Introduction

In our previous newsletter titled “The SFC’s most severe disciplinary actions taken against sponsors” (April 2019 Issue), we discussed about among others the disciplinary actions taken by the Securities and Futures Commission (the “SFC”) against UBS Securities Hong Kong Limited and UBS AG (“UBS”). UBS was reprimanded and fined a sum of HK$375 million due to its failure to discharge its obligations as a joint sponsor in various listing applications, one of which relates to China Metal Recycling Holdings Limited (“China Metal”).

In the recent determination on the case of Cai Hongping v Securities and Futures Commission (SFAT Application No.3 of 2019) (the “Determination”), the Securities and Futures Appeals Tribunal (the “SFAT”) allowed the application for review by Mr Cai Hongping (“Mr Cai”), a former executive officer and managing director of UBS, and ruled to set aside the decision of the SFC to ban him from re-entering the industry for five years. The SFC’s decision in relation to Mr Cai followed its earlier disciplinary actions against UBS for failing to discharge its obligations as one of the joint sponsors in the listing application of China Metal.

In the Determination, the SFAT clarified the different roles between sponsor’s management and the “Principal” (or the “Sponsor Principal”), the latter of whom should take personal responsibility for the failings of the sponsor in listing applications on the Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Further, the SFAT found that the SFC’s findings of facts against Mr Cai could not show sufficient evidence to hold him personally liable as a Principal or Sponsor Principal.

Background

In April 2019, UBS was reprimanded, suspended and fined by the SFC for its failures in relation to China Metal’s listing, including the failure to conduct adequate and reasonable due diligence enquiries and to keep proper written record of the work done in respect of its due diligence investigations.

Subsequently in September 2019, the SFC informed Mr Cai of its preliminary view that, among others, the failings of UBS were to a material degree attribute to the negligence on the part of Mr Cai in his capacity as the leader of the UBS transaction team and as a member of the senior management of UBS. In response, Mr Cai made submissions to the SFC denying he had been the leader or the principal of the UBS transaction team. Nevertheless, on 3 October 2019, the SFC determined that Mr Cai was culpable of misconduct and/or was not a fit and proper person who is licensed by the SFC to carry on regulated activities in the financial industry. Accordingly, to the SFC prohibited Mr Cai from conducting regulated activities for a period of 5 years pursuant to section 196 of the Securities and Futures Ordinance (Cap. 571) (the “SFO”).

Grounds of review

The grounds of review advanced by Mr Cai include, (i) there is no direct and unequivocal evidence or sufficient indirect evidence to prove that he had been appointed as the “Principal” or the “Sponsor Principal” for UBS in relation to China Metal’s listing application; (ii) he did not breach any duties because the extent of his duties of supervision was limited (merely as a member of the senior management); and (iii) the five-year industry ban was excessive and disproportionate. The SFAT conducted the review on a full merits basis as if it was the original decision-maker, and pointed out that the SFC must prove that it is likely than not that its findings were true.

Analysis of the SFAT

Role of the management of the sponsor

Mr Cai did not dispute the finding that he had at all material times been a member of the senior management of UBS. The SFAT was of the view that the management of a sponsor is ultimately responsible for the supervision of all necessary due diligence undertaken in order to ensure compliance with relevant rules, regulations and codes. It was considered that the management has an obligation to ensure that there is no confusion as to division between supervisory and reporting responsibilities.

Although the provision in the fit and proper guidelines for listing sponsors issued by the SFC (the “Guidelines”) in relation to the responsibilities of a sponsor’s management has been repealed after the reform for the new sponsor regime in 2013, the regulators may still expect the management of the sponsor to take a more active role to ensure that sponsor’s obligations have been fully discharged.

Role and appointment of Sponsor Principal

The term “Principal” or “Sponsor Principal”, in the context of the Guidelines, means a responsible officer or an executive officer appointed by the sponsor to be in charge of the supervision of the transaction team. Pursuant to the Guidelines, the Principal should be involved in the making of the key decisions for the transaction team’s work and must be aware of the key risks in such work and responsible for the measures to address them. Persons to carry out functions of a Principal of a sponsor in general must first receive approval from the SFC, before being appointed as the Principal for a particular project.

The internal guidelines issued by UBS (the “UBS Bulletin”) provides for the appointment methodology and functional role of the Principal of the UBS transaction teams. It is required that each of the transaction teams should approach a member of management who already received approval from the SFC, to act as the Principal of that particular team. The functional role of the appointed Principal includes attending all the Equity Commitment Committee meetings (the “ECC Meetings”) to review the general due diligence undertaken by UBS, and signing the correspondence with the Stock Exchange including the listing application and sponsor’s undertakings.

On the case of Mr Cai

Core issue

The SFAT determined that the core issue was whether the SFC could prove on a balance of probabilities that Mr Cai had been appointed as the Principal or co-Principal of the China Metal transaction team. As there was no documentary evidence put before the SFAT, such as internal memo or email, created or kept by UBS to serve as the unequivocal proof of the appointment of the Principal of China Metal transaction team, the determination of the core issue would essentially depend on considering and drawing inferences from conflicting indirect evidence.

Conflicting indirect evidence

On 7 January 2010, UBS submitted to the SFC a report drafted by the UBS Legal & Compliance Department (the “First Report”) as the result of its internal research in response to SFC’s investigation. In the First Report, a Mr Michael Ngai (“Mr Ngai”) was referred to as the “Project Sponsor” of the China Metal transaction team, which means that he was appointed as the Principal as provided in an internal bulletin of UBS issued two years before the listing of China Metal. In comparison, the First Report simply described Mr Cai as a member of senior management. It can be concluded from the First Report that Mr Cai was not the team leader and he only had a general and unspecified role in the workings of the China Metal transaction team as a member of UBS’s senior management.

Later on 20 November 2015, however, a second report written by UBS’s solicitors was sent to the SFC (the “Second Report”) asserting that Mr Cai was the Principal of China Metal transaction based on the fact that he was referred to as the “Principal for this deal” in an internal email exchange for the project written by an Executive Director who was a core execution member of the China Metal transaction team (the “ED”). Apart from the email referred to in the Second Report, some of intra-office correspondence during 2008 and 2009 authored by the ED also indicated that Mr Cai was the Principal of China Metal transaction team. However, in the interview with the SFC in December 2015, the ED responded on the contrary, that Mr Ngai was the main person in executing the China Metal project, whereas Mr Cai was only the “signing principal” of the deal and the members of the China Metal transaction team would not report to him in respect of the day-to-day execution of matters.

With reference to the functional role of the Principal as set out in the UBS Bulletin, Mr Cai and Mr Ngai both signed the “Sponsor’s Undertaking” and the “Sponsor’s Declaration”, which are two important documents for China Metal’s listing application (the “Listing Documents”), and their signatures were placed next to each other and only identified by the position held within UBS. Thus, the SFAT considered these signature endorsements on the face could not show who, if anyone, was signing as the Principal of China Metal transaction team. It was further argued by Mr Cai that he believed he had the authority to sign the Listing Documents because that he had been approved by the SFC to act as a Principal in general, instead of being appointed as the Principal to the listing of China Metal. Mr Cai also agreed with the SFC that he could be said to have acted as a “passive Principal” when he signed the Listing Documents, which meant that his signature is put as part of the formalities of forwarding the listing application if he was approached to do so.

SFAT’s conclusion

The SFAT was of the view that the evidence against Mr Cai was essentially founded on what other individuals believed to be the case at the time, and the individual belief may be subject to distortion in the absence of specific and unequivocal evidence to give convincing support to such belief. Therefore, it was unable to reach any conclusion as to the appointment either by direct consideration of all the evidence or inference from the proven facts. Accordingly, it was concluded that SFC could not meet the standard of proof that it is more likely than not Mr Cai had been appointed as the Principal or co-Principal of the China Metal transaction team and he was aware of that fact. As a result, the SFAT determined that Mr Cai could not be held personally responsible for the failings of the transaction team and the ban against Mr Cai from the industry for five years should be set aside.

Takeaway

The determination of the SFAT has helpfully considered and differentiated the roles of sponsor management and the identity of “Principal” or “Sponsor Principal” who would be personally responsible for the failings of the sponsor in listing applications. The SFAT determination highlights the importance of a clear internal structure of a sponsor firm in relation to a listing project. If there had been clear reporting line, Mr Cai would not have been “mistakenly” identified as the sponsor principal and the 5-year industry ban would not have been imposed in the first place.