Member Article

A recent Securities and Futures Commission (SFC) disciplinary action is a reminder of the need for managers to ensure there are systems and procedures in place to meet the short position reporting obligations of the funds that they manage.

The SFC reprimanded and fined an asset manager HK$3.5 million for its failures to ensure short position reports (SPRs) for four collective investment schemes (CISs) under its management were accurate and compliant with the requirements under the Securities and Futures (Short Position Reporting) Rules (SPR Rules). The SFC’s statement of disciplinary action is accessible here.

Summary of short position reporting obligations

Under the SPR Rules, a person with reportable short positions must report these positions to the SFC weekly. A short position is reportable when it concerns designated securities specified in a list maintained on the website of the Stock Exchange of Hong Kong (SEHK) and the net short position (i.e. after offsetting beneficially owned long positions), as a result of on-market sales, reaches or exceeds the lower of the following thresholds:

• 0.02% of the relevant company’s issued share capital listed on the SEHK, or
• a value of HK$30 million.
  
  

Short positions should be calculated at the end of the last SEHK trading day of each week and reportable positions must be reported by the second business day of the next week.

Reporting is done on an individual-entity basis and there is no aggregation within groups. Agents may be authorised to make reports on behalf of the relevant entity (for example, a fund with a corporate structure may appoint its investment manager to report on its behalf), but the relevant entity will remain legally responsible for reporting. Where an investment manager has been appointed to report on behalf of multiple funds that it manages, the reportable short positions of each fund must be calculated and reported separately.

Failures identified in SFC disciplinary action

In the recent case, the SFC found that the manager had prepared and submitted SPRs to the SFC for four CISs between 8 July 2016 and 30 August 2019, but a total of 7,814 short positions held by these CISs were either misstated or omitted in these reports. These misstatements and omissions arose for the following reasons:

1. The manager failed to incorporate the code of a new prime broker in its automated programme, which led to short positions held by the CISs through that prime broker being omitted in calculating the reportable short positions of the CISs;
   
   
2. The manager used the aggregated net short positions of all CISs as the basis for preparing the SPRs and reported all such short positions under the name of one CIS, instead of reporting separately for each CIS; and
   
   
3. In calculating whether the CISs’ short positions exceeded the threshold for reporting, the manager used the market capitalisation of A-shares and non-listed shares of the issuers, instead of the value of the relevant issuer’s issued share capital listed on the SEHK.
   
   

Responsibility of the manager

Although in this case the reporting obligation under the SPR Rules was an obligation of the CISs, the SFC imposed sanctions on the manager because it considered the manager had failed to act competently to ensure the SPRs it prepared would be accurate and compliant with the applicable requirements under the SPR Rules.