In our recent article, we talked about the setting up of 8 specialised teams to investigate those cases that pose particularly serious threats to the integrity of the Hong Kong markets. On 8 December 2016, the SFC relaunched its Enforcement Reporter which will be published twice a year. We welcome the effort made to use this publication to provide the market with updates on current SFC work and its key enforcement priorities.
Consistent with what the SFC has been saying, corporate fraud and misfeasance and AML are the first two matters raised in the publication. Apart from that, we would highlight the following three matters.
Focus on Systemic Problems
The SFC is targeting systemic problems within a company or even group companies. According to the SFC:
- if it identifies multiple failings within a company or corporate group, it will consider them together to assess whether they are attributable to systemic weaknesses;
- companies and corporate groups with serious, extensive and repeated failings will be targeted for enforcement actions;
- it will consider using independent reviewers to ensure that companies have identified and addressed all systemic problems.
In appropriate cases, in order to encourage cooperation and possible settlement negotiations, towards the end of its investigations, the SFC intends to notify the parties under investigation of its intended enforcement action and give them an opportunity to make submissions (either themselves or through their legal advisors) to inform the SFC of any additional relevant facts, set out legal reasons why the proposed enforcement action should not proceed or propose a settlement. This would apply in cases other than criminal proceedings. In other words, in addition to the current practice of providing the person to be sanctioned an opportunity to respond in disciplinary proceedings, the SFC intends to adopt a similar practice in relation to civil and Market Misconduct Tribunal proceedings. Parties should therefore be prepared to address the allegations at an earlier stage when they are informed of the intended enforcement action. They should also be aware that their reply will likely be looked at during the trial of the civil and MMT proceedings.
Tips for market players
The SFC gives the following tips for market players:-
- The SFC recognises and gives credit for cooperation and encourages cooperation as early as possible during enforcement actions.
- The SFC values timely, open and transparent disclosure of misconduct and encourages market players to contact them when they discover any material misconduct.
- Firms should have effective internal control systems and procedures in place, internal control failures being a very common finding by the SFC.
- Senior management (whether licensed by the SFC or not) should be fully aware that they are accountable for the misconduct of their firms.
Other than the last point on senior management, the others are not new. On 16 December 2016, the SFC issued a circular and a FAQ talking about the subject of senior management and their responsibilities. All licenced persons/entities should take note and consider any changes they might need to adopt.