On 11 May 2015, the Securities and Futures Commission (SFC) issued a circular (Circular) reminding intermediaries, and their substantial shareholders, of the various notification requirements under the law and the Code of Conduct.i In short, timely notification must be given to the SFC upon the occurrence of certain events, whether to the intermediary or other related parties. The Circular can be accessed here.
The Circular is of particular relevance where intermediaries operating in Hong Kong are part of a corporate group operating across borders. The intermediary’s circumstances may be impacted by events concerning other group entities, which may trigger notification requirements in Hong Kong.
This bulletin gives a summary of the Circular, outlines the global and local trends and offers some practical guidance.
1. The Circular
The Circular specifically referred to the notification requirements under two regimes:
1. Securities and Futures Ordinance (Cap. 571) (SFO)
Broadly, section 135(3) of the SFO requires a person, who has previously provided information to the SFC for licensing or registration purposes, to give notice to the SFC regarding any change in such information. Failure to comply with the above notification requirement constitutes a criminal offence punishable by a fine.
A key purpose of the requirement is to ensure that the SFC can remain informed and satisfied on an ongoing basis that intermediaries and their representatives remain fit and proper, notwithstanding any change in their circumstances.
The Circular specifically highlighted the requirement to notify the SFC and (where applicable) the Hong Kong Monetary Authority (HKMA) in writing within seven days if the intermediary or its group entities are subject to any disciplinary action or investigation by a regulatory body or criminal investigatory body, whether in Hong Kong or elsewhere.
2. The Code of Conduct
Under paragraph 12.5 of the Code of Conduct, intermediaries are required to report to the SFC immediately upon the happening of a number of events.
The Circular specifically highlighted paragraph 12.5(a) of the Code of Conduct which concerns any actual or suspected material breach, infringement of or non-compliance with any law, rules and codes administered by the SFC, as well as rules or requirements of other regulatory authorities, by
- the intermediary itself; or
- persons it employs or appoints to conduct business with clients or other licensed or registered persons.
It should be noted that under paragraph 12.5(f) of the Code of Conduct (which came into effect on 1 December 2012), intermediaries are required to report any material breach of the SFO market misconduct provisions that the intermediary reasonably suspects may have been committed by a client.
The Circular highlighted that the notification requirements are not restricted to regulated activities undertaken by the intermediary in Hong Kong, but will in certain cases cover information that:
- concerns regulated activities outside of Hong Kong;
- concerns other group entities;
- relates to substantial shareholders or directors of the intermediary; and
- relates to corporations or businesses owned by or managed by those substantial shareholders or directors.
Intermediaries are expected to be provided with appropriate information from other group entities, wherever located. The SFC specifically stated that corporate groups should have effective internal systems and controls in place to ensure appropriate dissemination of information.
Regulators in other jurisdictions have similarly focussed on institutions’ compliance with reporting obligations. In 2010 the UK financial regulator issued a final notice to a global bank in respect of weaknesses in controls which resulted in a failure to report appropriate information. The notice outlined core expectations on global financial institutions relating to transmission of information across borders and its assessment under other regulatory regimes. Of particular note, the notice commented on the expectations on senior managers in this area, which is worth considering given the recent global regulatory focus on senior management accountability.
Strategies which have been deployed by regulators in the UK and Australia in relation to reporting obligations may be adopted by the SFC. They include:
- using supervisory visits to review breach registers and compliance reports, to assess whether intermediaries are reporting breaches as required; and
- having regard to reporting statistics, to assess whether entities are making the number of breach reports that might be expected.
The SFC has shown it is willing to issue significant fines to firms for a failure to provide notification of reportable matters. In 2011 the SFC fined an institution HK$6 million in large part for a failure to report the suspected misconduct of a former licensed representative in a timely manner. At the first Supervisory Briefing Session held in September 2014, the SFC made clear that it expects firms to ensure that they report to the SFC at the earliest opportunity when issues arise so that appropriate action can be taken swiftly (our previous e-bulletin summarizing the Briefing Session can be accessed here). The Circular is a clear signal that the SFC will step up its scrutiny over intermediaries’ compliance with their notification obligations.
3. Practical tips
Intermediaries should ensure they have in place well documented policies, procedures, systems and controls to ensure compliance with notification obligations.
In relation to reporting material breaches, it is important to be mindful of the potential for reports to contain damaging admissions and be used in actions against the firm.
If an event is escalated internally but ultimately determined to be not reportable, clear documentation of the decision process is important to protect the interest of both the intermediary and management personnel making that decision.
Independent legal advice should be obtained in case of any doubt.