Why Hong Kong should expect a more active SFC this year

Updated: 2017-02-13 07:45

(HK Edition)

  Print Mail Large Medium  Small 分享按钮 0

The Securities and Futures Commission (SFC) began 2017 with some eye-catching news. First, it sued Standard Chartered, UBS, and KPMG for misconduct related to timber company China Forestry Holdings Co's IPO in 2009. Then, on Jan 20 the SFC and the US Securities and Exchange Commission (SEC) announced an expansion of the information-sharing arrangement between the agencies. This should come as no surprise, however, to those who followed the SFC's busy year in 2016.

Despite being the securities regulator of a premier global financial market, the SFC has often taken a back seat in the minds of foreign firms operating in Hong Kong compared with regulators in the United States or United Kingdom. But as the SFC strives for tougher action and ways to pursue this, foreign and multinational firms in Hong Kong should pay more attention to the local regulator.

Early last year, the SFC came to an agreement with the Department of Justice (DOJ) of the Hong Kong Special Administrative Region to strengthen cooperation in handling corporate and financial criminal cases. Internationally, the SFC entered into an agreement with the US Financial Industry Regulatory Authority (FINRA) to share information on cross-border infractions. Meanwhile, the SFC's CEO took over as chair of the International Organization of Securities Commissions - an organization whose members regulate 95 percent of the global securities markets.

Moreover, the SFC lured a new enforcement chief, Thomas Atkinson, from Canada's Ontario Securities Commission, where he had established a specialized team to pursue more criminal securities violations. This is much like the SEC did in 2010 after the global financial crisis. Atkinson has now implemented similar specialized teams in Hong Kong.

Over the course of the year, the SFC targeted entities related to BNP Paribas, HSBC and Morgan Stanley with multimillion-dollar fines for regulatory infractions.

The SFC's aim is unmistakable - to meet or exceed the best practices of its foreign regulatory colleagues and fill regulatory gaps in Hong Kong and also internationally.

Multinational entities typically follow the regulations of the jurisdiction with the strictest laws and toughest enforcement. In Hong Kong, this has generally meant compliance with US regulatory bodies with less concern about local regulators. This left the SFC's rules and requirements largely being ignored.

But this is changing. The SFC is joining a popular global chorus demanding action on corporate misconduct, particularly in the financial services industry. Moreover, the SFC's respective agreements with the SEC, FINRA, and the DOJ enable it to access more information about firms under investigation. It can also threaten them with heavier penalties for misconduct.

Consequently, any foreign firms that prioritize foreign regulatory compliance now face the risk that previous neglect of local regulatory frameworks may come at a cost. This is because they can no longer hide behind the walls that once separated the SFC from other regulators. Nor can they assume the SFC has no appetite or ability to bring any action against them.

Against this backdrop, foreign firms need a better understanding of Hong Kong's regulations while still complying with international rules. This means keeping up with local and international regulatory efforts by engaging legal experts with local market knowledge.

Such insight should help multinational entities navigate the complex international legal landscape, ensure compliance withthe highest legal standards, and minimize potential penalties. This means best practices for managing legal risk in the high-scrutiny environment.

Vasu B. Muthyala and Calvin K. Koo are practising lawyers in Hong Kong. Muthyala is formerly a US Department of Justice prosecutor and enforcement lawyer at the US Securities and Exchange Commission.

(HK Edition 02/13/2017 page8)