The rolling of "bad apples": When will an employee investigation need to be disclosed to the Hong Kong Securities and Futures Commission ?

Introduction 

In February 2019, the Hong Kong Securities and Futures Commission (SFC) announced the implementation of significant amendments to its licensing forms and processes, including in particular, a new disclosure obligation relating to employee investigations. More recently, the SFC published a series of FAQs on 21 May 2019 providing more detail on the scope of the new disclosure obligation and what will be required of licensed corporations going forward.

1. When does an investigation need to be disclosed? 

A licensed corporation (i.e. an entity holding a SFC licence to perform regulated activities) is now required to inform the SFC where a licensed individual (i.e. an individual who holds a SFC licence to perform regulated activities), who has ceased to be accredited to the licensed corporation, was under any investigation commenced by the licensed corporation in the six months before the cessation of accreditation.

‘Investigation’ in this context is widely construed to include an inquiry, review, examination or inspection etc. and could relate to a suspected or actual breach of applicable law, the licenced corporation’s own internal policies or any misconduct which would give rise to concerns about the individual’s fitness and propriety etc.

There is also an ongoing disclosure obligation on licensed corporations to disclose to the SFC any investigation in relation to the outgoing licensed individual after his/her departure, regardless of how long ago the outgoing employee ceased to be an accredited representative of the licensed corporation.

2. How much detail should be provided? 

The licenced corporation is required to provide the SFC with sufficient, meaningful information such that the SFC will have a ‘thorough understanding’ of the nature of the investigation. The information required includes the background to the matter, key dates, duration, the role played by the outgoing employee and the potential impact of the matter on the market and/or clients.

In determining the extent of the information that the licensed corporation should give the SFC in relation to any investigation, the licensed corporation will be faced with a delicate balancing exercise on a case-by-case basis, weighing up its duty of care and its contractual obligation of trust and confidence toward the employee against the need to provide an accurate, balanced and not misleading account of the investigation.

3. If an employee leaves before an investigation is concluded, what happens to the investigation? 

As mentioned above, there is an ongoing disclosure obligation on each licensed corporation to disclose to the SFC, as soon as practicable, where it initiates an investigation in relation to the outgoing licensed individual after his/her departure. Additionally, licensed corporations should update the SFC in relation to any ‘new developments’ relating to an investigation previously disclosed. These requirements (coupled with the probability that the licensed corporation may want to conclude an ongoing investigation for its own internal compliance or wider regulatory requirements), mean that a licenced corporation will likely want to continue and conclude an investigation even after the individual concerned has left the organisation.

4. What can you tell the employee about the disclosure?

The SFC’s FAQs are silent on the question of what a licensed corporation should or can tell the outgoing employee about its disclosure to the SFC. A licensed individual has a general right to make a data access request under the Personal Data (Privacy) Ordinance to require the licensed corporation to share personal data of which that individual is the subject. That right can include access to the disclosure made to the regulator and absent any specific regulatory restriction, the licensed corporation would be required to provide that information to the individual.

Licensed corporations should, however, be alert to any ‘tipping off’ risk where its own internal investigation is part of a wider regulatory focus. This would also feed into the careful planning of and strategy adopted in relation to dealing with the matter and the outgoing employee e.g. if continued employee cooperation is crucial, whether to postpone dismissal and suspend the employee in the meantime.

5. What happens if the employee files tribunal proceedings to dispute the findings? How will the regulatory disclosure affect the outcome of those proceedings?

As explained above, there is an ongoing disclosure obligation on licensed corporations to update the SFC in relation to any ‘new developments’ in relation to an investigation previously disclosed. Depending on the circumstances of the proceedings, the outgoing employee litigating the outcome of the investigation could constitute such a development requiring the licensed corporation to notify the SFC.

Further, there is a risk that an outgoing employee could try to challenge a disclosure made by a licenced corporation by claiming that such disclosure caused or exacerbated a ‘stigma’ against the individual. To address that sort of claim, it will be important for the licensed corporation to demonstrate that it has acted in good faith and used reasonable care in preparing its disclosure to the SFC (and the disclosure was objective, balanced and clear).

As the above discussion shows, the new disclosure obligation can be difficult for licenced corporations to navigate. We can assist you with practical advice in relation to the various ‘balancing exercises’ described above and help suggest best practice tips on planning and conducting an employee investigation, as well as working with the SFC.