Hedge Fund racks up US$1.3M in fines from both HK SFC and UK FCA for EU short selling breach.  

The Securities and Futures Commission (SFC) of Hong Kong has fined a hedge fund HK$1.75M (US$ 220K) for non-compliance failures with the EU’s short selling regime. Reportedly, this is the first case where the SFC has enforced disciplinary action against the firm’s former Head for Compliance with a 2-month ban from October 2022 to December 2022.

It has additionally been declared as the first action against compliance manager for overseas failure with a prior £873K fine (US$1.07M). On 14 October 2020, the UK Financial Conduct Authority (FCA) found that between 2017 and 3 December 2019, the fund failed to make a total of 155 notifications and 153 public disclosures of its net short position in Premier Oil.

By July 2019, the fund had built a net short position equivalent to 16.85% of the issued share capital in Premier Oil, which was then held for a further 106 trading days before notifying the FCA and disclosure to the public.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said “Failure to report disclosable short positions undermines the integrity and efficiency of financial markets…(the fund) repeatedly breached reporting rules and failed to provide important information to us and to the market. This fine reflects the seriousness of these breaches.”

Following the conclusion of the FCA’s action, the SFC undertook its own investigation into the company’s failures to comply and found that the company was not aware that the reporting obligation under the EU regulation applied to its short position in Premier Oil until it was alerted by its legal adviser in October 2019.

SFC noted the following in respect to the FCA fine:

• “Failed to put in place adequate systems and controls in its compliance framework to ensure its short position in Premier Oil was reported to the FCA and disclosed to the public as required under the EU regulation…”
  
  
• “…failed to seek legal advice on its reporting obligations under the regulation before it established a short position in Premier Oil, even though the asset manager was investing in a new jurisdiction and unfamiliar with the EU market.”
  
  
• The fund had also “failed to notify the SFC immediately on becoming aware that it had materially breached the EU regulation, only doing so after a delay of about two months.”
  
  
  

ARTIUS GLOBAL’S TAKE

“This is the first of its kind cross border fine because of non-disclosure in another jurisdiction,” says Caleb Woo, Head of Client Success, Artius Global. “Regulators are inclined to make sure institutions comply and will not hesitate to penalize institutions for failing to do so in order to protect the integrity of their financial systems.”.

“As former practitioners in asset management, we are familiar that many financial institutions can struggle to keep up with the many complex regulations.” Hence, it is crucial for firms to consider effective compliance solutions.

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• AGSD’s up-to-date, robust rule engine hosts 3,300+ rules across 100+ countries and 150+ exchanges for 5 regimes (substantial shareholdings, takeover, short selling, issuer limits, and sensitive industries).
  
  

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ENFORCEMENT TRENDS

The number of enforcement actions taken by the SFC has risen recently with:

• 220 investigations commenced and 28 criminal charges laid by the SFC as stated in the SFC Annual Report 2021-22.

• This number is up from 204 investigations and 29 criminal charges in 2020-21, and 197 investigations and 10 criminal charges laid in 2019-21.

The SFC has also issued significant fines:

• In 2020, the SFC reprimanded and fined a wealth management company HK$2.71 billion for “serious regulatory failures” over bond offerings.

• In 2022, the SFC reprimanded and fined a financial services entity HK$348.25 million for “serious regulatory breaches” over client facilitation activities.

The decision by the SFC, on top of the FCA fine is a testament that regulators have adopted a zero-tolerance mindset for the failure of implementing effective compliance systems and will not only impose hefty fines and penalties but also enforce individual sanctions on compliance officers.