On 26 February 2018 the SFC released the third edition of its new series of the Enforcement Reporter. The communication outlines the SFC's key enforcement priorities for the coming year and highlights significant recent enforcement actions.
The Enforcement Reporter follows similar themes as previous editions and is a useful indication to the market of the SFC's key concerns. In particular, tackling corporate fraud remains top of the agenda, with insider dealing, misconduct by intermediaries and sponsors, and money laundering also on the SFC's radar.
Sponsor Due Diligence
The SFC highlights sponsor due diligence as a key issue, noting its concern in previous cases where sponsors have failed to scrutinise and verify key information in a prospectus. The SFC reminds sponsors of their duty to ensure a prospectus contains sufficient information for investors to form a valid and justifiable opinion on the shares and the finances of the listing applicant.
The continued focus on sponsor failings should come as no surprise, particularly in light of the SFC's recent action in this area. In March 2017, it imposed a fine of HK$15 million on BOCOM International (Asia) Limited for sponsor failings, and in October 2017 it announced that it was investigating 15 financial firms for failing in their duties as listing sponsors.
Cooperation with the SFC
The SFC sets out a helpful table summarising what it considers the key takeaways from its revised 'Guidance Note on Cooperation with the SFC', issued in December 2017. The SFC emphasises that for cooperation to be recognised, firms and individuals must go above and beyond their statutory and regulatory obligations. Examples include the SFC's key message of the need to "voluntarily and promptly report breaches of failings to the SFC".
If recognised, cooperation will attract a reduction in sanction of between 10 to 30%. A reduction was given in the recent Credit Suisse enforcement action (also highlighted in the Enforcement Report), where the "high level of cooperation" and self-reporting was taken into account in determining the sanction. The SFC also highlights the potential benefits of cooperation in the context of civil court and Market Misconduct Tribunal proceedings.
Mis-selling of Financial Products
The mis-selling of financial products continues to be a regulatory priority a decade after the global financial crisis. The SFC indicates that mis-selling is on the Enforcement Division's 'watchlist' and strongly advises firms to review their compliance and control systems regularly to guard against mis-selling. It also confirms that the Enforcement Division collaborates and shares knowledge with the SFC's Corporate Finance and Intermediaries Divisions to combat mis-selling.
The SFC highlights the significance of the new Manager-In-Charge regime, which was announced in April 2017. We previously wrote about the Manager-In-Charge regime in the winter edition of our Financial Litigation Roundup.
The SFC views the new regime as one of the most effective ways of dissuading misconduct and improving corporate governance, by identifying responsible individuals and holding them accountable. The SFC warns that it will continue to seek criminal sanctions where appropriate, and therefore individuals caught by the new regime should be aware of their personal exposure.
Regulatory Ties with the Mainland
Just over a year after the Shanghai-Hong Kong Stock Connect scheme was extended to include Shenzhen Stock Exchange in December 2016, the SFC highlights its closer ties with its Mainland Chinese counterpart, the China Securities Regulatory Commissions (CSRC). The SFC's summary of the recent Tang Hangbo case is a reminder that the SFC is also legally able to exchange information and intelligence with other securities regulators, including the CSRC.
The SFC's explanation in the Enforcement Reporter of its cross-border cooperation with the CSRC serves as a reminder that the SFC is increasingly looking to obtain information from, and provide information to, the CSRC in appropriate cases.
Recent Key Enforcement Actions
Finally, the SFC provides examples of key cases in the past year.
In addition to the Credit Suisse and Tang Hangbo enforcement actions, the SFC highlights the record fine of HK$400 million imposed on HSBC Private Bank (Suisse) SA. As noted in our previous article, in November 2017 the Securities and Futures Appeal Tribunal reduced the HK$605 million fine proposed by the SFC, while confirming the SFC's power to multiply the fine for each systemic failure by the number of legitimate complaints of each such failure (i.e. the instances of each breach).
Since November 2017 we are yet to see the SFC impose another fine of a similar level (although the Credit Suisse fine of HK$39.3 million was high by previous standards), but we expect it to do so in future cases involving high numbers of pervasive and systemic regulatory breaches.