Authors: William Hallatt, Hannah Cassidy, Natalie Curtis, Tess Lumsdaine and Isabelle Lamberton
The Hong Kong Monetary Authority (HKMA) has issued a circular to registered institutions (RIs) in relation to the frequently-asked questions (FAQs) released by the Securities and Futures Commission (SFC) on 21 May 2019, which sought to clarify the SFC’s Internal Investigation Disclosure Obligation.
In the circular, the HKMA reminds RIs that they also must comply with the Internal Investigation Disclosure Obligation, when notifying the SFC that an individual has ceased to act as its executive officer (EO), reflecting the SFC’s guidance in Question 9 of the FAQs.
The Internal Investigation Disclosure Obligation
On 1 February 2019, the SFC announced significant changes to its licensing forms and processes. Included in these changes was the introduction of the compulsory Internal Investigation Disclosure Obligation through the new Form 5U, which came into effect on 11 April 2019.
The Internal Investigation Disclosure Obligation requires RIs to provide information to both the SFC and the HKMA regarding:
- whether departing EOs were the subject of an internal investigation in the six months prior to their cessation; and
- details of this investigation, if such details have not previously been provided to the regulators.
Firms are also required to notify the SFC and HKMA as soon as practicable if an internal investigation into that individual is commenced subsequent to making the initial notification of cessation (for more details, please see our February 2019 bulletin).
On 21 May 2019, the SFC released the FAQs to clarify various aspects of the Internal Investigation Disclosure Obligation, including:
1. The scope of reportable investigations
It is now clear that the scope of reportable investigations is very wide, given that:
- firms are required to proactively disclose information about all “investigative actions” (no matter how they are described in internal policies), regardless of whether the subject matter covers regulated or unregulated activities; and
- no materiality threshold will apply to exclude low-level investigations that are of minimal significance from the obligation.
2. The level of detail required for disclosures
When making an internal investigation disclosure, firms are required to provide information on:
- factual matters, including a description of the matter, background, relevant dates, duration, the role played by the outgoing employee, and status of the investigation;
- an assessment of the (potential) impact to the market and clients, and materiality; and
- if the investigation is completed, the outcome of the investigation and the basis of its conclusion.
3. The confidentiality applied to any disclosures made
In the FAQs, the SFC reiterated its statutory obligation under section 378 of the Securities and Futures Ordinance, and confirmed that it will not disclose information obtained under the new obligation to any other persons, including the outgoing employee and his/her prospective employer, unless otherwise permitted by law.
Although the HKMA’s circular is silent on this point, it is likely that the HKMA will take a similar approach to the sharing of information obtained under the obligation. However, given the scope of the obligation and the sensitive nature of the disclosures, a positive statement from the HKMA would be welcomed.
The HKMA’s circular has made clear that the HKMA is supportive of the SFC’s intention to ensure that individuals will no longer be permitted to escape regulatory scrutiny by simply resigning during the course of an investigation.
However, the Internal Investigation Disclosure Obligation is a significant enhancement of the prior notification requirements. We anticipate that firms will face a number of key issues in complying with this requirement, including navigating potential litigation risk from former employees, and considering what constitutes an “investigative action”.