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FCA Fines Former Chairman of Convatec for Unlawful Disclosure of Inside Information

September 7, 2022

by Mark Taylor and Kanika Mathew

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GENERAL

The Financial Conduct Authority (FCA) which regulates financial services and markets in the UK has fined Sir Christopher Gent, the former non-executive Chairman of ConvaTec Group Plc (the Company), for unlawfully disclosing inside information in breach of Article 14(c) of the EU Market Abuse Regulation (EU MAR).

Unlawful disclosure arises where a person discloses inside information otherwise than in the normal exercise of an employment, a profession or duties. In this case, the inside information, which related to (i) an impending revision of the financial guidance issued by the Company for its full year and (ii) the likely retirement of the Company’s CEO, was disclosed to two shareholders of the Company two days prior to the formal announcement of the inside information.

It was accepted that the Chairman believed that he was acting in the best interests of the Company and did not profit in any way from his actions. However, on the facts, the FCA was satisfied that the information disclosed was inside information and that the disclosures were not made in the normal exercise of the duties of the Chairman and it imposed a penalty of £80,000 for market abuse.

The Final Notice serves as a helpful reminder on (i) what constitutes inside information and (ii) the circumstances in which inside information can legitimately be shared on a selective basis.

THE FACTS

In the announcement of its year end results for 2017, the Company had provided financial guidance for 2018 with revenue growth of 2.5% to 3.0% and an adjusted EBIT margin of 24% to 25%. This guidance was reaffirmed at the time of publication of its interim results which also indicated that the Q3 trading update would be issued on 31st October 2018.

On 28th September 2018, during the course of a routine board meeting to review the Q3 financials and the full year financial guidance, the board was made aware that an important customer of the Company intended to reduce its orders through to the end of the financial year. Over the ensuing days, the board took steps to obtain clarity on the scale of the reduction and its likely implications on the Company’s financial guidance to the market. The Company also consulted with its brokers on the actions to be taken.

By 9th October, it was clear that the reduction in orders would in all likelihood take the Company below the guidance it had given (although work was continuing with a view to understanding the best and worst case outcomes). In an account of a meeting between senior management and the brokers that day the CEO said that advice was given that the information available to the board was not precise enough to trigger an announcement to the markets and that more information was required.

On 10th October, the CEO indicated that he was considering retirement subject to agreeing satisfactory terms with the board.

During the course of the afternoon of 10th October, the Chairman made private calls to two of the Company’s major shareholders in which he disclosed that the Company expected to make an RNS announcement on Monday 15th October, depending on the board’s analysis and that the Company was expected to say that it would be revising guidance and that the CEO was retiring.

The Chairman indicated to the FCA that he had imposed an obligation of confidentiality and no-dealing on the individuals he spoke to and that the main purpose of the conversations was to inform them of the likely retirement of the CEO. He also explained that he did not want to surprise shareholders of scale with announcements.

There are two additional pieces of factual information which are relevant to these disclosures. First that the first shareholder (Shareholder A) was one of the Company’s largest shareholders. Not only did that shareholder have a relationship agreement with the Company which imposed confidentiality and no-dealing obligations, but it had also exercised a right under that agreement to appoint a director to the board of the Company), and, second, that the other shareholder who received a call (Shareholder B) had, on 8th October, asked its brokers to make enquiries with a view to purchasing a large block of the Company’s shares, although no order had been placed. Subsequent to the call, Shareholder B put that request on hold.

On 15th October, the Company released two separate RNS announcements, one relating to the Q3 numbers and a downgrade of the full year financial guidance and the other dealing with the resignation of the CEO. Following the simultaneous release of the announcements, the Company’s share price dropped significantly.

FCA NOTICE

The FCA focussed on the two calls made by the Chairman.

The critical issues to be established were:

  • whether the information communicated by the Chairman was in fact inside information; and
  • whether that information had been unlawfully disclosed.

Was the information “inside information”?

The definition of “Inside Information” (Article 7(1) of EU MAR) is:

“Information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”.

One of the representations put forward by the Chairman was that the information he disclosed was not inside information within the scope of Article 7 of EU MAR as it was not “precise” and was “fundamentally unsuitable for announcement” at the time of disclosure.

The FCA considered whether the information was “precise” and rejected this argument because:

  • Article 7(2) of EU MAR specifically states that information will be treated as being “precise” if “it indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effects of that set of circumstances or event on the prices of the financial instruments”; and 
  • at the time of the disclosure, there was a realistic prospect that both the revenue growth guidance would be revised and the CEO would retire, notwithstanding that the board awaited further clarity on the Company’s financial position and had not yet received the CEO’s retirement letter. The FCA concluded that this was sufficient to meet the “reasonably expected” element in Article 7(2) and the information was also specific enough to enable a conclusion to be drawn as to its possible effect on the price of the Company’s shares (noting that the legal principle has already been established that there is no need to conclude whether the price movement would be up or down). The FCA specifically noted that the fact that the CEO still had to agree terms of his exit did not mean that his retirement was not a realistic prospect.

The FCA also emphasised that information does not have to be in a state which is ready to be announced for it to constitute inside information. It merely has to meet the core requirements of the definition, namely that it is precise and that if made public it would be likely to have a significant effect on the price of securities. It should be noted that the obligation to announce Inside Information (Article 17(1) of EU MAR) which provides that “An issuer shall inform the public as soon as possible of inside information which directly concerns that issue, and that that issuer shall ensure that the inside information is made public in a manner which enables fast access and complete, correct and timely assessment of the information by the public”. The requirement to announce “as soon as possible” anticipates that it may take time to get the information to the point where it is sufficiently complete and correct to enable a timely assessment to be made by the public. Specifically, the FCA agreed that the Company did not have to make an announcement to the market just because there was a prospect of the CEO retiring since, as mentioned above, Article 17(1) does not require the immediate publication of inside information.

In addition to the requirement for it to be “precise” (discussed above), the definition of inside information also requires it to be information which “if it were made public, would be likely to have a significant effect on the prices of …. financial instruments …”. The use of the word “significant” in the terminology of EU MAR is, frankly, unhelpful since Article 7(4) of EU MAR deems this to be the case whenever that information is “information a reasonable investor would be likely to use as part of the basis of his or her investment decisions”. The bar for meeting this test is therefore a very low one and the FCA was satisfied that it had been met in this case. In any event, the fact that, following the release of the RNS announcements, the Company’s share price fell from 224.2 pence to 175 pence (and closed at 150 pence) rendered any debate on the point academic.

Was the information lawfully disclosed?

Article 10(1) of EU MAR provides that:

“Unlawful disclosure of inside information arises where a person possesses inside information and discloses that information to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties”.

The Chairman argued that he had disclosed the likely developments in the normal exercise of his employment, profession or duties citing that “he did not want to surprise shareholders of scale with announcements” and alluding to a broader role to consult with shareholders.

The FCA rejected these and other arguments and concluded that:

  • the disclosures were not reasonable or necessary to be made in order for the Chairman to perform his proper functions. Note that while the FCA accepted that shareholder engagement was part of the duties of the Chairman (indeed EU MAR provides that discussions of a general nature regarding business and market developments are permissible between shareholders and management (Recital 19, EU MAR), disclosing inside information was not consistent with the objectives of EU MAR which seeks to prevent “unfair advantage being obtained from inside information to the detriment of third parties who are unaware of such information”;
  • the imposition of confidentiality and no-dealing requirements could not legitimise the disclosures;
  • there was no evidence of it being necessary for the Chairman to consult with individuals at Shareholder A and Shareholder B. In the case of Shareholder A, the FCA noted that that shareholder already had a nominee director on the board to whom the Chairman could have legitimately disclosed the information, but he chose to speak to another individual, and, in the case of Shareholder B, the disclosure was particularly inappropriate given that the Chairman was aware of Shareholder B’s active intention to build a more significant shareholding in the Company; and
  • there was no justification for the timing of the disclosures, which took place at least two working days before the Chairman believed any announcement would be released.

Was following the advice of in-house legal and the Company’s brokers a defence?

The Chairman pointed out that he had mentioned his intention to make the advance disclosures to an executive in the Company charged with giving legal and compliance advice and at no point was he advised against making the calls. Additionally, one of the brokers engaged by the Company had actually encouraged him to make the call to Shareholder B.

The FCA was of the view that it was not sufficient for the Chairman to place reliance on these matters. Given his own considerable experience and his position, and the fact that he had recently received external training on EU MAR, he ought to have realised that it was not in the normal exercise of his employment, profession or duties to make the disclosures, and that he was being negligent in doing so. Additionally, he should have obtained clear, formal advice regarding the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom, before making the disclosures.

Whilst the FCA acknowledged that the Chairman believed that the disclosures were made in the best interests of the Company and that he had not made, or intended to make, any personal gain pursuant to such disclosures, it conclusively held that these matters did not constitute a defence to market abuse.

BEST PRACTICES

The FCA’s finding of market abuse and the imposition of a financial penalty (as opposed to the alternative sanction of a public censure) underline the FCA’s determination to pursue its statutory objective to enhance the integrity of the UK financial system including by taking action to prevent market abuse. The FCA’s Decision Procedure and Penalties Manual states that the principal purpose of imposing a penalty is to promote high standards of regulatory and/or market conduct by deterring persons who have committed breaches from committing further breaches, helping to deter other persons from committing similar breaches and demonstrating generally the benefits of compliant behaviour.

The decision underlines the need for listed companies to review their policies and procedures for dealing with inside information. In terms of “Best Practices”, we recommend the following:

  • the adoption and regular review of written policies for the treatment of inside information. Such policies should:
    • emphasise the need to obtain clear and formal external advice on what constitutes inside information and on whether there are circumstances that render it legitimate to make a selective disclosure of such information in advance of any public announcement. Had such advice been sought and obtained in this case, a finding of negligence would have been significantly harder to establish;
    • onote that an internal decision to classify or not classify information as inside information in line with such policies will not necessarily be recognised by the FCA who will make a determination on the facts of each case;
    • emphasise that information does not need to be at the point where it can be announced before it becomes “inside information”;
    • explain the formal wall-crossing procedures that should be followed in cases where the Market Abuse Regulation (as now incorporated into our national law) permits selective disclosure (for example in the context of a placing, where an existing shareholder is to be approached as a possible placee);
    • require written records to be kept of internal discussions and communications relating to inside information; and
    • encourage the board and senior executives to keep in mind the “level playing field” principle which is central to the legislation. A key question must always be whether a proposed disclosure of information on a selective basis would confer an advantage on the recipient or be to the disadvantage of others.
  • the provision of regular training for members of the board and senior executives on the concept of “inside information” and how it should be treated.

Read the full text of the Formal Notice.

ASK DORSEY LONDON

Please contact Mark Taylor, Kate Francis or Kanika Mathew for further information.

This e-bulletin is issued to provide general guidance on the above topic. It is not comprehensive or exhaustive and does not constitute legal advice given by this Firm.

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The Court of Appeals rejected a simple headcount approach, instead explaining that the state had a legitimate interest in protecting residents’ economic well-being as a whole. In any event, the Court of Appeals held that if restitution was not appropriate under the state’s parens patriae authority, then it would still be appropriate under the Attorney General’s enforcement powers under Minn. Stat. § 8.31. The decision reinforces that the broader and more sustained the deceptive advertising, the stronger the case for restitution to protect Minnesotans’ economic interests. Civil Penalties Accrue Per Violation, Not Per Defendant The Court of Appeals finally rejected W&A’s claim that the Attorney General’s enforcement powers under Minn. Stat. § 8.31 permit only civil penalties of up to $25,000 for each defendant. Rather, the Court of Appeals explained that penalties are limited to $25,000 per violation. Multiple violations can therefore produce substantially greater penalties. The Court of Appeals also rejected the argument that restitution made penalties unnecessary: repaying consumers does not eliminate the need to address gains from deceptive conduct and deter future violations. Final Takeaways Align every consumer-facing communication. Broad and extensive marketing campaigns can expose businesses to stronger enforcement standards under the MCFA and MDTPA, making it critical that consumer communications remain accurate and consistent from the first advertisement through the final sale. Plan for layered enforcement exposure. Penalties under the MCFA and MDTPA can add up quickly: W&A, Wall, and Yates ultimately faced more than $6 million in civil penalties, restitution, and attorneys’ fees. The decision continues a line of Minnesota cases recognizing the Attorney General’s broad consumer-protection authority. Details matter. Although the Attorney General’s enforcement power is broad, it is not boundless. As the Court of Appeals explained, issues of causation, the effectiveness of contractual disclaimers, and the availability of restitution and civil penalties all turn on the specific facts of the case. Effective advocacy at trial and on appeal is critical to developing the facts relevant to liability and damages.

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Separately, operators could demonstrate compliance with the operational NIE requirement by making repairs as soon as practicable, with an initial repair attempt within five days and final repair within 30 days, or by qualifying for the existing delay-of-repair provisions. A deviation of the operational requirement would occur if the applicable repair deadlines are not met and the delay-of-repair provisions do not apply. The proposal also establishes a new framework for addressing recurring or “chronic” emissions events. After the third emissions event or defect from the same cover or CVS within a year, the owner or operator would be required to conduct an investigative analysis within 10 days to determine whether the underlying cause relates to equipment design, operation, maintenance, or prior repair efforts. The results of that investigation would have important compliance implications. If recurring emissions are attributable to a design flaw, EPA would treat the issue as a deviation of the design requirements. If the emissions result from inadequate prior repairs, the deviation would be attributed to the repair requirements. If operations, maintenance, or other site practices are responsible, the deviation would be classified under the operational requirements. EPA would also require implementation of corrective measures identified through the analysis, including design modifications within 90 days and operational or maintenance-related corrective actions within 30 days. Taken together, these revisions would shift the NIE standard away from a framework in which the mere presence of emissions may establish noncompliance and toward one that focuses on whether operators identify emissions, complete timely repairs, investigate recurring problems, and address the root causes of repeated emissions events. IV.    Solicitation of Comment on “Legally and Practicably Enforceable” Standard EPA is also soliciting comment on the definition of “legally and practicably enforceable” (“LPE”), which industry has identified as one of the more problematic existing requirements. Under the 2024 rule, EPA adopted an interpretation of LPE that many commenters argued effectively disqualifies numerous state regulatory programs, permits, and other federally enforceable mechanisms from serving as the basis for remaining below applicable Subpart OOOOb storage tank thresholds. In particular, stakeholders have asserted that the current LPE framework makes it difficult for state air permitting programs and other state regulatory requirements to satisfy EPA's criteria, thereby causing more storage tanks and other emission units to remain subject to Subpart OOOOb requirements than would otherwise be the case. EPA now requests comment on whether its current interpretation of LPE is overly restrictive and whether alternative approaches would better account for the manner in which state permitting and regulatory programs are administered and enforced. The request is significant because a broader interpretation of LPE could allow a wider range of federally enforceable state permits and regulatory requirements to satisfy exemption criteria under OOOOb, potentially reducing the number of storage tanks and other sources subject to direct NSPS regulation. As a result, the LPE issue has implications that extend beyond compliance mechanics and could materially affect the scope of sources regulated under the federal methane program. V.    Revised Requirements for Marginal Wells EPA is also proposing significant revisions to the treatment of lower-producing wells under Subparts OOOOb and OOOOc. The agency notes that marginal wells constitute a substantial portion of the nation’s producing well inventory but account for a relatively small share of overall production. At the same time, EPA discusses studies estimating that marginal wells contribute a disproportionate share of methane emissions from oil and natural gas production. The agency is evaluating whether the 2024 rule appropriately accounts for the operational characteristics, emissions profiles, and compliance costs associated with these wells. To address those concerns, EPA is proposing two alternative approaches to well-site subcategorization. Under the first option, EPA would distinguish between marginal and non-marginal well sites. EPA proposes to define a marginal well as a well that produced no more than 15 barrels of oil equivalent (“BOE”) per day over the prior 12-month period and a marginal well site as a site consisting exclusively of marginal wells with total site-wide production of no more than 15 BOE per day over the same period. EPA is also soliciting comment on whether marginal wells should be further subdivided based on production levels, including a potential distinction between sites producing 6 BOE per day or less and sites producing more than 6 BOE but no more than 15 BOE per day, which could result in additional regulatory flexibility for the lowest-producing wells. Under the second option, EPA would distinguish between conventional and unconventional well sites and tailor requirements based on that classification, including reduced requirements for conventional wells. The agency is seeking comment on which framework better reflects the operational and emissions characteristics of different well sites, as well as whether additional subcategories should be established within the marginal-well population and the extent to which compliance requirements should differ among categories. VI.    LDAR, Pneumatic Controllers, Control Device Monitoring, and Facility Modifications EPA's proposal also includes several targeted revisions to the 2024 rule's leak detection and repair (“LDAR”) requirements. Most notably, EPA proposes additional flexibility in the use of advanced monitoring technologies and seeks to move away from compliance frameworks that rely heavily on a single detection method. The agency is proposing changes intended to facilitate the use of multiple monitoring technologies, including optical gas imaging and other alternative detection approaches, and is seeking comment on whether technology-neutral compliance options can achieve equivalent emissions reductions at lower cost. EPA also proposes revisions for components and equipment that are particularly difficult to monitor using conventional LDAR methods, reflecting concerns that certain 2024 requirements may not be practical or cost-effective in the field. More broadly, EPA questions whether some of the monitoring frequencies adopted in 2024 appropriately balance compliance burdens and emissions-reduction benefits and seeks comment on additional opportunities to tailor LDAR obligations based on emissions risk and source characteristics. EPA also proposes technical revisions to requirements governing control devices and related equipment. These include changes addressing continuous pilot-flame requirements, flame-monitoring data deviations, control-device alerts, visible-emissions test conditions, temporary or backup control devices, temporary process controllers, and control-device categories. The agency’s stated objective is to provide additional compliance flexibility while maintaining appropriate emissions controls. The practical effect will depend on the final requirements and the equipment and circumstances to which each amendment applies. The proposal also addresses pneumatic controllers and equipment leaks at gas processing plants. For certain high-pressure process controllers at transmission compressor stations, EPA proposes a separate regulatory approach based on its reassessment of technical feasibility and cost. The proposal should not be read as establishing a general exemption for pneumatic controllers across the industry. EPA also proposes changes to other equipment-specific requirements, including requirements applicable to pumps, storage vessels, and equipment leaks at gas plants, in response to concerns raised following promulgation of the 2024 rule. Finally, EPA proposes changes to certain requirements governing liquids unloading and other well-site operations, as well as technical corrections and clarifications to the existing regulatory text. These provisions form part of EPA’s broader effort to address implementation concerns and reassess the costs and expected emissions reductions associated with selected requirements in the 2024 rule. Operators should evaluate the specific proposed amendments applicable to their facilities rather than assume that the proposal would provide across-the-board relief from existing monitoring, equipment, or control-device obligations. VII.    Implications for States and Future Congressional or Administrative Action EPA’s proposal would substantially revise several consequential elements of the 2024 methane rule, but it would not eliminate regulation of existing oil and natural gas sources under Clean Air Act § 111(d). As a result, states remain subject to the existing obligation to develop and submit plans for existing sources. If the proposed revisions are finalized, states currently developing those plans may need to reevaluate key program elements, including requirements relating to associated gas, well-site subcategories, the Super Emitter Program, and other compliance obligations. The proposal does not itself extend the January 22, 2027 deadline for state-plan submissions established under the existing framework. The Congressional Review Act (“CRA”) remains a potential source of uncertainty. Depending on when EPA submits a final rule to Congress and the applicable congressional-session timing, a future Congress and President could seek to disapprove the rule under the CRA. A successful disapproval would invalidate the rule and generally restrict the agency from issuing a rule in substantially the same form absent subsequent statutory authorization. The CRA’s lookback provisions can affect the period during which a rule remains subject to congressional review, so the risk cannot be assessed solely by reference to the calendar year in which the rule is finalized. The timing of finalization and submission to Congress, together with the applicable congressional calendar, will determine the extent of that exposure. Finally, unlike the CRA, which can nullify a recently promulgated rule through legislative action, a future administration seeking to unwind this rule would generally need to proceed through a new notice-and-comment rulemaking. EPA would need to revisit the underlying BSER determinations, cost analyses, technical feasibility findings, and enforceability conclusions that support the final rule. Because this proposal is grounded heavily in findings regarding achievability, legal and practical enforceability, and cost-effectiveness, a future administration would need to develop a sufficient record supporting different conclusions before reinstating more stringent requirements. Consequently, the final rule may prove more durable than prior pendulum swings, even if it remains politically controversial.

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Dorsey Celebrates Pro Bono Week and Honors Attorneys and Business Professionals for Impactful Pro Bono Work

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Capital Markets Lawyer Cameron Half Joins Dorsey’s London Office

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Observations on the SEC’s 2027 Examination Priorities

The SEC’s Division of Examinations (the “Division”) recently announced its examination priorities (“Exam Priorities”) for fiscal year 2027.1 Although many of the Division’s core areas of focus remain consistent with fiscal year 2026, the 2027 Exam Priorities include notable changes and refinements, which we discuss below, along with other key 2027 examination priorities. Dorsey Observations Renewed focus on economic conflicts of interest. After certain economic-incentive topics received less emphasis in the 2026 Exam Priorities2, the Division has again expressly identified economic conflicts as an examination focus. The 2027 Exam Priorities indicate that the Division will prioritize reviewing advisers’ fiduciary obligations relating to economic conflicts of interest raised by fee rebates, fee and expense calculations, cash management, quid pro quo arrangements, and deposits and withdrawals. Greater emphasis on private-fund practices. Building on the private-fund items in the 2026 Exam Priorities, the 2027 Exam Priorities indicate that the Division will assess private-fund disclosures and controls relating to investment allocations, leverage, affiliated service providers, and fees and expenses. The Division also identified investments in private companies through special purpose vehicles (“SPVs”) and loans provided by private funds and business development companies (“BDCs”) as products the Division will scrutinize. Advisers, particularly private-fund advisers, should evaluate whether their disclosures and compliance programs address these areas. Expanded focus on AI-related cybersecurity risks. While the 2026 Exam Priorities focused on advisers’ use of and representations regarding artificial intelligence (“AI”), the 2027 Exam Priorities specifically highlight AI-enabled cybersecurity threats, including AI-generated phishing and synthetic or “deepfake” voice and video used for social engineering. The shift signals that registrants should consider whether their cybersecurity policies and controls adequately address these evolving threats. New focus on proxy advisory firms. The 2027 Exam Priorities state that the Division will examine advisers that rely on proxy advisory firms, including how those advisers evaluate the firms’ recommendations, assess the bases for those recommendations, identify potential conflicts of interest, and determine whether that reliance satisfies applicable legal obligations. Advisers that rely on proxy advisory firms may wish to consider whether their compliance programs address these areas. Updated focus on Regulation S-P and Regulation S-ID. The 2026 Exam Priorities stated that the Division would engage firms during examinations regarding their progress in preparing incident response programs ahead of the compliance dates for the amendments to Regulation S-P and would examine compliance with the amended rule after those dates. The 2027 Exam Priorities indicate that examinations will focus on whether firms have developed, implemented, and maintained reasonably designed policies and procedures addressing administrative, technical, and physical safeguards to protect customer information and that, in accordance with the amended rule, staff will evaluate response program policies and procedures for unauthorized access to or use of customer information, including customer notification procedures and oversight of service providers. With respect to Regulation S-ID, the 2027 Exam Priorities indicate that examiners will assess whether firms are updating their Identity Theft Prevention Program to address emerging risks, such as those related to AI and stolen credentials. Advisers may wish to consider whether their compliance programs address these areas, as applicable. Summary of Other 2027 Examination Priorities Beyond the developments discussed above, many of the Division’s core examination priorities remain consistent with fiscal year 2026. These include investment adviser fiduciary obligations and compliance programs, examinations of never-examined and recently registered advisers, and cybersecurity and operational resiliency. The Exam Priorities are not exhaustive, and examinations will vary based on each registrant’s business, activities and risks. Advisers should consider the 2027 Exam Priorities in reviewing their compliance programs and preparing for potential examinations, including by: Reviewing risk disclosures and controls. The Division states that, when examining advisers to private funds, it will assess whether investment-related risk disclosures are consistent with fiduciary standards and whether compliance policies, procedures, and controls are designed to address both fund-level and investment-level risks. Reviewing disclosures on allocations, leverage, and affiliated service providers. The 2027 Exam Priorities identify disclosures related to certain investments and allocations, the use of debt and fund-level lines of credit, and the use of affiliated service providers as examples. Confirming the accuracy of fee and expense calculations. The Division states that it will assess the accuracy of fee and expense calculations at both the fund and investment levels, and it identifies fee rebates, cash management, quid pro quo arrangements, deposits, and withdrawals as areas in which economic conflicts of interest may affect the impartiality of advice. Reviewing recommendations of illiquid or hard-to-trade products. The Division states that it will prioritize advisers that recommend products that are difficult to trade, have unusual features, or are illiquid, including loans provided by private funds or BDCs and investments in private companies through SPVs. Confirming that the compliance program is implemented and reviewed. The Division states that it will review compliance program components such as marketing, valuation, and custody, as appropriate, and will typically analyze the annual compliance review. It will also focus on compliance practices when advisers have started advising new asset classes or clients or grown through mergers or acquisitions. 1 SEC Division of Examinations 2027 Examination Priorities. 2 See Dorsey’s Client Alert on the SEC’s fiscal year 2026 exam priorities.

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Dorsey London Team Secures Positive Rankings from The Legal 500, Including Premium Recognition for Commercial Litigation Team

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Dorsey & Whitney Advises Beijing Xunzhong on Two Consecutive H Share Placings Raising HK$418.5 Million

International law firm Dorsey & Whitney LLP acted as Hong Kong legal advisors to Beijing Xunzhong Communication Technology Co., Ltd. (“Xunzhong”) as to Hong Kong law in connection with two consecutive placings of new H shares under general mandate (the “First Placing” and the “Second Placing”, respectively, and together, the “Placings”). Xunzhong’s H shares are listed on the Main Board of the Hong Kong Stock Exchange (Stock Code: 2597). Winbull Securities International (Hong Kong) Limited acted as sole overall coordinator and placing agent on both Placings. The First Placing of 11,190,000 new H shares at HK$28.20 each was completed on September 17, 2026, followed by the Second Placing of 3,550,000 new H shares at HK$29.00 each on October 30, 2026. The Placings raised approximately HK$315.56 million and HK$102.95 million in gross proceeds, respectively, or approximately HK$418.51 million in aggregate (approximately HK$415.96 million in aggregate net proceeds). Both Placings were conducted under the same general mandate granted by shareholders at Xunzhong’s 2025 annual general meeting, and each was completed within one week of the signing of its placing agreement. Completing placings in consecutive months is relatively uncommon in the Hong Kong market, and doing so called on the technical depth of Dorsey’s Hong Kong Capital Markets team. Working closely with Xunzhong to understand its business needs and prepare the transaction documents, the team addressed in quick succession the remaining capacity under the general mandate, disclosure of the use of proceeds and the maintenance of Xunzhong’s public float, enabling both Placings to be completed seamlessly. “We are pleased to have advised Xunzhong on both Placings,” said Rachel Han, Partner and Co-Head of Dorsey’s Asia Capital Markets practice. “We appreciate the trust placed in our team and the close collaboration among all parties involved. We look forward to supporting Xunzhong as it continues to execute its growth strategy and pursue future capital markets opportunities.” Xunzhong is principally engaged in cloud-based communications services and enterprise digitalization services in the PRC. As disclosed in its announcements, the net proceeds of the First Placing are allocated to developing Xunzhong’s new computing power operation services business, while those of the Second Placing will be used to integrate model-as-a-service (MaaS) and AI agent capabilities into its existing cloud communications platform-as-a-service (PaaS) platform and software-as-a-service (SaaS) products. Approximately 55% of the net proceeds of the Second Placing will be used for computing power equipment upgrades for the MaaS system, approximately 35% for MaaS, PaaS and SaaS platform upgrades, and approximately 10% for working capital and general corporate purposes. With a single MaaS platform and shared computing power supporting its PaaS and SaaS offerings, Xunzhong intends for its MaaS, PaaS and SaaS capabilities to complement and reinforce one another, and to address customer needs from multiple angles, from embedding AI in customer communications and business workflows to maintaining stable performance at scale and keeping customer data within controlled environments. Partner and Co-Head of Dorsey’s Asia Capital Markets practice Rachel Han and Of Counsel in the Capital Markets and Corporate Compliance group Carlton Ng, along with Associate Kristy Ting, led the Dorsey Hong Kong Capital Markets & Corporate Compliance group in advising Xunzhong on both Placings.