclose to the SEHK and the relevant listed companies all notifiable interests in eight Hong Kong listed shares held in client portfolios it managed. It failed to file 339 disclosure notices accurately or promptly in relation to 65 notifiable events during the relevant period.

In connection with the disclosure failures, the SFC found that there has been a lack of internal controls for monitoring notifiable interests and ensuring compliance with the disclosure requirements, including the following:

• Notwithstanding that Adamas engaged a third party service provider for compliance services in respect of Part XV of the SFO and used a portfolio management system to monitor shareholding movements, the disclosure failures still occurred.

• Prior to July 2015, Adamas’ written policies and procedures did not contain a specific section on disclosure of notifiable interests.

• There was no clear guidance to members of its operations team on how to identify and make disclosure to the SEHK and the relevant listed corporations for the purpose of Part XV of the SFO.

• There also appears to be no clear delineation and documentation of the responsibilities of the investment team and operations team in relation to the monitoring and reporting of notifiable interests prior to July 2015.

• There was a lack of specific training on disclosure of notifiable interests prior to November 2015.

General Principle 7 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) provides that a licensed corporation should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market. Paragraph 12.1 of the Code of Conduct also provides that a licensed corporation should comply with, and implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered or issued by the SFC.

In the present case, the SFC is of the view that Adamas had failed to implement appropriate procedures to ensure compliance with the disclosure requirements under Part XV of the SFO, whereby amounting to non-compliance with the aforesaid requirements under the Code of Conduct. As a result, the SFC publicly reprimanded and fined Adamas HK$2.5 million for its regulatory breaches.

In light of the disciplinary action taken by the SFC in respect of lack of internal controls resulting in disclosure failures, licensed corporations are reminded to review and update their policies and procedures to ensure that the duty of disclosure of interests under Part XV of the SFO is properly addressed. Licensed corporations should also consider providing regular training to the relevant staff to ensure they are aware of when and how disclosure filings should be made.

主要负责人

萧景霞

合伙人 | 金融服务

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