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Hong Kong Regulatory Investigations Update
12 January 2021

The Hong Kong Exchange (the “Exchange”) is the frontline regulator of all listing related matters in Hong Kong, with a statutory duty to ensure an orderly and informed securities market in Hong Kong. It fulfils this important role by working closely with other regulators, for example the Securities and Futures Commission (“SFC”) in relation to investigations, enforcement work and legal proceedings.

Number of Investigations*

As shown in the table below, the number of investigations by the Exchange (current as of six months ended 30 June 2020) remains high. The total number of investigations carried out by the Exchange between 2019 and 2020 remained consistent, although when compared with previous years there has been a steady increase.

6 months ended 30/6/2020

6 months ended 30/6/2019

6 months ended 30/6/2018

Number of investigations

84

85

77

Investigations against companies 

75

79

70

Investigations against current and former directors  

56

52

55

Number of directors subject to disciplinary sanctions

43

15

60

* Figures from the enforcement statistics page published on the Exchange’s website as of 3 January 2021.

Amongst the issues under investigation, a high proportion of investigation matters (over 90%) relate to enforcement themes that have been adopted since 2014, which involve (1) directors’ duties; (2) failure to co-operate with an Exchange investigation; (3) inaccurate, incomplete and/or misleading disclosure in corporate communication; (4) failure to comply with procedural requirements in respect of notifiable/connected transactions; (5) repeated breaches of the Listing Rules; (6) delayed trading resumption; and (7) financial reporting delays or internal control/corporate governance issues. These thematic approaches to enforcement activity form the main focus of an investigation and may involve multiple themes and/or involve other issues.

The figures also show that during the first six months of 2020, the Exchange took disciplinary action and obtained public sanctions against 43 directors, a marked increase of 187% from a similar period in 2019.

Compliance Outlook in 2021

The Exchange’s selective and thematic approach to enforcement continued in 2020, with a higher proportion of investigation matters focused on directors’ duties (i.e. whether the directors have applied the skill, care and diligence required and expected under the Listing Rules (in particular, Rule 3.08(f)) and failure to co-operate with an Exchange investigation. As in years past, the Exchange has on various occasions taken enforcement action for failure to maintain proper internal controls and it is expected that the maintenance of proper internal controls will remain a particular focus in 2021. Directors should note that such breaches may result in a statement by the Listing Committee that, in the Exchange’s opinion, the retention of office by the relevant director is or would have been prejudicial to the interests of investors. In the worst case scenario, the director may be removed from office.

For boards including independent non-executive directors, this means that internal control policies and procedures should be reviewed on a regular basis and any identified risk or event of non-compliance should be recorded and training be arranged for staff. Boards including independent non-executive directors should also consider the retention of an internal control adviser to conduct a comprehensive study of its internal control policies as good practice. Any identified internal control failures should be immediately discussed with legal advisers, to maintain a good culture and oversight of corporate governance and proper internal controls to navigate any potential investigation from the outset.

In view of the above, it is important for directors and legal teams involved in Listing Rule compliance and corporate governance in Hong Kong, to ensure they stay knowledgeable of current developments in enforcement at the Exchange.

If you have any queries in relation to the above eNews or would like to know how our lawyers can assist with your listed vehicle including advising independent non-executive directors, our experienced Regulatory & Compliance team will be pleased to assist on strategic advise on investigation and enforcement matters.

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