The Securities and Futures Commission of Hong Kong (SFC) recently introduced the “Senior Management Accountability Regime” (regime), in an effort to make senior managers (particularly those who are not already designated as “responsible officers”1) aware of their responsibilities as senior managers of SFC-licensed businesses and hold them accountable. The regime requires SFC-licensed corporations to: reassess their management structure; appoint at least one individual as “Manager-In-Charge” (MIC) for each of eight “core functions;” and notify the SFC as to the names of each MIC. Most importantly, licensed corporations and individuals should be aware that, as a result of this new regime, the SFC is now able to easily identify and take action against individuals who are responsible for the core function in which any misconduct occurred but had not previously been licensed as responsible officers. This article examines the requirements of the regime and the action items of which licensed corporations should take note ahead of the initial filing deadlines in July 2017.
On 16 December 2016, the SFC issued a Circular2 and related FAQs3 introducing the Senior Management Accountability Regime. The Circular: (a) sets out who the SFC regards as “senior management” of a licensed corporation; (b) introduces the concept of MICs; and (c) clarifies the responsibilities and liabilities of the members of senior management. Under the regime, senior managers (whether or not SFC-licensed) could be held accountable for misconduct committed by the licensed corporation, taking into account the level and area of responsibility of the senior manager, as well as the particular misconduct committed.
Who is Regarded as Senior Management?
“Senior management” of a licensed corporation includes, among others: (a) the members of its board of directors (which includes executive, non-executive and shadow directors); (b) its responsible officers (ROs) and (c) its MICs (see below). An individual can occupy more than one position.
Requirements Relating to the Appointment of MICs
Pursuant to the Circular, licensed corporations must appoint at least one MIC for each “core function,”4 which consist of the following (with details set forth in Annex 1 of the Circular):
(a) Overall Management Oversight (e.g., Chief Executive Officer, President)
(b) Key Business Line (e.g., Chief Investment Officer, Head of Corporate Finance, Head of Equity, Chief Rating Analyst)
(c) Operational Control and Review (e.g., Chief Operating Officer, Head of Operations, Head of Internal Audit)
(d) Risk Management (e.g., Chief Risk Officer, Head of Risk Management)
(e) Finance and Accounting (e.g., Chief Finance Officer, Financial Controller, Finance Director)
(f) Information Technology (e.g., Chief Information Officer, Head of Information Technology)
(g) Compliance (e.g., Chief Compliance Officer, Head of Legal and Compliance)
(h) Anti-Money Laundering and Counter-Terrorist Financing (e.g., Head of Financial Crime Compliance, Money Laundering Reporting Officer)
Who can be an MIC?
The determination of whether an individual is considered an MIC depends on his or her apparent or actual authority with respect to the core function, as well as his or her seniority. The SFC has provided the following attributes and responsibilities as examples.
Attributes Related to Apparent/Actual Authority
- Position of sufficient authority to enable the individual to exert a significant influence on the relevant core function
- Authority to make decisions
- Authority to allocate resources or incur expenditures
- Authority to represent the licensed corporation
Responsibilities Related to Seniority
- Direct reporting to the board of directors or the MIC in charge of the Overall Management Oversight function
- Accountable for the performance or achievement of the business objectives set by the board or the MIC in charge of the Overall Management Oversight function
A licensed corporation should also consider the following when appointing an MIC:
- MICs of the Overall Management Oversight function and the Key Business Line function should be licensed as ROs, as such MICs generally actively participate in or directly supervise the business of the regulated activities.
- Whether or not MICs of other core functions are to be licensed as ROs would depend on whether such core function involves activities that are regulated by the SFC.
- MICs must be “fit and proper” (as discussed below).
- Although MICs need not be employed by the licensed corporation, such individuals should not be external parties merely providing outsourced services – they need to hold a position of authority within the organization.
- MICs can be located in Hong Kong or overseas.
Senior Management Responsibilities
The Circular provides that senior management has the following responsibilities:
- Maintenance of appropriate standards of conduct and adherence to proper procedures by the licensed corporation (General Principle 9 of the Code of Conduct5);
- Proper management of the risks associated with the business of the licensed corporation (paragraph 14.1 of the Code of Conduct); and
- Ensuring adequacy and effectiveness of the licensed corporation’s internal control system.
Consequences for Committing Misconduct or Not Being Viewed as Fit and Proper
The SFC may take disciplinary actions (including imposing fines) against members of senior management (including MICs not licensed by the SFC) if such members are guilty of misconduct or, in the SFC's view, are not fit and proper.6 Further, members of senior management can be held personally accountable for the licensed corporation’s misconduct if (among other things) the misconduct is committed with the member’s knowledge or attributable to such member’s neglect.7 Senior management may also face criminal liability under the SFO if an offence by the licensed corporation is proved to be assisted or approved by the member or attributable to such member’s recklessness.
“Misconduct” is defined8 to include (among other things) an act or omission relating to the carrying on of any regulated activity for which a person is licensed that, in the opinion of the SFC, is or is likely to be prejudicial to the interest of the investing public or to the public interest.
In determining whether a person is “fit and proper,” the SFC will take into account the elements set out in the SFC’s Fit and Proper Guidelines, as well as the past and present conduct of the person. An example of not being viewed by the SFC to be fit and proper would be the failure by an MIC to ensure the licensed corporation’s compliance with the codes or guidelines published by the SFC. As a result, the “fit and proper” requirement can transform minor noncompliance with the broad range of requirements contained in SFC codes and guidelines into a much more serious question of whether an MIC is fit and proper.
Role and Responsibilities of the Board of Directors
The SFC stresses that the board of directors of a licensed corporation has the ultimate responsibility for the conduct, operations and financial soundness of the corporation. This includes determining an appropriate management structure, putting that structure in place and ensuring that each MIC acknowledges responsibility for the core function of which he or she is in charge.
The date of implementation of the new regime is as follows:
(i) 18 April 2017 – commencement of SFC collection of information from licensed corporations as to their management structure and MICs.
(ii) 17 July 2017 – deadline for licensed corporations to submit information as to their management structure and MICs.
(iii) 16 October 2017 – deadline for MICs of the Overall Management Oversight function and the Key Business Line function to obtain approval to become ROs.
Action items for compliance with the new regime include:
- Reviewing management structure, taking into account the core functions;
- Assessing business lines and reporting lines;
- Appointing individuals as MICs of each of the eight core functions and determining their roles and responsibilities;
- Reviewing and (as appropriate) updating policies on corporate governance, internal controls, operations, compliance and other applicable internal policies in light of changes to the management structure, business lines and reporting lines;
- Reviewing employment agreements of MICs to ensure that job descriptions and responsibilities are well defined. Further, notice and termination provisions should cover SFC enforcement actions against the MICs or neglect of their responsibilities; and
- Implementing an appropriate succession plan, particularly in the situation of replacing an MIC whose employment is terminated.
1) “Responsible officers” are the individuals designated by SFC-licensed entities who have primary responsibility for compliance with all applicable standards of conduct, including statutory requirements of the Securities and Futures Ordinance and codes issued by the SFC.
2) Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management.
3) Frequently Asked Questions on Measures for Augmenting Senior Management Accountability in Licensed Corporations.
4) An individual may be appointed as an MIC for more than one core function (subject to the scale of operations and adequacy of controls).
5) Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). The Code of Conduct provides an overall compliance framework for the broad variety of entities that are licensed by the SFC.
6) Section 194 of the Securities and Futures Ordinance (SFO).
7) Section 193(2) of the SFO.
8) Section 193(1) of the SFO.