SFC Enforcement Priorities and Key Focus Areas - Fireside Chat with Kit Wilson and Lisa Chen
We sat down with Christopher (Kit) Wilson and Lisa Chen on 17 March 2023 to discuss the enforcement priorities and key focus areas of the Securities and Futures Commission (SFC) since Kit took over the role of overseeing the Enforcement Division in November 2022. Lisa is a Senior Director in the Enforcement Division.
Kit described his transition into the head of enforcement role as a very natural one, since for the past ten years, he has worked in risk management in banks. He brings with him this industry background and a fresh perspective.
On what will be his general enforcement approach – Kit stated that it will be a hybrid of Mark Stewards' enforcement led approach (taking a very technical approach which can result in more enforcement) and Thomas Atkinson's pragmatic approach (going after bad actors without much room to argue technical points). He sees the accumulation of small cases as being just as toxic as the big cases. At the outset, he will first choose – strategically – some of the small cases and secure some wins. As for technical points, with his legal background, he stated that he cannot ignore them, but they must not get in the way of a fair and just resolution.
On senior management and Manager-In-Charge (MIC) liability – Lisa went back to basics remarking that senior management will be their first port of call for enforcement. Senior management are the decision-makers and should be held accountable for wrongdoing. The SFC will enforce in clear cut cases where senior management themselves participated in the wrongdoing such as in the recent Philip Shaw case. In terms of the expectations of senior management, they are not expected to be perfect and will not generally be disciplined in cases of wrong judgment. Whilst they may delegate, they must not turn a blind eye; they are expected to be aware of the issues and to have properly considered them. An example would be a licensed corporation entering into a new jurisdiction whilst assuming that regulatory requirements would be the same, and taking no steps to confirm this.
In terms of the liability of mid-ranking or junior staff, the above expectations apply, though one difference is that they might claim they did something because they were told to do so or because it was policy; these extenuating factors will be considered by the SFC. With middle management, there may be cases where they are held liable for implementation of an otherwise perfectly drafted and compliant policy. Proper implementation is therefore important.
On the SFC enforcement consultation – in terms of the proposal to empower the SFC to seek investor compensation and other civil remedies after the exercise of disciplinary powers including for breach of codes, Kit found two main strains of concern from the industry, namely: (i) the codes are principles-based and open to broad interpretation and (ii) there is a danger of parallel disciplinary and investor compensation proceedings and the issues arising therefrom (including, for example, the potential for double recovery, if not, the burden of both fines and damages, as well as whether and how findings in one set of proceedings should be taken into account in the other). Kit indicated that the SFC is postponing the decision and meanwhile, may beef up disciplinary sanctions instead.
On key areas of focus – Kit and Lisa described how ramp and dump schemes continue to consume the SFC's resources. Insider dealing is also an evergreen focus area for enforcement, as it goes to market integrity and reputation, and at its core, unfairness. Other key areas of focus for SFC enforcement include dubious private fund and discretionary account arrangements, and failures of fund managers to carry out their duties. In terms of sponsor misconduct, the record fines seem to have deterred this, however, there are still some smaller firms creating problems.
On the newer regulation including the principles-based chapter in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) addressing bookbuilding activities in equity and debt capital market transactions, and ESG disclosure-based requirements for asset managers, the SFC is taking a wait-and-see approach. On ESG, Kit said that the SFC is currently taking a supervisory approach and he is seeing how he can support the SFC’s Intermediaries Supervision team in this regard.
On virtual assets – Lisa emphasised that the SFC wants to get this right, pointing out the recent consultation in February 2023. It is also on the agenda of regulators internationally including IOSCO (International Organization of Securities Commissions). The SFC is concerned with know-your-client, mis-selling, conflicts of interests, cybersecurity, operational resilience, and safe custody of assets (they are concerned with similar issues in relation to other types of exchanges and brokers). An enforcement specific concern is that with virtual assets, there is the difficulty of locating servers and operators. The SFC has been having conversations with and learning from other regulators on this.
On off-channel communications such as WhatsApp and WeChat for making orders – According to paragraph 3.9 of the Code of Conduct, if an order is made through the trading floor, it must be through a recorded line. If it is made otherwise, this must be followed by a call through the recorded line. Records are important including for enforcement purposes. The SFC has not so far taken any action in exactly these circumstances, but it did take action against a bank, who had upgraded its telephone system and missed some telephones in the upgrade. Some orders were not recorded as a result and the bank was fined.
On cooperation with the CSRC – Kit reiterated the close relationship with the China Securities Regulatory Commission (CSRC) with both regulators working closely by way of regulatory assistance and joint enforcement. He also allayed concerns regarding data "leaks" to the Mainland; he emphasised that there is very specific criteria for data sharing and the SFC itself is subject to criminal sanction for breach of secrecy obligations. The SFC has a team just for this, and puts a lot of thought into getting this right.
Two takeaways – each of Kit and Lisa ended with the following:
Kit – the market has been quiet for the last few years and when the market is quiet, there are costs and headcount pressures, particularly in risk management and controls. Control fine tuning should be performed regularly, and reference made to industry best practice.
Lisa – the SFC does not look at issues in the abstract. If you feel that the SFC does not understand your business, do pick up the phone to explain. The SFC encourages explanations that can shorten an investigation.