SFC Investigation Disclosure Obligation Presents Challenge to Industry

The SFC has clarified aspects of the new disclosure obligation, but concerns remain over logistical and administrative burdens, say ASIFMA and Herbert Smith Freehills.

Hong Kong’s SFC (Securities and Futures Commission) recently issued a set of FAQs intended to clarify aspects of the new reporting regime for licensed persons in the city.

The SFC’s new licensing processes, announced in February, were aimed at enabling the SFC to more efficiently gather the information it needs to assess an applicant’s fitness and properness. They include an obligation for firms to disclose when licensed persons are subject to internal investigations and to provide details of such investigations.

The move was aimed at halting “rolling bad apples” in their tracks by requiring firms to provide the SFC with details about the circumstances under which employees depart, law firm Herbert Smith Freehills had said at the time.

The industry had welcomed the reporting requirements, but was keen to ensure that the new obligation worked administratively and logistically, and could ensure a level playing field between reporting firms and reported employees.

Firms have already started reporting under the new regime as of 11 April 2019, when the new licensing forms became compulsory for electronic  submission via a new  SFC portal.

On 21 May, the SFC published the new FAQs, which – according to ASIFMA and Herbert Smith Freehills – have clarified many aspects of a new reporting regime, and provided welcome guidance on what is and is not reportable and the wide scope of the new requirement.

“It is now clear that the regime captures investigations into both regulated and non-regulated activity, and that the SFC will require reports of internal investigations even when there are no adverse findings,” they said. “The FAQs also clarify that very high standards of confidentiality apply to these disclosures, as do existing SFC appeal procedures, which is also welcome.”

However, concern still remains over the logistical and administrative burden being imposed by the new requirements.

“We remain concerned that by requiring firms to capture and report every investigative action that takes place that the scope will impose a huge administrative burden,” said ASIFMA managing director for compliance and tax Patrick Pang.

“This burden falls not only on the reporting firms but also on the SFC, which will potentially have to screen and handle a huge number of reports – many of which may not even prove very useful to the SFC.”

Herbert Smith Freehills partner Hannah Cassidy says firms are already reporting under this new system, and including events that occurred long before the new obligation was introduced.

“Practically, this Obligation applies to a very mobile group of over 30,000 people in a high-pressure financial market,” Cassidy said. “Our concern is that if reporting levels climb, firms may look for ways to reduce the burden,” she says.

“If firms trimmed back internal policies to stem the number of reports triggered, it could impact standards overall and possibly impact those in other areas, such as security or IT.”

The FAQs’ clarification that the SFC will require all information that can be “lawfully” provided could also reduce the level of reporting, as much of the information will also be covered by a web of potentially conflicting laws on employment, personal privacy and data privacy.

Pang also notes that firms may also face legal risks and privacy issues if they report any technical breach of a company’s internal policies.

“If the firm opens an inquiry and subsequently clears the employee, concluding that there is no breach, it will still be a reportable investigative action under the SFC’s requirements – and the firm may face potential privacy issues by reporting,” Pang said.

ASIFMA and Herbert Smith Freehills are also concerned that firms may find it difficult to enforce the new obligation in practice without the force of a clear legal provision behind the reporting.

Additionally, they say, the burden falls unequally on smaller firms or branches of firms in Hong Kong.

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