HK regulator fines Potomac Capital for failures to comply with Financial Resources Rules

Hong Kong’s Securities and Futures Commission (SFC) today announces that it has publicly reprimanded and fined Potomac Capital Limited $800,000 due to the firm’s failures to comply with the Securities and Futures (Financial Resources) Rules (FRR).

Potomac is licensed under the SFO to carry on Type 1 (dealing in securities) and Type 9 (asset management) regulated activities.

According to the financial returns submitted by Potomac to the SFC, Potomac had an excess liquid capital of over $5 million from November 2016 to May 2017. A major component of its liquid capital, i.e. “other assets arising from asset management”, was comprised solely of account receivables from two clients.

The evidence shows that Potomac included in its liquid assets certain fees receivables from the clients outstanding and accumulated since around April 2013, which fall outside the length of period (i.e. 1 or 3 months depending on whether the fee receivable has been accrued, billed or fallen due for payment) prescribed under section 35(a) of the FRR. If the aged receivables had been excluded, the liquid capital of Potomac would have been much lower, and Potomac would have had a required liquid capital deficit, varying from $335,000 to $449,000, for four months from February to May 2017.

According to the SFC, Potomac incorrectly included the aged receivables in its liquid assets, and hence overstated its liquid capital, for more than three years as a result of its misinterpretation of section 35(a) of the FRR.

Potomac rectified the breach after the SFC pointed that out to Potomac in or around June 2017.

In determining the disciplinary sanction, the SFC has taken into account a variety of factors, including:

• (a) Potomac had incorrectly included the Aged Receivables in its liquid capital for more than 3 years;
• (b) Potomac has rectified the FRR breach; and
• (c) Potomac’s otherwise clean disciplinary record.