Enforcement trends as revealed in the SFC's October – December 2020 quarterly report
On 23 February 2021, the Securities and Futures Commission (SFC) issued its quarterly report for October to December 2020, which keeps its stakeholders and the public informed of its key regulatory work during this period.
The following key themes emerged from the enforcement work of the SFC as revealed by its report for the fourth quarter of 2020 (the report can be found here):
Regulation of virtual asset trading platforms
In December 2020, the SFC announced the grant the first licence to a virtual asset trading platform in Hong Kong.
In November 2020, the Financial Services and Treasury Bureau launched a public consultation proposing a new legislative framework under which the SFC is to regulate all centralised virtual asset exchanges, which will be subject to anti-money laundering (AML) and counter-terrorist financing (CTF) requirements under the AML and CTF Ordinance (AMLO).
Not only in relation to virtual assets, AML is otherwise high on the SFC's agenda. 34 instances of non-compliance with AML guidelines were noted during on-site inspections in this period (this was 10% of the 329 instances of breaches noted). The findings of the SFC's inspections of AML/ CTF controls were shared in a circular in December 2020.
Internal controls deficiencies
Internal controls deficiencies were also a focus of the SFC with three cases resulting in fines ranging from HK$2.1 million to 2.7 billion. The cases involved internal control failures relating to AML; detection, prevention and reporting of short selling, and electronic trading systems. 120 instances of internal control weaknesses were also noted during on-site inspections in this quarter (this was 36% of the 329 instances of breaches noted).
The last quarter of 2020 and 2021 to date further saw four findings of insider dealing or failure to disclose inside information involving both Market Misconduct Tribunal (MMT) and court proceedings with fines ranging from HK$900,000 to 1.5 million in cases where sanctions have been determined. One disqualification order was made, as well as an order for directors to attend an SFC-approved training programme on the corporate disclosure regime, directors' duties and corporate governance.
Recently, the SFC has warned the public of social media "ramp and dump" schemes (whereby fraudsters try to ramp up the price of listed securities through social media posts, and then dump such securities at artificially high prices). 15 securities firms received restriction notices from the SFC in relation to accounts suspected to be associated with such schemes.
Cross-boundary enforcement cooperation continues with the China Securities Regulatory Commission (CSRC) and a tenth high-level meeting held in December 2020. It is noted that representative litigation mechanisms have been introduced in Mainland China under the Securities Law and relevant provisions and notices for securities disputes including insider dealing. The SFC quarterly report referred to a special mechanism available whereby the CSRC Investor Protection Bureau may initiate a representative action on behalf of all qualified investors unless expressly refused for damages.
Enforcement activities generally appear to have picked up with 61 investigations started in the quarter (40% of those for the nine months ended 31 December 2020) and 10 cases with search warrants executed (70% of those for the nine months ended 31 December 2020). Despite COVID-19 and the shift of the SFC to high impact cases, financial institutions should be ready for further regulatory scrutiny.