Hong Kong Financial Industry Employee Conduct: SFC Restrictions on Personal Trading Activities

In late 2024, the Securities and Futures Commission (SFC) published its annual enforcement report, revealing that 14 disciplinary actions in the prior year involved failures by licensed corporations to supervise employee personal trading. This represents a 40% increase from the previous two-year average. The SFC has signalled that 2025 will see intensified thematic inspections focused on personal account dealing (PAD) controls, particularly at mid-sized brokers and asset managers. For compliance officers and HR professionals at licensed corporations, the message is clear: the era of treating employee trading declarations as a box-ticking exercise is over. The SFC now expects demonstrable, automated surveillance and a culture where personal trading restrictions are understood and enforced at every level. This article outlines the core regulatory framework under the SFC’s Code of Conduct, the specific restrictions on personal trading, and the practical steps firms must take to comply.

The Regulatory Foundation: The SFC Code of Conduct and the Manager-In-Charge Regime

The primary source of obligations regarding employee personal trading is the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code). Two specific paragraphs are critical: paragraph 10.1, which imposes a general duty on licensed corporations to ensure their employees act with due skill, care, and diligence, and paragraph 12.3, which directly addresses personal trading.

Paragraph 12.3: The Core Obligation

Paragraph 12.3 of the Code states that a licensed corporation must establish and implement written policies and procedures to control personal trading by its employees. The legislation provides that these policies must, at a minimum, cover pre-trade clearance, post-trade reporting, and a prohibition on trading in certain securities, such as those on the firm’s restricted list or those in which the firm is actively trading for clients. The SFC’s 2022 Thematic Inspection Report on Personal Account Dealing found that 38% of inspected firms had inadequate pre-trade clearance systems, often relying on manual email approvals that were not auditable.

The Manager-In-Charge (MIC) Accountability

The SFC’s Manager-In-Charge (MIC) regime, introduced in 2017 and refined in subsequent circulars, directly ties personal trading failures to individual senior management. Under this regime, each licensed corporation must designate specific MICs for core functions, including the MIC for Compliance. The SFC’s Guidelines on the Manager-In-Charge Regime (2023 update) explicitly state that the MIC for Compliance is responsible for ensuring the firm’s PAD policies are effective. If a firm’s surveillance system fails and an employee engages in prohibited trading, the SFC can take disciplinary action against the MIC personally, not just the corporation. In 2024, the SFC publicly reprimanded a compliance MIC at a small asset manager for failing to implement automated pre-trade checks, despite the firm having a written policy.

Step 1: Defining the Scope of Prohibited Personal Trading

The first compliance step is to define what constitutes personal trading and what is prohibited. The SFC does not mandate a one-size-fits-all list. Instead, the legislation provides that the scope must be “reasonable and appropriate” given the firm’s business model.

Covered Persons: Who is an “Employee”?

The Code defines “employee” broadly to include all directors, officers, and staff of the licensed corporation, as well as any associated person, such as consultants or temporary workers who have access to non-public information. The SFC’s 2021 Circular on Personal Account Dealing clarified that the definition also extends to immediate family members living in the same household, unless the firm can demonstrate effective controls to prevent information leakage. Practical step: audit your employment contracts and staff handbooks to ensure the definition covers all these categories.

Prohibited Transactions: What is Banned?

The core prohibition under paragraph 12.3 covers transactions in securities where the firm has a “restricted list” or a “watch list”. The court procedure is that a firm must maintain these lists. The restricted list typically includes securities in which the firm is:

• Acting as a market maker or placing agent.
• Providing investment banking or advisory services.
• Holding a material position for a client.

Additionally, the SFC’s Code of Conduct prohibits employees from trading in initial public offerings (IPOs) without prior written approval from the compliance officer. A 2023 SFC enforcement case involved a broker who traded in an IPO for which his firm was the lead underwriter, resulting in a $1.5 million fine and a two-year suspension.

Step 2: Implementing Pre-Trade Clearance and Post-Trade Reporting

Once the scope is defined, the firm must operationalise the controls. The SFC expects a two-tier system: pre-trade clearance and post-trade monitoring.

Pre-Trade Clearance: Automated vs. Manual

The SFC’s 2022 thematic report strongly recommended automated pre-trade clearance systems. Manual email-based systems are considered high-risk. An automated system should:

• Block trades in restricted list securities in real-time.
• Flag trades in watch list securities for compliance review.
• Require the employee to submit a clearance request via a centralised platform, not via personal email.

The legislation provides that records of all clearance requests and decisions must be retained for at least seven years under the Securities and Futures (Keeping of Records) Rules (Cap. 571 sub. leg.). Failure to maintain auditable records was a contributing factor in the 2024 reprimand of the compliance MIC mentioned earlier.

Post-Trade Reporting: T+1 Declaration

Post-trade, the Code requires employees to submit a personal trading declaration within one business day (T+1) of the trade. This declaration must include:

• Security name and code.
• Transaction date, price, and volume.
• Whether the trade was pre-cleared.

The SFC’s Code of Conduct also mandates that the compliance officer must review these declarations on a monthly basis and investigate any discrepancies. A 2023 SFC survey found that 25% of firms did not conduct monthly reviews, relying instead on quarterly or annual checks.

Step 3: Enforcement and Escalation Procedures

A written policy is insufficient without enforcement. The SFC expects firms to have clear escalation and disciplinary procedures for breaches.

Internal Reporting and Investigation

The policy must specify that any breach of the personal trading policy must be reported immediately to the compliance officer. The compliance officer must then conduct an investigation and, if a breach is confirmed, escalate to the board of directors or the MIC for Operations. The SFC’s Guidelines on the Manager-In-Charge Regime require that the board be notified of any material breach within five business days.

Disciplinary Consequences

The SFC does not prescribe specific penalties, but it expects firms to impose proportionate sanctions. These can range from a written warning to termination of employment. In 2024, the SFC fined a licensed corporation HK$3 million for failing to take disciplinary action against a senior trader who repeatedly failed to submit post-trade declarations. The SFC’s enforcement notice stated that the firm’s inaction demonstrated a “lack of a culture of compliance”.

Step 4: Annual Training and Policy Review

The SFC’s Code of Conduct does not explicitly mandate annual training, but the SFC’s 2022 thematic report strongly recommended it. The court procedure is that training must be documented and tailored to different roles.

Training Content

Training must cover:

• The definition of personal trading and who is covered.
• How to use the pre-trade clearance system.
• The consequences of non-compliance, including potential SFC disciplinary action.

The SFC’s 2023 Circular on Staff Training noted that firms should provide role-specific training. For example, investment bankers must receive additional training on restricted lists during M&A activity, while traders must receive training on market abuse and front-running.

Policy Review Cycle

The policy must be reviewed at least annually, or more frequently if there is a change in the firm’s business model or a regulatory update. The SFC’s 2024 enforcement report highlighted that 30% of firms had not updated their PAD policies since 2020, despite significant regulatory changes, including the introduction of the MIC regime.

Actionable Takeaways

1. Automate your pre-trade clearance system by Q2 2025 to meet the SFC’s expectation of real-time, auditable controls, and avoid manual email approvals that are now considered a red flag in thematic inspections.
2. Expand your definition of “employee” in your personal trading policy to include immediate family members living in the same household, and document how you will monitor these accounts.
3. Conduct a monthly review of all post-trade declarations, not a quarterly or annual one, to comply with the SFC’s expectation under paragraph 12.3 of the Code.
4. Ensure your compliance MIC has direct oversight of the personal trading surveillance system and is prepared to report any material breach to the board within five business days.
5. Schedule an annual, role-specific training session on personal trading rules for all staff before the end of 2025, and retain attendance records for at least seven years.

This does not constitute legal advice. Consult a solicitor for your specific case.