October 18, 2022
On 12 October 2022, the Hong Kong Securities and Futures Commission (“SFC”) reprimanded and imposed a HK$1.75 million fine on Asia Research & Capital Management Limited (“ARCM”), a Hong Kong licensed corporation (“LC”), for its failure to:
The SFC also banned ARCM’s Manager-In-Charge (“MIC”) for Compliance, Mr. Billy Wong Yim Chi (“Wong”), for 2 months in relation to the above failures.
This disciplinary action is particularly noteworthy given that the SFC has imposed disciplinary action in relation to a licensed firm’s failure to comply with foreign regulatory requirements.   Further, this matter is also the second time that the SFC has announced disciplinary actions against an MIC since the introduction of the MIC regime in 2017. The SFC’s first disciplinary action against an MIC was in November 2021 against Fulbright Securities Limited and its MIC.
I. Disciplinary action against ARCM
The disciplinary action against ARCM by the SFC followed a similar action against the firm by the Financial Conduct Authority (“FCA”) in the United Kingdom in relation to its failures to comply with the EU Regulation in relation to disclosures of its net short position in Premier Oil Plc, a company listed on the London Stock Exchange.
The SFC was unsympathetic towards ARCM’s explanations that its breach of the EU Regulation was due to ARCM’s unfamiliarity with the EU Regulation, its reliance on reference materials provided by its prime brokers rather than on legal advice regarding the EU reporting regime and the absence of alerts from ARCM’s investment bank counterparts.
Instead, the SFC attributed ARCM’s failures to:
The SFC considered that the above failures amounted to a breach of:
The SFC also found that ARCM’s notification of its breaches of the EU Regulation two months after notification of such breaches to the FCA constituted a breach of the requirement under paragraph 12.5 (Notifications to the Commission) of the Code of Conduct to notify the SFC immediately of any material breach of any regulatory requirements applicable to the licensed corporation.
II. Disciplinary action against Wong
Wong was ARCM’s Head of Compliance and Operations, and the MIC for Compliance during the relevant time periods. As MIC for Compliance, his responsibilities included handling regulatory filings in relation to ARCM’s portfolio positions, and consulting external legal advisors where necessary. The SFC took the view that ARCM’s failures were attributable to Wong’s neglect in discharging his responsibilities as MIC for Compliance and as a member of senior management. In particular, the SFC noted that Wong failed to:
Based on the above findings, the SFC held that Wong had breached General Principle 9 (Responsibility of senior management), and paragraph 14.1 of the Code of Conduct. The provisions required Wong, as senior manager, to bear primary responsibility for maintaining appropriate standards of conduct and procedures, and to properly manage risks associated with the business of the LC.
This disciplinary action serves as a reminder to LCs and their senior management of the broad scope of the Code of Conduct in relation to foreign regulatory requirements, both from a compliance perspective as well as a self-reporting perspective. In particular, it serves as an important caution to firms considering whether foreign regulatory breaches may have triggered foreign self-reporting obligations that they must also carefully consider whether a self-report under paragraph 12.5 is required. Given the stringency of the self-reporting standard under paragraph 12.5 in comparison to foreign reporting requirements, this may put some firms in the uncomfortable position that foreign regulatory breaches may not require reports to be made to foreign regulators, but will require reporting in Hong Kong to the SFC. Similarly, given the ‘immediate’ nature of the Hong Kong self-reporting requirement and the SFC’s expectation that firms report prior to completion of investigations into the relevant conduct, firms may also need to report to the SFC before reporting to foreign regulators.
Further, this case is also particularly significant given the SFC’s clear expectation that senior management will seek legal advice in relation to regulatory requirements where they and their teams are unfamiliar with these requirements, rather than relying on (for example) summaries provided by counterparts. This should serve as an important reminder to senior Compliance staff of the need to carefully assess the necessity of seeking legal advice when entering new jurisdictions and/or rolling out new product types or lines of business. We would recommend that firms review their processes in relation to new types of business activity more broadly to ensure that these processes require active consideration by senior management as to whether legal advice is required, with a particular emphasis on new types of business activity which might lead to the firm being subject to foreign regulatory requirements.
 “SFC reprimands and fines Asia Research & Capital Management Limited $1.75 million and bans former senior executive Billy Wong Yim Chi for two months” (12 October 2022), published by the Securities and Futures Commission, available at: https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=22PR79
 Previously, the SFC had disciplined Capital Global Management Limited (“CGML”) over breaches of foreign regulatory laws. In February 2020, the SFC reprimanded and fined CGML HK$1.5 million for failing to ensure compliance with Taiwan’s Securities Investment Trust and Consulting Act when distributing investment funds and offering investment advice in Taiwan, and for failing to adequately supervise the business activities of its representatives to ensure such compliance. The SFC enforcement action followed the judgment of the Prosecution Office of the Taipei District Court which fined the owners of CGML. See “SFC reprimands and fines Capital Global Management Limited $1.5 million” (14 February 2020). Published by the SFC, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=20PR16.
 We further note that the SFC recently suspended a Responsible Officer and CEO of a licensed firm for two years following the SFAT upholding the SFC’s disciplinary action against this individual for breaches of the SFC Code of Conduct which occurred as a result of breaches of Korean legislation. See “SFAT affirms SFC decision to suspend hedge fund manager Christopher James Aarons” (29 September 2022), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=22PR75.
 “SFC reprimands and fines Fulbright Securities Limited $3.3 million and suspends its responsible officer for internal control failures” (1 November 2021), published by the Securities and Futures Commission, available at https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=21PR107
 “Final Note to Asia Research and Capital Management Ltd” (14 October 2020), published by the Financial Conduct Authority, available at https://www.fca.org.uk/publication/final-notices/asia-research-and-capital-management-ltd-2020.pdf. The FCA’s disciplinary action against ARCM resulted in ARCM being fined £873,118.
 “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission” (August 2022), published by the Securities and Futures Commission, available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct_05082022_Eng.pdf
The following Gibson Dunn lawyers prepared this client alert: William Hallatt, Emily Rumble, and Jane Lu.
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