On 16 December 2016, the Securities and Futures Commission (SFC) issued a circular which introduces new measures to heighten the individual accountability of senior management of licensed corporations (LCs), through the designation of one or more Managers in Charge (MIC) of certain Core Functions. Our briefing on the new MIC Regime, including implementation deadlines, can be located here.
As senior management, legal and compliance should work towards appointing MICs ahead of the 17 July 2017 deadline, it is important that HR teams are engaged early on so that any consequential changes to HR processes can be implemented in parallel.
In a keynote speech at the Alternative Investment Management Association APAC Annual Forum on 19 January 2017, Ms Julia Leung, the Executive Director, Intermediaries of the SFC, explained that "if we want to improve conduct and change behaviour, it should start from the top by clarifying who has responsibility for what, and holding them accountable for the conduct and behaviour of the firm".
In this context, the new MIC Regime requires the following:
1. Identify and appoint one or more MICs for each of the eight Core Functions prescribed by the SFC;
2. Prepare and submit, via the SFC's Online Portal, an organisational chart capturing the roles, responsibilities and reporting lines of its senior management personnel, which should include all MICs, their respective reporting lines and the job titles of those reporting to them, by 17 July 2017. The LC must also submit specified particulars for each MIC by that date, including their full name, identification information, job title, place of residence, the Core Function(s) of which he/she is in charge and the job titles of the persons to whom he/she reports;
3. To the extent that the MICs for the Overall Management Oversight and Key Business Line functions are not already Responsible Officers (ROs), they must apply for approval to become ROs by 16 October 2017; and
4. Update or create an internal document, approved by the board, which clearly sets out the management structure of the LC, including the roles, responsibilities, accountability and reporting lines of its senior management personnel. Where a LC designates more than one individual to be the MIC of a particular Core Function, the board should ensure that the document contains sufficient detail regarding the specific responsibilities of each MIC concerned.
HR work streams
For some organisations, the process of identifying the appropriate person(s) to be designated as MIC for each Core Function may lead to changes to reporting lines and/or governance structures. HR teams should be engaged early in the process so that they can work in parallel with the business. The following is a non-exhaustive list of action items for HR to consider as the LC works towards implementing the new regime.
1. An audit will need to take place of MICs' employment contracts and job descriptions (if any) as well as existing policies and procedures relating to standards of conduct, what it means to be "fit and proper", appraisals, performance management, disciplinary procedures, objective setting and determining fixed and variable remuneration to consider what changes may need to be made.
2. The firm will need to engage in discussions with those individuals proposed to be appointed as MICs. During those discussions, the parties should agree the scope of the MICs' role and responsibilities and document that in a variation or supplement to the employment contract, together with any other changes to be made to the MICs' terms and conditions of employment. A clear division of responsibilities will be especially critical where two or more individuals are appointed as MIC for the same Core Function. This should be in addition to the formal acknowledgment of appointment as MIC (including the Core Function(s) for which he/she is responsible) which each MIC will need to sign and submit to the firm's board.
3. Other aspects of the employment terms that the firm may wish to revisit include notice provisions, ongoing record keeping requirements, handover obligations and duties to co-operate with the firm after the employment relationship ends, in order to facilitate a smooth transition when an MIC leaves the firm and is replaced in that role.
4. Training for relevant individuals must be carefully reviewed and updated to ensure that the MICs understand fully the ambit of the rules which apply to them, what that means in the performance of their day to day duties and the consequences of non-compliance. This training will be particularly important for those MICs whose roles have not to date been the focus of regulatory scrutiny, such as those whose responsibilities fall outside of the firm's regulated activities (including, for example, IT, Finance and Accounting).
5. MICs should be encouraged to think about succession planning, to ensure that when they leave the firm there are others who are ready and capable of stepping up and becoming an MIC in their place upon or soon after their departure. In that context, individuals who report to an MIC should also be properly trained on the role of an MIC, in order to understand the MICs' responsibilities and support them in that role by ensuring appropriate information flow and assisting in proper recording of management decisions for future reference in an internal or SFC investigation.
6. From time to time an MIC may require legal advice in relation to their responsibilities and actions taken by them in their capacity as MIC. Due to the potential for the interests of the firm and the MIC to diverge, such advice may need to be given by legal advisers that are not also acting for the firm. The firm will need to consider carefully whether it is prepared to fund that advice, and under what conditions. In addition, the firm may also need to consider whether its existing D&O insurance does, or could be extended to, cover actions or omissions of an MIC in their capacity as such.
7. In the event of an investigation into the activities of a licensed firm (whether instigated internally or by the SFC), it will be necessary to investigate thoroughly not only the conduct giving rise to the investigation, but also whether supervisors and/or managers further up the chain (including the MIC) should also bear responsibility either for authorising or condoning the misconduct and/or for failing to take appropriate steps to prevent the misconduct. In this context, this focus by the SFC on individual accountability will make it increasingly important for all senior management (and especially those appointed as MICs) to keep thorough records of all decisions made (including, where appropriate, where views diverge) and steps taken to ensure regulatory compliance within their respective Core Functions. Systems should be put in place to ensure that those records are available to management on an ongoing basis, as well as to the individual's successor after the manager/MIC has left the firm.
On 19 January 2017, the SFC issued a circular inviting firms to send representatives to SFC workshops to be held in February and March. In the workshops, the SFC will introduce the new features of the SFC Online Portal, through which licensed corporations will need to submit the required MIC information and organisational charts, and there will be opportunities to ask questions.
HSF has been advising the Asia Securities Industry and Financial Markets Association (ASIFMA) on the Manager in Charge soft consultation, and we continue to work with ASIFMA members on this important regulatory change. Our colleagues in London have been advising global banks and financial institutions on the UK's Senior Manager and Certification Regime, which came into effect in March 2016.