CSj provides a summary of recent updates to the enforcement policies and disciplinary powers of The Stock Exchange of Hong Kong Ltd relevant to governance professionals in Hong Kong.

Listing Rule amendments enhancing the disciplinary powers and sanctions of The Stock Exchange of Hong Kong Ltd (the Exchange), a wholly owned subsidiary of Hong Kong Exchanges and Clearing Ltd (HKEX), came into effect on 3 July 2021. Subsequently, the Exchange has published statements updating the market on its revised approach to enforcement and disciplinary matters. This article highlights the key implications for governance professionals in Hong Kong of these latest changes to the Exchange’s enforcement policies and powers.

Secondary liability for senior managers

A key message for governance professionals is that the Listing Rule amendments that came into effect on 3 July 2021 broaden the reach of the Exchange’s disciplinary powers. In particular, sanctions can be imposed on members of senior management within listed companies and their subsidiaries if they cause or knowingly participate in a breach of the Listing Rules. Senior management explicitly includes company secretaries.  The Exchange, in its conclusions paper to the consultation proposing the latest Listing Rule changes, emphasised that this ‘secondary liability’ for members of senior management would only arise where the relevant individual was under a duty to act, but failed to do so. Moreover, the conclusion paper makes it clear that this secondary liability would not extend to cases where a breach of the Listing Rules resulted from the board overruling the correct advice of a senior manager.  The latest Listing Rule amendments also widen the range of disciplinary sanctions available to the Exchange. At this year’s Annual Corporate and Regulatory Update (ACRU) webinar, held by the Hong Kong Chartered Governance Institute (the Institute) on 11 June, Jon Witts, Head of Enforcement, Listing Division, HKEX, described the Listing Rule changes as opening a new chapter in the regulator’s enforcement work. ‘The new range is going to help us to distinguish more clearly between different levels of misconduct,’ he said.  Sanctions available to the Exchange range from a private reprimand, a public statement involving criticism and public censure, or a statement that the Exchange considers a person’s retention of office to be prejudicial to investors’ interests (PII Statement) up to a cancellation of listing. The latest Listing Rule amendments lower the threshold for the Exchange to issue a PII Statement. Previously such statements could be issued where there was evidence of ‘wilful or persistent failure’ by individuals to discharge their responsibilities under the Listing Rules. The reference to ‘wilful or persistent failure’ has been removed and the Exchange can now issue a PII Statement where the occupying of office by an individual (whether a director or a member of senior management) ‘may cause prejudice’ to investors’ interests. Moreover, a PII Statement can be made whether or not an individual remains in office at the time of the statement. In addition, the Listing Rules amendments also include enhanced disclosure requirements for directors and senior managers subject to public sanctions, as well as enhanced follow-on actions in relation to public statements regarding individuals. 

Greater focus on enforcing individual accountability 

Pursuing individual accountability is a theme that has been shared by many regulatory bodies, both locally and globally. Since the global financial crisis of 2008, regulatory regimes around the world, including in Hong Kong, have sought to increase the personal accountability of directors and senior management.   The latest enforcement policy issued by the Exchange makes it clear that the imposition of individual accountability for misconduct will be a key priority for the Exchange. The revised Enforcement Policy Statement (Policy Statement), issued in July 2021, replaces enforcement themes that had been in place since 2017 and describes the areas in which the Exchange is targeting its enforcement resources.  ‘Listed issuers are, by definition, companies. But these companies can only operate under the control, and through the acts, of individuals. A key priority behind the Exchange’s enforcement actions is to ensure that those individuals who are responsible for discharging duties in connection with listing matters, and those who are culpable of failures and misconduct, are held to account,’ the Policy Statement says. The Policy Statement also makes clear that this does not only apply to executive directors. While executives may have the clearest individual liability in cases of misconduct, the principle of collective responsibility means that non-executive directors (including independent non-executive directors) ultimately share the same responsibility to procure the company’s Listing Rule compliance. ‘The principle of collective and individual responsibility of directors for compliance is a cornerstone of the Exchange’s enforcement regime,’ the Policy Statement says.  Thus, even where non-executive directors are not personally involved in misconduct, the Exchange will look at whether they exercised their independent judgement and followed up anything untoward that came to their attention.  Looking beyond the board, the Exchange will also be seeking to impose individual accountability on a broader range of individuals, including company secretaries. This was another key point highlighted in Mr Witt’s presentation at the Institute’s ACRU webinar in July this year. He pointed out that guarding against corporate misconduct is the work of many different individuals. ‘There are plenty of people, no matter where they are within an issuer, who we think have a responsibility to help ensure that the market remains orderly, informed and fair. We all have our part to play,’ he said. A key feature of this higher liability risk is the principle that, while individuals may delegate specific tasks, they cannot delegate their responsibility for personal oversight of those tasks. Where directors seek professional advice, for example, they cannot put unquestioning reliance on the advice received and will still be expected to apply their own independent judgement to the relevant matters.  Generally, the Exchange expects to see a culture of proactivity and vigilance in listed companies. Individuals will need to be able to show that they took appropriate steps to minimise the risk of breaches and wrongdoing. ‘Assuming that “someone else will deal with it” has led many individuals into enforcement investigation and disciplinary action. If we perceive that individuals are passive to risk, or are indifferent to issues which warrant inquiry or action, then that suggests those people have not understood or discharged their responsibilities,’ the Policy Statement says. Mr Witts put this succinctly in the Exchange’s latest Enforcement Bulletin – ‘Never let down your guard, speak up if you see something troubling and always aspire to better corporate governance.’

Good governance culture and controls are mitigating factors

On a more positive note, the work of governance professionals, where it is successful in creating a compliance culture within organisations and building effective internal controls, can be a major mitigating factor for the Exchange when it is considering whether to impose sanctions. The Exchange’s revised Enforcement Sanctions Statement (Sanctions Statement), also published in July this year, makes it clear that the Exchange considers a broad range of factors when considering whether to impose disciplinary sanctions. As you might expect, these factors include the seriousness of the misconduct, the size of any financial benefit gained by the guilty parties and the potential loss or injury caused to other parties. Perhaps less obvious, however, is the range of mitigating or aggravating factors that are also relevant to the Exchange’s sanctions decisions.  Among these factors, the Exchange will look at the relevant company’s internal culture and controls relevant to ensuring Listing Rule compliance and good corporate governance. It will look, for example, at the compliance history of the company and parties involved. Was the misconduct an isolated instance or did it occur over an extended period of time? Was it a repeated offence? Did it evidence an intentional, wilful or reckless disregard for the Listing Rules?  Another key factor here, is whether the companies and individuals involved cooperate with the Exchange’s enquiries or investigation. The latest Listing Rules amendments enhancing the Exchange’s disciplinary powers and sanctions include an explicit obligation for listed companies to provide accurate, complete and up-to-date information and explanation to the Exchange when responding to its enquiries or investigations. The Sanctions Statement also makes it clear that good cooperation will be considered a mitigating factor in sanctions decisions; conversely, any lack of cooperation will be considered an aggravating factor.  This message is backed up in other policy statements issued by the Exchange, including the Policy Statement discussed above and the Exchange’s updated Disciplinary Procedures issued in June 2020. Amongst other things, the updated Disciplinary Procedures now include a ‘fast-track’ approach for dealing with cases involving non-cooperative individuals. The Exchange’s Listing Committee now has the ability to determine such cases without convening a hearing attended by the non-cooperative parties. This allows the cases to be concluded and public sanctions imposed on such individuals more speedily and efficiently. Since the adoption of the updated Disciplinary Procedures, a number of non-cooperation proceedings have adopted this fast-track approach. In addition to cooperation in its investigations, the Exchange also looks favourably on parties seeking to settle enforcement actions, particularly at an early stage, since this speeds up the enforcement process and saves on both cost and time. The Exchange’s revised Settlement Statement, also published in June 2020, sets out guidance on its approach to settlement of enforcement action.  ‘We recommend to all parties involved in enforcement action that they read the Settlement Statement and consider contacting the Enforcement Department at an early stage if they wish to take advantage of an agreed resolution. In doing so, parties should remember that the settlement terms must result in a fair overall regulatory outcome, and any proposal should be formulated with this in mind,’ the Settlement Statement says.  More information is available on the Exchange’s website: www.hkex.com.hk. The Institute’s ECPD programme has been running a series of webinars dedicated to updating governance practitioners on enforcement issues since June this year. The final webinar of the series will be held in October 2021. More information is available on the Institute’s website: www.hkcgi.org.hk.  

SIDEBAR: The salutary effects of good governance

The Exchange’s revised approach to enforcement, as set out in its revised Enforcement Policy Statement (Policy Statement) published in July this year, reinforces the importance of the work of governance professionals in a number of key areas of their function. The Policy Statement highlights a number of aspects of good governance practice relevant to the Exchange’s enforcement work. In particular:

1. building and maintaining effective internal controls against regulatory breaches and misconduct
2. ensuring that directors and managers receive sufficient briefings and professional development necessary to ensure that they have a proper understanding of the issuer’s operations and business, and
3. ensuring the proper keeping of books and records.

The Policy Statement points out that having effective internal controls in place, and regularly reviewed for effectiveness, is a basic requirement and deficiencies in control systems can lead to disciplinary action, even if the deficiencies themselves were not causative of any loss. When considering enforcement action, the Exchange looks at a listed company’s compliance and governance culture and any deficiencies in internal controls will be taken as a red flag. The Exchange also looks at whether individuals in the company are encouraged to raise areas of potential risk or concern and whether these issues are then properly addressed.  Another factor is whether directors and managers have been kept up-to-date through ongoing training and professional development. Regarding the second point above, the Exchange expects directors and managers to have a sound knowledge and understanding of the Listing Rules, as well as their own responsibilities under the relevant regulations and legislation.  Regarding the third point above, the Policy Statement points out that enforcement investigations will often request documentary evidence of steps taken by individuals and listed issuers to discharge duties and comply with the Listing Rules. ‘The absence of such evidence will call into question whether those steps have been taken, the adequacy of the listed issuer’s controls and compliance culture, and whether duties have been properly discharged,’ the Policy Statement says.   

SIDEBAR: Regulatory cooperation 

Another theme of particular relevance to governance professionals in Hong Kong is the trend for greater cooperation among regulatory bodies. The Exchange and the Securities and Futures Commission (SFC), together with other regulatory bodies and law enforcement authorities, have stepped up the level of cooperation in their enforcement work concerning listed companies and relevant individuals.  In particular, the Exchange and the SFC are intensifying their joint efforts to tackle misconduct and improper behaviour related to new listings. A joint statement by the two regulators released in May 2021 notes some problematic issues in recent initial public offerings (IPOs) which suggest the lack of genuine investor interest and call into doubt the existence of an open, orderly and fair market in the shares.  The Joint Statement on IPO-related Misconduct is available from the websites of the Exchange and the SFC (www.hkex.com.hk and www.sfc.hk).