Hong Kong: Corporate misconduct – the regulator’s enforcement priority

In April, we reported that the Securities and Futures Commission (“SFC”) has adopted a more proactive regulatory approach towards the listed companies sector, in response to market concerns over serious corporate misconduct by Hong Kong listed companies. To enhance its oversight of listed companies and their executives, the SFC established a new Corporate Regulation Team, which was tasked with reviewing listing documents and company announcements, and following up on red flags. A new litigation team was also set up to address the SFC’s concerns that cases had increased both in terms of volume and complexity, and investigations were taking too long to be completed. These initiatives supplemented the new statutory inside information disclosure regime and IPO sponsors regulations, both of which aim to promote better corporate governance and market quality.

Since then, the SFC has noted “significant changes” in corporate behaviour, including a considerable increase in the number of inside information announcements made pursuant to the statutory regime. The Corporate Regulation Team, now firmly embedded in the SFC’ Corporate Finance Division, has also published its first work report. While it found the increase in corporate disclosure encouraging, the Corporate Regulation Team continued to find substantial shortcomings in the quality of the disclosure.

In terms of enforcement work, the SFC has continued to pursue listed companies, their executives and professional advisors for perceived corporate misconduct. Themes arising from the latest enforcement actions include false financial information from management, self-enrichment of corporate insiders, and disclosure of false information or concealment of information from shareholders. These are likely to form the future focus of the SFC in carrying out its role as the statutory corporate regulator.

As we have mentioned previously, the SFC also had major concerns about the conduct of listed companies’ advisors, in particular IPO sponsors and auditors. In less than a year after the new regulations of IPO sponsors came into force, the SFC issued a statement which sought to dispel any room for argument that sponsors would not face civil and criminal liability for untrue statements in a prospectus under the companies legislation. This has unsurprisingly caused a great deal of disquiet in the financial market, and attention would be on when and how the civil and criminal provisions would be used against sponsors for the first time since the prospectus liability provisions have been in place. On the other hand, listed companies auditors can also expect greater regulatory scrutiny, in light of the proposals in the recent public consultation on tightening the regulation of listed entity auditors. 

In light of the new regulatory architecture and persistent findings of failings in corporate behaviour, we can be certain that corporate governance would remain one of the SFC’s enforcement priorities for the foreseeable future, and more surveillance, investigations and enforcement actions in this area can be expected.