“Ramp and dump” or “pump and dump” schemes continue to attract significant press coverage and are an enforcement priority for the Securities and Futures Commission (SFC) in Hong Kong. These schemes do not only have penalties for the fraudsters, but could also have significant implications for SFC-licensed corporations (LCs) who are the gatekeepers for the financial system. Recent statements by the SFC and The Stock Exchange of Hong Kong Limited (SEHK) suggest that the impact of these schemes is not limited to secondary trading and may extend to initial public offerings (IPOs). We discuss the key stages of these schemes, the primary regulatory obligations of LCs and the enforcement trends of the SFC.
The SFC has reinforced in its latest Annual Report and Notification Circular that ramp and dump schemes remain an enforcement priority and that it does not tolerate any form of market misconduct. To reduce the risk from these types of schemes, LCs should do the following:
- Ensure that all employees are aware of, and comply with, the applicable regulatory requirements and internal processes and procedures.
- Review client onboarding and ongoing monitoring processes to ensure any high-risk client and unusual transaction patterns are identified in a timely manner with follow-up actions being taken promptly.
- Provide regular and ongoing reminders and trainings to staff on the red flag indicators and build in the red flag identification, escalation and blocking mechanisms into the trading and account monitoring programs.
- Implement processes to identify any potential market misconduct by clients or employees at an early stage to enable timely escalation and reporting to the regulators.
- Ensure that requests for information from the regulators are addressed in a timely and thorough manner.
In the IPO context, LCs should monitor the ongoing SFC and SEHK commentary regarding the development of the Proposed Code and “Sponsor Coupling” proposal for further developments and apply professional skepticism to ensure the following:
- The pricing of the IPO shares is fair and reasonable.
- Consideration is given to whether existing processes and procedures are sufficiently robust to prevent any of the potential misconduct that has been highlighted by the SFC and SEHK.
Click here to access the full alert.