In more detail

FCA's Findings

On 14 October 2020⁴, the Financial Conduct Authority in the United Kingdom (FCA) found that between 22 February 2017 and 3 December 2019 ("Relevant Period"), the Subject LC failed to make a total of 155 notifications to the FCA and 153 public disclosures of its net short position in Premier Oil plc ("Premier Oil"), a company listed on the London Stock Exchange. These failures constituted breaches of the European Union's short-selling regulation ("EU Regulation"). As a result, the FCA imposed a financial penalty of GBP 873,118 on the Subject LC.

SFC's disciplinary action against the Subject LC

Following the conclusion of the FCA's action, the SFC undertook its investigation into the Subject LC's failures to comply with the EU Regulation and its internal control environment. The SFC found that the Subject LC 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 advisor in October 2019.

The SFC considered that the Subject LC 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 EU Regulation before it established a short position in Premier Oil even though the Subject LC was investing in a new jurisdiction and unfamiliar with the EU market.
• Notify the SFC immediately upon becoming aware that it had materially breached the EU Regulation, and only did so after a delay of around two months.

As a result, the SFC found that the Subject LC 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 ("Code of Conduct").

SFC's Disciplinary Action against the Subject MIC

During the relevant period, the Subject MIC was the MIC for Compliance and the Head of Compliance and Operations. It is worth noting that at the material time, the Subject MIC was not an RO of the Subject LC, but a licensed representative accredited to Subject LC to carry on Type 9 (Asset management) regulated activities.

The SFC noted that, as a MIC for Compliance, the Subject MIC's key responsibilities included:

• Implementing and maintaining a robust risk management framework to ensure compliance with applicable laws and regulations.
• Handling regulatory filings in relation to the Subject LC's portfolio positions.
• Consulting external legal advisors whenever considered necessary to do so.

The SFC considered that the Subject LC's failures to meet its regulatory obligations were attributable to the Subject MIC's neglect in discharging his responsibilities as a MIC for Compliance and a senior management member. In particular, he failed to:

• Implement adequate systems and controls to ensure the Subject LC's compliance with the EU Regulation.
• Seek legal advice on the Subject LC's 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 Subject MIC'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 the Subject MIC for two months.

Conclusion

The disciplinary action against the Subject LC reinforced the SFC's reminder to LCs in January 2014. LCs should maintain effective policies and controls to monitor and ensure compliance in relation to cross-border business activities and to adhere to local and overseas legal and regulatory requirements.⁵       

This disciplinary action is significant for both LCs and their MICs for Compliance. We 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 LCs 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.

We recommend that LCs and the MICs for Compliance take note of the following:

• LCs should make proper enquiry and familiarize themselves with the applicable regulatory requirements, especially when entering a new market or trading in a new type of product.
• LCs should refrain from relying on generic reference materials which are 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 LC instruct the internal legal or other appropriate team to obtain the advice and ensure that they provide it to the MIC for Compliance) as and when appropriate, especially when they and/or their team(s) are unfamiliar with the subject matter or in doubt.
• Before expanding into any cross-border business activities, LCs (and the ROs 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.
• LCs 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.

If you have any questions on how the SFC's disciplinary action may impact your business and/or day-to-day work, please reach out to your usual contact at Baker McKenzie or the lawyers listed in this client alert.

1 Please see our earlier alerts which discuss the SFC Manager in Charge regime in more detail at the following links: al_hk_sfcseniormanagement_jan17.pdf (bakermckenzie.com) and Bite-size Briefings: Individual Accountability Regimes – Driving Improvements in Culture | Insight | Baker McKenzie

2 https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=22PR79

3 In November 2021, the SFC suspended a responsible officer of an LC (who was also the MIC for Overall Management Oversight and MIC for Key Business Line) for six months for internal control failures: https://sc.sfc.hk/TuniS/apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=21PR107

4 FCA's Final Notice dated 14 October 2020

5 Circular to Licensed Corporations Regulatory Compliance regarding Cross-border Business Activities | Securities & Futures Commission of Hong Kong (sfc.hk)