Rethinking the Enforcement Function of the SFC
With a proven record of strengthening the enforcement function of the Ontario Securities Commission when he served as a director of that body, the appointment of Tom Atkinson as the Executive Director of Enforcement at Hong Kong’s Securities and Futures Commission in May this year might have been expected to bring about a new approach by the regulator. Last week we learnt what that new approach would look like. At a speech to the Pan Asian Regulatory Summit, Mr Atkinson set out his vision for improving the enforcement capabilities of the SFC.
Not long after Mr Atkinson’s accession to his new role, a strategic review was carried out, which identified a number of areas that pose particularly serious threats to the integrity of markets in Hong Kong. Top amongst the priorities identified were corporate fraud, corporate misfeasance, insider dealing and market manipulation, and misconduct by intermediaries. Key cases concerning these issues have been estimated to have cost the Hong Kong stock market around $200 billion in lost market capitalization.
Enforcement actions against both recalcitrant listed companies and the individuals involved in their management has increased substantially since 2012. The number of enforcement cases generally has been growing, as has their complexity. Figures recently released for enforcement activities during the second quarter of 2016 show that the number of investigations started by the SFC were up by 22 per cent on the same period in 2015, whilst the proportion of investigations completed within seven months was down from 56 per cent in Q2 2015 to 45 per cent in Q2 2016.
In light of this, Mr Atkinson has made it plain that the approach of the SFC must be to focus on those key areas of concern identified in the strategic review. Permanent teams have been set up to focus on those four key areas. In addition, temporary teams have been established to confront what are seen to be serious emerging risks. These include misconduct by sponsors of initial public offerings, irregularities in the Growth Enterprise Market, failings in anti money laundering and KYC controls. A temporary team has also been assigned the task of investigating the mis-selling of specific investment products. It is hoped that this targeted approach will ensure that the SFC not only serves as an effective deterrent against misconduct, but does so in an efficient way, as it is obliged by section 6(2)(e) of the Securities and Futures Ordinance so to do.
Hand-in-hand with this targeted use of resources goes a greater cooperation with other agencies both within Hong Kong and in mainland China. The SFC and the China Securities Regulatory Commission recently jointly hosted a Market Manipulation Conference, and efforts to build understanding between the two regulators, Mr Atkinson assured us, have not waned. Investigations will involve collaboration between the SFC and the Hong Kong Monetary Authority, and, although there has been a continuing trend towards fewer criminal prosecutions, a memorandum of understanding between the SFC and the Hong Kong Department of Justice formalises processes of collaboration between the two agencies.
What remained notable by its absence in Mr Atkinson’s speech was any mention of Deferred Prosecution Agreements as a means of tackling the increasing workload of the SFC. The instruments, now a familiar part of the enforcement landscape in the US, and having been recently adopted and utilised in the UK, have been mooted by some commentators as a possible feature of the SFC’s enforcement function in the future. And Tom Atkinson himself will be acquainted with these instruments from his time at the OSC. But with no mention of DPAs in his speech, it remains unclear whether any role is foreseen for them in Hong Kong’s regulatory enforcement in the future.
What is clear is that a renewed focus on certain key areas, and corporate fraud and misfeasance in particular, will lead, if not to more investigations, then certainly to more resources being brought to bear on those investigations. As such, the need to be familiar with the regulatory framework in these key areas is more crucial than ever.