First action against compliance manager for overseas failures

The Hong Kong Securities and Futures Commission’s (SFC) “manager in charge” (MIC) regime, which aims to heighten senior management’s accountability within licensed corporations, came into effect in 2017. In a recent disciplinary action, the SFC reprimanded and fined a company licensed to conduct an asset management company HKD1.75 million (USD220,000), and banned its former MIC for compliance for two months.

This is the first case where the SFC has taken disciplinary action against an MIC for compliance who was also not a responsible officer. The decision provides a good reminder to all MICs for compliance that there are serious consequences for failure in their roles.

FCA’S FINDINGS

On 14 October 2020, the UK Financial Conduct Authority (FCA) found that between 22 February 2017 and 3 December 2019, the asset manager failed to make a total of 155 notifications to the FCA and 153 public disclosures of its net short position in Premier Oil, a company listed on the London Stock Exchange. These failures constituted breaches of the EU’s short-selling regulation. As a result, the FCA imposed a financial penalty of GBP873,118 (USD1.07 million) on the asset manager.

DISCIPLINARY ACTION

Following the conclusion of the FCA’s action, the SFC undertook its own investigation into the company’s failures to comply with the EU regulation and its internal control environment. The SFC found that the company was not aware that the reporting obligation under the EU regulation applied to its short position in Premier Oil until it was alerted by its legal adviser in October 2019.

The SFC considered that the company had failed to:

• Put in place adequate systems and controls in its compliance framework to ensure its short position in Premier Oil was reported to the FCA and disclosed to the public as required under the EU regulation;
• Seek legal advice on its reporting obligations under the regulation before it established a short position in Premier Oil, even though the asset manager was investing in a new jurisdiction and unfamiliar with the EU market; and
• Notify the SFC immediately on becoming aware that it had materially breached the EU regulation, only doing so after a delay of about two months.

As a result, the SFC found that the company had breached general principle 2 (diligence), general principle 7 (compliance), paragraph 12.1 (compliance in general) and paragraph 12.5 (notifications to the SFC) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

MIC DISCIPLINARY ACTION

The person at the centre of the case was the MIC for compliance, as well as holding the title of head of compliance and operations. It is worth noting that at the material time, the person was not a responsible officer of the company, but a licensed representative accredited to the company to carry on Type 9 (asset management) regulated activities.

The SFC noted that key responsibilities on an MIC for compliance included:

• Implementing and maintaining a robust risk management framework to ensure compliance with applicable laws and regulations;
• Handling regulatory filings in relation to the asset manager’s portfolio positions; and
• Consulting external legal advisers whenever considered necessary to do so.

The SFC considered that the company’s failure to meet its regulatory obligations were attributable to the MIC’s neglect in discharging his responsibilities as a senior management member in charge of compliance. In particular, he failed to:

• Implement adequate systems and controls to ensure compliance with the EU regulation; and
• Seek legal advice on the reporting obligations under the EU regulation, or instruct his compliance and operations team to do so when he and his team were unfamiliar with the EU regime.

Having concluded that the MIC for compliance’s conduct breached general principle 9 (responsibility of senior management) and paragraph 14.1 (responsibility of senior management) of the code of conduct, the SFC banned him for two months.

CONCLUSION

The disciplinary action reinforced the SFC’s reminder to licensed corporations regarding compliance in relation to cross-border business activities and adherence to local and overseas legal and regulatory requirements.

This disciplinary action is significant for both the licensed corporations and their MICs for compliance. The authors have on numerous occasions been consulted as to the extent of the duties of MICs for compliance and the possible consequences for failures. Undoubtedly, their duties are extensive and important, and this decision demonstrates the possible serious consequences for failures in such duties.

It is interesting and noteworthy that the decision specifically refers to the failure to seek legal advice. It highlights the importance for licensed corporations and their MICs to understand and make themselves aware of the applicable legal and regulatory requirements, whether locally or overseas. They should seek help whenever it is prudent to do so.

The authors recommend that licensed corporations and MICs for compliance take note of the following:

• Corporations should make proper enquiry and familiarise themselves with the applicable regulatory requirements, especially when entering a new market or trading in a new type of product;
• They should refrain from relying on generic reference materials not meant to be relied on as legal or regulatory advice for a particular jurisdiction;
• MICs for compliance should seek legal advice (or, depending on the internal policies of the specific licensed corporation, instruct the internal legal or other appropriate team to obtain the advice) as and when appropriate, especially when they and/or their teams are unfamiliar with the subject matter, or are in doubt; and
• Before expanding into any cross-border business activities, licensed corporations, responsible officers and MICs should ensure that effective policies and procedures are put in place to monitor and ensure compliance with the applicable legal and regulatory requirements imposed by any relevant authorities. Licensed corporations should be mindful of the reporting obligation under paragraph 12.5 of the Code of Conduct and immediately notify the SFC in the event of any actual or potential breach of regulatory requirements, whether within or outside Hong Kong.