Hong Kong SFC highlights common types of corporate misconduct in acquisitions and disposals

The SFC has recently published its Statement on the conduct and duties of directors when considering corporate acquisitions or disposals.

The statement:

  • outlines the recurring types of misconduct relating to corporate acquisitions and disposals which the SFC observed over the past two or so years, since it adopted a front-loaded regulatory approach;
  • reminds listed company directors and their advisers to comply with their statutory and other legal duties when evaluating or approving such corporate transactions; and
  • warns listed company directors and their advisers that where the SFC has serious concerns that an announced acquisition or disposal may be structured or conducted in a manner that constitutes a breach under the Securities and Futures Ordinance (SFO) or other applicable laws, it will have no hesitation in using its powers under the SFO and the Securities and Futures (Stock Market Listing) Rules (SMLR) to protect market integrity and the investing public.

Front-loaded regulatory approach in action since 2017

Over the last two or so years, the SFC has been using its powers under the SMLR and the SFO to intervene at an early stage in serious cases of corporate misconduct, as part of its “front-loaded” or “real time” regulatory approach.

As the name suggests, the approach involves “nipping problems in the bud” through early targeted intervention (such as making inquiries or directing the stock exchange to suspend trading in the listed company’s shares) to minimise damage to the market. It also involves being more direct, upfront and transparent about how it regulates as a gatekeeper (such as issuing statements, guidelines and bulletins) to prompt fast behavioural changes. This is in addition to the enforcement work which the SFC will continue to conduct at the back end.

The SFC has issued a series of bulletins – SFC Regulatory Bulletin: Listed Corporations – to provide guidance on the manner in which it performs its functions under the SMLR and the SFO. The series can be accessed here and contains numerous case examples.

Recurring types of misconduct relating to corporate acquisitions and disposals

In the present statement, the SFC focuses on the recurring types of misconduct relating to acquisition and disposal transactions. The SFC notes that more than 55% of the cases in which it issued letters of concern in 2017 and 2018 involved corporate acquisitions and disposals.

Some of the recurring types of misconduct highlighted by the SFC include:

  • lack of independent professional valuation for a planned acquisition or disposal;
  • lack of independent judgment in considering valuation reports by external valuers and profit forecasts from vendors;
  • performing little or no independent due diligence on the forecasts, assumptions, or business plans provided by the vendors or the management of the targets;
  • cherry picking companies rather than using a representative sample of comparable companies for the purpose of valuation;
  • failing to assess the potential negative impact of a planned acquisition on the resources and financial position of the listed issuer;
  • no verification of the vendor’s ability to pay compensation or other safeguards to protect the listed issuer’s interests, where the issuer has paid consideration upfront based on the vendor’s profit forecast and the projected profits are not met;
  • suspicious transactions that suggest undisclosed relationships or arrangements among purported independent third parties.
William Hallatt
William Hallatt
Asia Head of Financial Services Regulatory, Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Matthew Emsley
Matthew Emsley
Partner, Hong Kong
+852 21014101

SFC, CSRC and MOF sign tripartite MOU on access to audit working papers kept in Mainland China

Last week, the Hong Kong Securities and Futures Commission (SFC) signed a tripartite memorandum of understanding (MOU) with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China (MOF) regarding audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies.

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SFC encourages the industry to keep in mind the ‘spirit’ of the new Internal Investigation Disclosure Requirement introduced to halt the ‘roll’ of ‘bad apples’

On 17 June 2019, Ms Julia Leung (Deputy Chief Executive Officer, Intermediaries) and Mr Wilson Lo (Senior Director, Licensing) discussed the recent initiative by the Securities and Futures Commission (SFC) to halt the ‘roll’ of ‘bad apples’ within the financial services industry at the 2019 SFC Compliance Forum (Forum). The SFC encourages industry participants to have regard to the spirit of the Internal Investigation Disclosure Obligation when assessing whether internal investigations in relation to outgoing licensed individuals should be disclosed to the SFC.

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SFC Compliance Forum 2019: the SFC outlines its key supervisory priorities for the year ahead

The Securities and Futures Commission (SFC) held its third annual Compliance Forum (Forum) on 17 June 2019 – a series of six panel discussions with industry participants:

  1. Morning plenary panel: Digital journey of client onboarding, act on red flags of improper client activities
  2. Morning breakout session 1: Vaccines of client protection – internal controls and supervision of account executives
  3. Morning breakout session 2: Securities margin financing
  4. Afternoon plenary panel: Governance framework as a driving force for a culture of accountability and behavioural change
  5. Afternoon breakout session 1: Gearing up for distribution of investment products in an evolving world
  6. Afternoon breakout session 2: Regulatory obligation and risk management function of prime brokerage in Hong Kong as Asia’s hub

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Client facilitation – Key standards of conduct and internal controls identified and reiterated by Hong Kong SFC

Authors: William Hallatt, Hannah Cassidy and Jennifer Fong

On 14 May 2019, the Securities and Futures Commission (SFC) issued further guidance identifying and reiterating the key standards of conduct and internal controls relating to client facilitation expected of licensed corporations (LCs).

By way of background, conflicts of interest may arise in a facilitation transaction where LCs assume a risk-taking principal position against clients as opposed to acting as an agent. Such conflicts of interest have long been identified by the SFC as a recurring regulatory concern, which they take very seriously.

Guidance issued to date on client facilitation

Back in 2014, the SFC organised a supervisory briefing session so as to draw the industry’s attention to common deficiencies and vulnerabilities associated with the provision of client facilitation services identified during its routine inspections.

Two years on, the SFC commenced a thematic review in 2016, which assessed the effectiveness and adequacy of management supervision and controls concerning client facilitation.

In 2018, the SFC published detailed observations from its thematic review, and set out guidance on the standards of conduct and internal controls expected of LCs providing client facilitation services. Four main areas of expected standards of conduct and internal controls relating to client facilitation were identified:

  1. controls, monitoring and management supervision;
  2. segregation of agency and facilitation activities;
  3. consent and disclosure; and
  4. indications of interests (IOIs).

Most recently, on 14 May 2019, the SFC issued a circular to LCs to:

  • outline its inspection findings relating to client facilitation in recent years; and
  • remind LCs of the expected standards of conduct and internal controls in respect of providing client facilitation services.


Recent inspection findings

Since mid-2018, the SFC has reviewed the level of compliance with expected standards during the course of its inspections of selected brokers. In particular, the SFC found that certain traders:

  • misrepresented a house or client facilitation trade as an agency trade;
  • were silent or not transparent about whether facilitation would be involved in a trade; or
  • failed to obtain express consent from clients prior to effecting client facilitation trades;

The SFC also discovered that:

  • some IOIs were described as natural although they were not based on a genuine client intent to trade; and
  • some firms’ policies and procedures were not clear and failed to ensure compliance with the expected standards.


Expected standards of conduct and internal controls – the key ones

The SFC identified in its 14 May 2019 circular the standards of conduct and internal controls relating to client facilitation expected of LCs it considered were key, all of which were covered in the 2018 observations and are not new:

  • controls, monitoring and management supervision: establishing policies and procedures which cover key client facilitation controls such as client consent and accuracy of IOIs;
  • segregation of agency and facilitation activities: recording and monitoring on a timely basis communications between agency traders and client facilitation traders;
  • consent and disclosure: disclosing to clients the nature of trades and obtaining clients’ prior explicit consent to each client facilitation trade to ensure that they are fully informed of the inherent conflicts of interest; and
  • IOIs: disseminating IOIs with accuracy and sufficient details only in cases of a genuine client or proprietary intent to trade.


Way forward

Ensuring compliance with the SFC’s expected standards in relation to client facilitation, especially the key ones identified in the 14 May 2019 circular, is of utmost importance as it helps to protect clients who rely on LCs to act in their best interests and to maintain market integrity and confidence.

In doing so, licensed individuals should, when dealing with clients, always act honestly and fairly, disclose conflicts of interests and take all reasonable steps to ensure fair treatment of clients if such conflicts cannot be avoided.

In light of the SFC’s close scrutiny of non-compliance on the part of LCs and the increasing enforcement focus on individuals (including Managers-in-Charge), LCs are advised to critically review existing policies and procedures for client facilitation and implement all necessary measures to ensure full compliance with the SFC’s expected standards.


William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Jennifer Fong
Jennifer Fong
Associate, Hong Kong
+852 2101 4244

Disclosure of internal investigations – the Hong Kong SFC’s FAQs fail to relieve industry concerns

The Hong Kong Securities and Futures Commission (SFC) has released frequently-asked questions (FAQs) to clarify its Internal Investigation Disclosure Obligation – a measure introduced in February 2019 to stop the “roll” of “bad apples” within the financial industry.

The Obligation requires licensed corporations (LCs) and registered institutions (RIs) to provide the SFC with extra information about the circumstances of any licensed employee’s departure. This includes whether the individual was subject to an internal investigation in the six months prior to their departure.

The FAQs cover:

  • what must be reported under the Obligation;
  • the level of detail required for an Internal Investigation Disclosure; and
  • how the SFC will treat the confidentiality of information reported under the Obligation.

While the aims of the Obligation and the clarity provided by the new FAQs are generally welcomed by the industry, serious concerns remain about the practicalities of implementation by firms and the usefulness of the disclosed information to the SFC.

We have been following the developments of the Obligation since its introduction in February and have been part of the industry discussion on this new requirement led by the Asia Securities Industry & Financial Markets Association (ASIFMA). Herbert Smith Freehills and ASIFMA are holding a joint briefing in Hong Kong to explain how the new Obligation and the FAQs will impact LCs and RIs in Hong Kong, and you are welcome to attend.


Date:Tuesday, 28 May 2019
Time:6pm – Registration

6.30-7.30pm – Seminar

7.30-9pm – Cocktail reception

Venue:Eaton Club, 5/F Champion Tower

Three Garden Road, Central, Hong Kong

Please click here to view a map

If you are interested in attending the joint briefing, please email our Events Team for registration.


On 20 April 2018, the Financial Stability Board (FSB) released its regulatory toolkit for misconduct risk. Amongst its aims, the FSB encouraged regulators to do more to prevent individuals who engage in misconduct moving between financial institutions without their misconduct being disclosed to their new employer (for further details, please see our April 2018 bulletin).

On 1 February 2019, the SFC announced significant changes to its licensing forms and processes. Included in these changes was the introduction of the new compulsory Internal Investigation Disclosure Obligation through the new Form 5U, which came into effect on 11 April 2019.

Specifically, under the new Form 5U, firms need to:

  • identify whether departing licensed representatives, responsible officers and executive officers (outgoing employees) were the subject of an internal investigation in the six months prior to their departure;
  • provide details of this investigation if such details have not previously been provided to the SFC; and
  • notify the SFC as soon as practicable if an internal investigation into that individual is commenced after making the initial notification of cessation.



Apart from providing an introduction and explaining the purpose of the new Obligation, the SFC has clarified various key aspects of this new requirement, including:

  • the scope of reportable investigations;
  • the level of detail required for disclosures; and
  • the confidentiality applied to any disclosures made.

Scope of reportable investigations

The SFC acknowledges that firms may adopt different terms, such as checking, inquiry, enquiry, review, examination, inspection or investigation, in respect of their investigative actions. However, the SFC has made it clear that it expects firms to proactively disclose information about all “investigative actions” (no matter how they are described), regardless of whether the subject matter covers regulated or unregulated activities.

The SFC has further provided a non-exhaustive list of examples of investigations involving an outgoing employee that should be reported:

  • investigations about suspected or actual breaches of applicable laws, rules and regulations;
  • investigations about suspected or actual breaches of a firm’s internal policies or procedures;
  • investigations about misconduct that is likely to give rise to concerns about the fitness and properness of an outgoing employee;
  • investigations about any matter that may have an adverse market or client impact; and
  • investigations about any matter potentially involving fraud, dishonesty and misfeasance.

In addition, the SFC has clarified that, even where a firm has completed its investigation and made no negative findings against an outgoing employee, the firm will still be required to notify the SFC of the investigation. However, in such situations, only a brief description of the nature of the matter and an explanation about the basis of conclusion will be required.

Whilst it was understood that a firm had to disclose any investigations that began after the departure of its outgoing employee as soon as practicable, the SFC has further clarified that such investigations must be disclosed regardless of the length of time that has elapsed since the outgoing employee left the firm, i.e. there is no time limit on the on-going requirement.

Level of detail required for disclosures

Broadly speaking, firms should disclose information that they can lawfully disclose to the SFC for its thorough understanding of the subject matter of an investigation.

Generally, firms should include in their disclosures:

  • the nature and background of the matter;
  • the date(s) when the matter occurred;
  • the duration of the matter;
  • the role played by the outgoing employee in the matter;
  • the actual and/or potential impact to the market and client(s) and assessment of materiality;
  • the status of the investigation; and
  • the outcome of the investigation and basis of its conclusion (if the investigation is complete).

Where there are any developments such as new information or updates on the status of an investigation that has already been disclosed to the SFC, firms should provide such information to the SFC as soon as practicable, irrespective of whether the investigation had previously been concluded.

Confidentiality applied to any disclosures made

The SFC has reiterated its statutory obligation under section 378 of the Securities and Futures Ordinance (SFO) to preserve secrecy in respect of information obtained during the performance of its regulatory functions including disclosures made to the SFC under the new Obligation and will treat such information as confidential.

In particular, the SFC 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.



Won’t this be a heavy administrative and logistical burden on firms?

The SFC has made clear that no materiality threshold will apply to exclude investigations that are of minimal significance and/or impact to the market and client(s) from the Obligation.

The scope of reportable investigations is therefore very wide given that any and all potentially wrongful acts committed by an outgoing employee could trigger the Obligation regardless of the eventual outcome of investigations.

The administrative and logistical burden therefore imposed on firms raises issues as to the practicality of implementing the requirement properly, especially for smaller firms in Hong Kong with limited resources.

How should firms navigate the potential pitfalls as to conflicts with other laws and regulations?

Whilst the SFC has clarified that disclosures need only be made where the same would be lawful, no further guidance has been published on how this would work in practice.

As such, firms will likely have to consider each reportable investigation on a case-by-case basis and decide whether a disclosure may breach any laws or regulations, e.g. relating to personal privacy, data privacy or employment, in turn increasing the burden on firms to ensure compliance.

What is the utility of collecting so much information and won’t this cause undue delays in the licensing process?

The information collected through the disclosures could potentially assist the SFC in considering whether an individual is a fit and proper person to remain licensed under the SFO.

However, the catch-all nature of the Obligation raises questions as to the utility of this information if the SFC is flooded with disclosure reports that are not relevant for these purposes. It also raises concerns as to the length of time required by the SFC to complete the licensing process in circumstances where a disclosure has been made on Form 5U.



The new Internal Investigation Disclosure Obligation is a significant enhancement of the prior notification requirements. It is clearly the intention of the SFC to ensure that individuals will no longer be permitted to escape regulatory scrutiny by simply resigning during the course of an investigation.

Whilst the enhanced Obligation, which forms part of a broader focus by the SFC on individuals’ fitness and properness, is generally welcomed by industry participants, serious concerns remain about the practicalities and challenges of implementation, as well as the scale and usefulness of the information to be disclosed to the SFC.


William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Natalie Curtis
Natalie Curtis
Partner, Singapore
+65 6868 9805
Tess Lumsdaine
Tess Lumsdaine
Registered Foreign Lawyer (New South Wales, Australia), Hong Kong
+852 2101 4122

Jennifer Fong
Jennifer Fong
Associate, Hong Kong
+852 2101 4244

HKMA and SFC issue joint circular following co-ordinated inspections which reveal risky financial arrangements and deficient lending practices

Authors: William Hallatt, Hannah Cassidy and Valerie Tao

On 24 April 2019, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) issued a joint circular on their recent co-ordinated inspections of a bank and an SFC licensed corporation (LC) within a Mainland-based group.

The inspections identified two key areas of concern:

  • The group had adopted complex structures and opaque financing arrangements, which may have concealed financial risks and made it difficult to conduct rigorous risk assessment.
  • There were deficiencies in the lending practices of the bank within the group.

The regulators have indicated that this is not a one-off case and encourage institutions with similar structures and arrangements to conduct a review urgently and take action to mitigate risks.

This is not the first time the HKMA and the SFC have undertaken co-ordinated inspections, but is a relatively new collaborative approach. The SFC has recently stated that, as part of its front-loaded regulation, it will be conducting more joint supervisory exercises with the HKMA.

The regulators have indicated in the circular that they have also been coordinating with Mainland regulators to share information and observations derived from their supervisory work.

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AML/CFT compliance in Hong Kong: Recent record fine and reminder of latest guidance

Authors: William Hallatt, Hannah Cassidy, Natalie Curtis, Valerie Tao and Jennifer Fong.

The Hong Kong Securities and Futures Commission (SFC) has recently reprimanded and fined Guosen Securities (HK) Brokerage Company (Guosen) HK$15.2 million for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) regulatory requirements when handling third party fund deposits.

This is the largest fine imposed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to date.

In this e-bulletin, we provide an overview of the Guosen case and other recent cases, the regulators’ approach to AML/CFT enforcement, as well as a reminder of the recent AML/CFT regulatory guidance.

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Corporate Crime Update – Winter 2019

Welcome to the Winter 2019 edition of our corporate crime update – our round up of developments in relation to corruption, money laundering, fraud, sanctions and related matters. Our update now covers a number of jurisdictions.

For the full update on each jurisdiction, please click on the name of the jurisdiction below. Below we provide a brief overview of what is covered in each update.

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