Year of the Ox 2021: financial regulatory investigations and proceedings year in review

It’s that time of the year again when the Kennedys Hong Kong financial regulatory team releases our annual review of financial regulatory investigations and proceedings. 

As we have done in recent years, we will review the regulatory enforcement lunar year that was in this e-bulletin, followed by a webinar after Chinese New Year with our prognosis on the year ahead – watch this space! In the meantime, we wish you all a happy, healthy, prosperous and safe Year of the Tiger.

'Business as usual'?

The Year of the Ox is a display of how adaptable and agile we are in face of the unprecedented challenges arising from COVID-19 and how resilient we are throughout the pandemic, with the view to try and resume life as 'normal'.

As the Securities and Futures Commission (SFC)’s CEO, Ashley Alder, put it at the AIMA APAC Annual Forum 2021:

We have faced unprecedented challenges, but despite all of the uncertainty brought about by the pandemic, our markets have operated normally throughout.

Ashley Alder, CEO, Securities and Futures Commission

He added: "This is to the credit of Hong Kong’s financial services industry, which has demonstrated commendable adaptability in the face of severe disruptions.”

The enforcement-related statistics also tell us that the SFC have doubled down on their regulatory approach over the past year and it has been very much 'business as usual' for the SFC, in terms of the level of enforcement in 2021. See these SFC quarterly reports for relevant statistics:

SFC Quarterly Report | July - September 2021

SFC Quarterly Report | July - September 2019

Comparing the figures for the six months leading up to 30 September 2019 and 2020 with those for the six months leading up to 30 September 2021:

  • Commencement of inquiries into listed companies conduct issues dropped from 21 to 16 in 2020, and now increased by 100% to 32.
  • Issuance of directions to investigate market misconduct and licensed entities/representatives conduct issues dropped from 120 to 86 in 2020, and now increased by 46.5% and back to 126.
  • Investigations started fell from 126 to 90 in 2020, and now rose by 44.4% to 130.
  • Notices of proposed disciplinary action dropped from 17 to 13 in 2020, and now increased by 92.3% to 25.

Highlights of the regulatory themes

Despite the pandemic, the SFC continues to take active steps to enhance the regulatory framework and adopt a front-loaded regulatory approach, with a greater focus on 'high impact' cases:

Regulatory enhancements

To strengthen the Stock Exchange of Hong Kong Limited (SEHK)’s role as joint regulator with the SFC, new rules were implemented in July 2021 to enhance its disciplinary powers and sanctions. This has not only ensured that disciplinary actions can be brought against a broader range of individuals, but has also increased the range of reputational sanctions that can be imposed.

In the capital market space, following the consultation conclusion on conduct requirements for bookbuilding and placing activities released by the SFC in October 2021, new requirements will become effective in August 2022. This will clarify the roles of capital market intermediaries and set out the expected standards in bookbuilding, pricing, allocation and placing activities.

Corporate fraud

On the enforcement end, the SFC continues to adopt a front-loaded regulatory approach and, together with SEHK, intensified their efforts to tackle IPO-related misconduct and improper behaviour.

Online investment scams, such as social media ramp-and-dump schemes, remain a top enforcement priority of the SFC. The SFC also conducted joint operations with other regulators and enforcement agencies, both locally and overseas, to tackle these online scams. For example:

Commercial Crime Bureau of the Hong Kong Police Force

Independent Commission Against Corruption

Monetary Authority of Singapore and the Singapore Police Force

In terms of Court proceedings, the SFC successfully obtained disqualification orders against former directors of listed companies for failing to discharge their duties as directors and act in the best interest of the company. For example, in the following case examples:

SFC obtains court order to disqualify former executive director of Anxin-China Holdings Limited for eight years

Court of Appeal grants SFC $622 million compensation orders against former directors of EganaGoldpfeil (Holdings) Ltd

SFC obtains disqualification orders against former senior executives of Long Success International (Holdings) Limited

Intermediary misconduct

Some 'hot themes' that continue to remain targets include:

Sanctioning licensed representatives over listing sponsors’ due diligence:

SFAT affirms SFC decision to reprimand and fine Yi Shun Da Capital Limited for sponsor failures

SFC reprimands and fines Ample Capital Limited $5.5 million and suspends its responsible officer for IPO sponsor failures

Anti-money laundering controls shortcomings:

SFC reprimands and fines Zhonghui International Futures Company Limited $5 million for regulatory breaches

SFC reprimands and fines Grand International Futures Co., Limited $8 million and suspends its responsible officer for regulatory breaches

SFC reprimands and fines Mason Securities Limited $3.6 million for breaches of anti-money laundering regulatory requirements

Other internal control/regulatory deficiencies:

SFC reprimands and fines Black Marble Securities Limited $1.8 million for internal control failings and regulatory breaches

SFC reprimands and fines Ewarton Securities Limited $1.5 million

In addition to sanctioning intermediaries at the corporate level, the SFC also sought to hold the relevant responsible officers and senior management (whether licensed or not), including the money laundering reporting officer and manager-in-charge, responsible. For example:

SFC reprimands and fines Grand International Futures Co., Limited $8 million and suspends its responsible officer for regulatory breaches

SFC reprimands and fines Fulbright Securities Limited $3.3 million and suspends its responsible officer for internal control failures

SFC reprimands and fines Raymond Leung Tak Shing $400,000 for breaches of anti-money laundering regulatory requirements

Comment

As illustrated above, amidst the challenges arising from the pandemic, it is 'business as usual' in terms of the SFC’s enforcement actions. Senior management accountability is a recurring theme in the enforcement regime.

It remains to be seen whether more enforcement actions will be taken against individual directors, responsible officers and senior management for non-compliance with their duties in the Year of the Tiger.

Gong Xi Fa Cai/Kung Hei Fat Choy!

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