SFC underlines importance of meeting international regulatory obligations

An investigation, conducted by the SFC, on Asia Research & Capital Management Limited resulted in disciplinary action and the banning of its Manager-in-Charge for Compliance due to an overseas regulatory breach. The move sets a clear standard for senior management around reporting obligations, with the SFC keeping a close eye on foreign regulatory breaches.

The SFC reprimanded and fined Asia Research & Capital Management Limited (ARMCL) HK$1.75 million for failures relating to its non-compliance with the European Union’s short selling reporting requirements (EU Regulations) and failing to promptly notify the SFC of its material regulatory breaches.

ARCML is licensed for Type 9 (asset management) regulated activities. It was fined by the Financial Conduct Authority (FCA) GBP873,118 for its failures to disclose its net short position in a London Stock Exchange-listed stock to the FCA and the public between 22 February 2017 to 3 December 2019. Although ARCML knew about this material breach in early November 2019, it only notified the SFC of the breach about two months later in January 2020.

As a result of the FCA’s enforcement action, the SFC undertook its own investigation into ARCML and found that it failed to:

  • Implement adequate measures to ensure compliance with the EU Regulations.
  • Seek legal advice on its reporting obligations under EU regulations before entering swap transactions and establishing a short position of the relevant stock, even though it was unfamiliar with the EU market.
  • Promptly notify the SFC of upon the occurrence of its material breach of the EU Regulations.

This sets a clear precedent that the SFC will initiate an investigation based on foreign regulatory breaches. Seeking legal or regulatory advice is therefore essential for LCs venturing into a new product or jurisdiction, particularly if they aren’t familiar with the new regulatory environment.

LCs have a duty to report misconduct and suspected misconduct to the SFC, including any related to overseas regulatory regimes, immediately upon discovery. This should be done regardless of whether or not any internal investigations into the matter have been completed. The SFC clearly believes that delay in reporting may help the wrongdoer(s) perpetuate their misconduct and can jeopardise the investigations of law enforcement agencies.

The SFC also found that Mr. Billy Wong, ARCML’s former Head of Compliance and Operations and MIC for Compliance, should have been responsible for implementing and maintaining a robust risk management framework to ensure the LC complies with applicable laws and regulations. According to the investigation, he failed to handle regulatory filings in relation to ARCML’s portfolio positions and consult external legal advisor when required. His conduct was seen to have fallen short of the standard required by the regulator as an MIC and member of ARCML’s senior management, resulting in a ban from the industry for two months.

This is the first time the SFC has taken disciplinary action against an MIC who was not a Responsible Officer (RO); a licensed representative in this case. The regulator has shown that it won’t hesitate to sanction both the LC and licensed person where misconduct is discovered, regionally as well as internationally. This further emphasises the need for regulated persons, such as licensed persons and persons involved in the management of a business, to be aware of their responsibilities and the expected regulatory standards of conduct.

How we can help

We regularly support our clients in Hong Kong to:

  • Ensure they have effectively implemented the requirements under the MIC regime.
  • Design effective control frameworks for their broader SFC requirements.
  • Understand their exposure to third-country regulations when entering transactions outside Hong Kong through our dedicated presence in the UK, EU, Singapore and the Americas.

Get in touch with our specialist team to discuss how we can help you navigate this regulatory landscape.

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