The SFC’s new Executive Director of Enforcement, Thomas Atkinson, has recently announced the setting up of eight specialised teams to investigate cases in the following key areas that pose particularly serious threats to the integrity of the Hong Kong markets:
1. Corporate Fraud Team
2. Corporate Misfeasance Team
3. Insider Dealing and Market Manipulation Team
4. Intermediary Misconduct Team
5. Sponsor Team
6. GEM (Growth Enterprise Market) Team
7. AML Team
8. Specific Products Team
1 to 4 are permanent teams. This reflects the regulator’s expectation that there will be a constant flow of cases in these important areas in the foreseeable future. 5 to 8 are temporary teams to tackle emerging risks in these new areas of importance. These teams are expected to be disbanded when the underlying risks have been addressed.
These teams will be made up of experienced professionals in the areas, as well as specialists with relevant expertise and special skills, such as market analysis and investigation. The impetus for the new set up comes from the rapid increase in enforcement cases (an increase of 20% a year). This has called for a new approach, Atkinson says, from a “try to do everything” approach to a focused approach, targeting key risk areas.
Last month, the Process Review Panel issued a report for the SFC. In the report, it was mentioned that some enforcement cases have taken quite a long processing time. The backlog of cases and an increasing number of new cases are some of the immediate matters that Thomas Atkinson has had to tackle since his arrival in Hong Kong earlier this year. The establishment of the specialised teams has given the market a clear message about the high impact cases that the SFC will be putting its resources into to tackle and we should see more of such cases in Court, in the Market Misconduct Tribunal or in SFC Press notices announcing sanctions imposed on licensed entities/persons.
More information about the eight teams:
- Corporate Fraud and Corporate Misfeasance Teams: They will target the senior management of listed companies against any corporate fraud and misuse of powers. These types of cases make up a substantial portion of the SFC’s enforcement actions and Atkinson says that despite them being complex and time consuming, the SFC will continue to focus its enforcement efforts on such cases, as they pose one of the greatest threats to the investing public and the integrity of the Hong Kong markets. Recent examples of such cases include proceedings against CITIC and five of its former directors for disclosure of false or misleading information on CITIC’s financial position and proceedings against the former Chairman of GOME Electrical Appliances Holding Ltd and his wife for breach of their duties as directors, in which the SFC obtained $420 million compensation for GOME.
- Insider Dealing and Market Manipulation Team: They will focus on investigating market misconduct related offences.
- Intermediary Misconduct Team: This team will focus on misconduct by persons regulated by the SFC, including short selling, mishandling of client orders, misappropriation of client assets and investment bank malpractice.
- Sponsor Team: They will look at sponsor misconduct during IPOs. Recently, two banks disclosed that they are being investigated by the SFC over their roles in certain IPOs and there might be actions taken against them.
- GEM Team: The team will investigate irregularities in the Growth Enterprise Market.
- AML Team: This team will target Know Your Client and Anti-Money Laundering control failings. In a SFC notice in September this year, the SFC said they are investigating a number of cases of SFC licensed brokerages with suspected inadequate AML internal controls. A number of concerns on AML failings have been identified.
- Specific Products Team: They will deal with mis-selling of specific investment products. We note that this is not actually new as there has been this type of case since the investigation into the sale of mini bonds some time ago.
Collaboration with China Securities Regulatory Commission (“CSRC”)
Given that many Hong Kong listed companies have business operations in Mainland China, Thomas Atkinson said that the SFC will work closely with Mainland regulators, especially the CSRC. In our experience, this is inevitable as more and more cases require the SFC to obtain information and evidence from individuals and companies based in the Mainland.