The UK Financial Conduct Authority (FCA) has published a final notice fining Asia Research and Capital Management Ltd (ARCM) for breaches of short selling disclosure rules. Notably, this is the first time that the FCA has taken enforcement action in relation to the Short Selling Regulation 2012 (SSR), although it has regularly issued fines for other notification and reporting failures. This case provides some useful compliance reminders that extend beyond the SSR context and will be relevant to most regulated firms.
ARCM is an alternative asset management firm, headquartered in Hong Kong and dealing primarily in Asian debt and equity securities; its trade in EU markets is infrequent. Between 24 February 2017 and 5 July 2019, ARCM built up a very substantial short position in Premier Oil plc, a company listed on the London Stock Exchange. Indeed, by the end of this period ARCM had the largest net short position ever held in a UK-listed company (16.85% of Premier Oil's issued share capital).
The SSR requires firms to disclose net short positions above certain thresholds to the FCA. Short positions over 0.5% of the issuer's share capital must be announced to the public. Certain increases in these positions must also be disclosed. Holdings in derivatives, such as swaps and contracts for difference, with equivalent effects to short positions in shares must be included in the disclosure.
ARCM failed to make 155 notifications to the FCA and 153 public disclosures in relation to its net short position in Premier Oil. It was not until December 2019 that it finally made the required notifications and disclosures.
There are two points from the final notice that are of general significance to firms:
- As it rarely traded in the EU, ARCM was unused to the EU/UK regulatory framework. It relied on third party materials which gave an indicative (and incomplete) list of instruments caught by the SSR, rather than taking legal advice on whether derivatives were within scope. There is a clear message here for international firms that do not have everyday contact with the EU/UK regulatory regime. That being said, ARCM had no history of non-compliance, which was counted in its favour as a mitigating factor.
- A perennial issue for firms who become aware of an actual or suspected breach is how much diligence, data gathering etc. they can or should do before notifying the FCA. ARCM took 11 days to determine whether they were required to notify, then another 21 days to collect and verify the data before notifying the FCA. The FCA considered that the length of the latter period aggravated the seriousness of the offence, despite the delay partly being caused by last year's Hong Kong protests which prevented ARCM and its advisers accessing their premises. This serves as a useful reminder that, whilst it will normally be acceptable for a firm to verify that there has been a breach and to obtain preliminary data on its likely extent, the firm should carry out this exercise as a matter of urgency and notify the FCA as soon as it understands the broad outlines of the breach.
One final point of interest relates to the FCA's approach to the financial penalty. The FCA's starting point for SSR fines is to apply a sliding percentage scale (from 0% to 1% depending on the seriousness of the breach) to the cumulative value of the total short position. In relation to ARCM, the FCA considered that the starting point was disproportionately high, as all of the breaches had stemmed from the same root cause, and reduced it by the unusually low amount of 25%. Most previous disproportionality reductions have been of higher percentages, perhaps suggesting that the FCA was only comfortable applying such reductions where the starting point was clearly well outside a proportionate range. Greater flexibility on the FCA's approach to fines would be welcome, and it will be interesting to see if this is a sign of a general change in its approach.