Compliance slip-up lands Fidelity in the hot pot
Mongolian hot pot is delicious, but can prove a little hard to digest for those not prepared for its spicy offerings. Such is the case not just for the many Hong Kongers who flock to Little Sheep Group hot-pot restaurants, but also for Fidelity.
Hong Kong’s Securities and Futures Commission (SFC) yesterday publicly criticised Fidelity for breaching its code on takeovers and mergers by failing to report dealings in the locally listed stock of Little Sheep.
A Fidelity spokeswoman notes the firm has accepted the public rebuke over trading in Little Sheep Group stock that was not reported properly.
Fidelity – whose corporate name is FIL Investment Management (Hong Kong), trading under the brand name Fidelity Worldwide Investment – increased its holdings in Little Sheep from 8.20% to 8.21% between May 23 and June 1 this year.
This came at a time when the company was subject to a takeover and privatisation offer, necessitating any change in ownership above 5% to be reported. The firm’s compliance system or process failed to note this, although this was publicly mentioned on the Hong Kong Exchange website as well as on offer period tables on the SFC website.
Fidelity itself notified the SFC of the breach once it realised its mistake. The SFC is believed to accept that Fidelity’s trades were on behalf of client portfolios and not involved in any activity that could constitute an attempt to bid for control of Little Sheep.
"There was a human error in the manual checking process and since then we have beefed up our back-up checking process to ensure future compliance with the takeover code,” says the Fidelity spokeswoman.
The firm declined to comment on the nature of the systems it deploys for portfolio compliance monitoring.
Although the breach was an honest mistake, it has led the SFC to single out the firm as an example for the rest of the industry.
Fidelity has agreed to improve the training of its regulatory reporting staff with regard to daily checks and reports; ensure someone checks the SFC’s “offer period tables” and the HKEx announcements page daily; ensure the Bloomberg terminal’s ‘query’ function is used to identify takeover offers; to hire someone to help with daily monitoring; and to enhance the overall compliance system as recommended by an outside counsel.
The SFC notes that when a company is potentially in play, it is especially critical for investment groups to report their dealings accurately as these have the potential to influence takeovers.