24 Apr 2017

SFC's Manager-In-Charge Initiative

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The Securities and Futures Commission (“SFC”) has brought in new measures to strengthen the concept of holding senior management of a corporation accountable for misconduct. Known as the Manager-In-Charge Initiative (“MIC Initiative”), the new measures seek to spell out precisely who will be regarded as senior management in a licensed corporation. Since 18 April 2017, the SFC has started to accept from licensed corporations and new corporate license applicants information regarding its managers in charge and management organisational charts.

The SFC is the first Asian regulator to adopt a regime to increase the scrutiny of senior management and make them more accountable in Hong Kong’s finance sector. The MIC Initiative follows similar rules which were introduced by the UK Financial Conduct Authority.

Background

Since 2003, it has been a requirement of the SFC before approving a corporate licence application to require a corporation to appoint two Responsible Officers (“ROs”) to be responsible and accountable for good governance and proper behaviour. The RO Regime generally works well although gaps, such as identifying who holds the real responsibility of the running of the company, have sometimes been an issue. In some instances junior executives have been appointed as ROs rather than the controlling minds of an entity and there was no systematic way for the SFC to ascertain the management structure of a firm particularly for core functions which do not constitute regulated activity.

Under the MIC Initiative, senior management of a licensed corporation will include:

(a) directors of a corporation;

(b) ROs; and

(c) managers in charge.

The three categories are not mutually exclusive and may be held simultaneously by an individual.

Who is a Manager in Charge (“MIC”)?

A MIC is an individual appointed by a licensed corporation to be responsible for any of the following functions (“Core Functions”):

  1. Overall Management Oversight;
  2. Key Business Line;
  3. Operational Control and Review;
  4. Risk Management;
  5. Finance and Accounting;
  6. Information Technology;
  7. Compliance; and
  8. Anti-Money Laundering and Counter-Terrorist Financing.

Each Core Function must be taken care of by at least one MIC of a licensed corporation. Depending on the corporation’s size and needs, a Core Function may be jointly managed by more than one individual and an individual can manage more than one Core Function.

The MIC must have sufficient authority and seniority to exert influence in the conduct of their responsible Core Function(s). They should report either directly to the Board of the licensed corporation or the MIC who is in charge of the Overall Management Oversight.

Although a MIC does not need to be an employee, they should not be external service providers who do not hold any positions of authority within the licensed corporation.

Legal liabilities for the senior management

The MIC Initiative builds upon existing regulations and does not impose additional legal liabilities on the senior management.

Under Part IX of the Securities and Futures Ordinance, the SFC may impose disciplinary sanctions on a regulated person who is guilty of misconduct or is considered not fit and proper to remain a regulated person. “Regulated person” includes:

(a) a licensed person;

(b) a responsible officer of a licensed corporation; and

(c) a person involved in the management of the business of a licensed corporation.

The SFC has clarified that “regulated person” includes all senior management because of their involvement in the management of the licensed corporation’s business.

Disciplinary sanctions under Part IX of the SFO are civil in nature. Section 390(1) of the SFO provides the conduct of senior management may also attract criminal liability where the commission of a SFO offence by a corporation is proved to have been aided, abetted, counseled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of the senior management.

New reporting obligations

  1. When applying for a licence under section 116(1) of the SFO, corporations are required to provide the following information:

    (a) information regarding its MIC; and

    (b) its organisational chart depicting its management and governance structure and its business and operational units.

    For each MIC, the SFC expects to be provided with their full name, job title, place of residence, the core function which they are in charge of and the job titles of the persons to whom the MIC reports within the licensed corporation.

  2. Existing licensed corporations must submit (a) and (b) via the SFC Online Portal.

  3. Licensed corporations have a continuing obligation to inform the SFC of any changes in their appointment of the MICs and submit an up-to-date organisational chart within 7 business days of the changes.

  4. MICs who head the Overall Management Oversight and Key Business Line functions have to be approved by the SFC as ROs unless they do not supervise the business of the regulated activities. For the other MICs, SFC’s approval is not required, as long as the licensed corporation ensures that the MIC is fit, proper and qualified to perform their roles.

  5. All MIC appointments need to be approved by the Board of Directors of the licensed corporation. Furthermore, the Board is required to ensure that each MIC has acknowledged their appointment as a MIC and the core function for which they are responsible.

Important dates

17 July 2017 is the deadline for licensed corporations to submit MIC information and organisational charts via the SFC Online Portal.

16 October 2017 is the deadline for MICs who need to be approved as ROs to submit their applications to the SFC.

Action to be taken

Licensed corporations should now be reviewing their employment contracts to ensure that job descriptions will in future take account of an employee’s duties if appointed a MIC. For existing employees, additional documentation will need to be drawn up to record the role and responsibility of the employee as a MIC and where more than one MIC is appointed for a core function, how the role will be split between individuals.

Codes of conduct relating to acceptable standards of conduct as well as disciplinary policies should be updated to set out what it means to be “fit and proper”.

Discussions need to take place with individuals who will be appointed MIC to ensure that they understand and accept their obligations and whether they will receive additional remuneration for their appointment.

On the basis that an employee can buy out his notice period and bring his employment to an immediate end, contractual obligations should be put in place to ensure a smooth transition between an exiting MIC and the handover of his role to his replacement.

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