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First FCA Enforcement Action for Breach of Short Selling Disclosure Regulations

Posted on 14 October 2020

Asia Research and Capital Management Ltd (ARCM) has been fined £873,118 for breach of disclosure obligations relating to net short positions. Without the 30% discount for early settlement, the fine would have been almost £1.25m.

ARCM is an asset management firm based in Hong Kong. Over a period of more than two years, it built up a net short position in Premier Oil, equivalent ultimately to 16.85% of Premier Oil's issued share capital. This was the largest net short position ever held in a main listed company. Under the 2012 Regulation on short selling and certain aspects of credit default swaps (the SSR), ARCM was under an obligation to (i) report to the FCA when its net short position was equivalent to 0.2% of the issued share capital in the company, and (ii) disclose to the market when it reached the threshold of 0.5%. Thereafter, in respect of both, it was required to disclose each time its position increased by a further 0.1%.

ARCM traded infrequently in EU markets. Based on the third party material it had received about the regulatory context in the UK, it mistakenly considered that derivatives trading (which is what its trades were) did not require notification, as was the regulatory position in the non-EU jurisdictions in which it operated. Accordingly, it failed to disclose its net short positions in accordance with its obligations under the SSR. When it did finally discover that it had been obliged to make notifications, it investigated the position thoroughly and self-reported to the FCA. The upshot was that, in breach of the SSR, it had failed to make 155 notifications to the FCA and 153 disclosures to the public.

The FCA considered that the level of seriousness of the failure was level three (out of the five levels), which resulted in ARCM being fined in the sum of approx. £875,000. This is the first FCA enforcement action for breach of the SSR.

Comment

The case is interesting for two main reasons. The first is that it is clear from the Final Notice that ARCM's errors were entirely innocent and, furthermore, having realised its error, it self-reported. Despite this, the level of penalty was nevertheless reasonably significant. This shows the importance that the FCA places upon reporting, both to it and to the market.

Beyond that, what is interesting is the way the FCA deals in the Notice with the issue of timeliness of self-reporting. The fact that ARCM had self-identified all of its failures to comply with the SSR was considered to be a mitigating factor in assessing penalty. Set against that, however, the fact that it did not inform the FCA promptly on discovering its failure to comply with its obligations, but waited until it had reviewed and collated the data for disclosure, was considered to be an aggravating factor. This aggravating factor in respect of the timing of self-reporting is identified by the FCA in the Notice as one of the three reasons why the FCA considered ARCM's failings to be particularly serious.

(For those keen to get an insight into the FCA's thinking on the timeliness of self-reporting, this is the timeline:

  • On 29 October 2019, ARCM had become aware of the obligation to report short selling of swaps and that its net short position might be subject to those obligations. It sought to confirm this through further analysis.
  • By 8 November 2019, it had determined that it did have an obligation to make the disclosures.
  • However, it was not until 29 November 2019 that it notified the FCA that it had failed to make a significant number of notifications and that it would be submitting these short position notifications to it as soon as it could.
  • On the evening of 3 December, it submitted to the FCA 155 notifications in relation to its net short position, of which it had determined that 153 had been subject to an obligation to disclose.)
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