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SFC Seeks to Widen Its Enforcement Power

  • Hong Kong
  • Financial services and markets regulation - Briefings and articles
  • Financial services disputes and investigations
  • Financial services

04-08-2022

On 10 June 2022, the Securities and Futures Commission (“SFC”) published the Consultation Paper on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance (“Consultation Paper”), consulting the market on proposed changes to the existing enforcement regime under the Securities and Futures Ordinance (“SFO”).

The SFC has proposed the following amendments be made to the SFO:

  • Broadening the scope of section 213 of the SFO to expand the SFC’s disciplinary power in respect of the breach of its codes and guidelines by a regulated person;

  • Clarifying the professional investor exemption to the prohibition on the issue of advertisements under section 103 of the SFO; and

  • Expanding the territorial scope of the insider dealing provisions of the SFO.

Amendments to section 213 of the SFO

Section 213 of the SFO provides a cause of action for the SFC to apply to the Court of First Instance (“CFI”) for various forms of injunctive relief. However, under the current drafting of section 213, the SFC can only seek such relief when there are contraventions of certain “relevant provisions” or conditions by another person, which the current ambit does not cover the breach of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission or other SFC’s codes or guidelines.

As such, even if a regulated person has been found guilty of misconduct or not to be a fit and proper person to remain a regulated person through a disciplinary action in respect of licensed persons or registered institutions under section 194 or 196 of the SFO, the SFC currently cannot apply to the CFI for the above orders. The SFC’s enforcement power is further limited by the fact that sections 194 and 196 do not empower it to require the regulated person to take any remedial actions to compensate the persons who have been adversely affected by such contraventions.

Therefore, the SFC has proposed the following key amendments:

  • Introducing an additional ground under section 213(1) which will empower the SFC to apply for remedial and other orders, where it has exercised any of its powers under section 194 or 196 against a regulated person;

  • Introducing an additional order under section 213(2) that may be made by the CFI to restore the parties to any transaction to the position in which they were before the transaction was entered into, where the SFC has exercised any of its powers under section 194 or 196 against a regulated person; and

  • Enabling the CFI to make an order under section 213(8) against a regulated person to pay damages, where the SFC has exercised any of its disciplinary powers against a regulated person.

Amendments to exemptions in section 103 of the SFO

Section 103(1) of the SFO prohibits the unauthorised issue of advertisements or invitations to the public to invest in securities or participate in collective investment schemes. Section 103(3) further contains a list of exemptions to this prohibition, which includes an exemption from the authorisation requirement for advertisements of investment products that “are or are intended to be sold to professional investors” under section 103(3)(k) (the “PI Exemption”).

In the Court of Final Appeal (“CFA”) case of Securities and Futures Commission v. Pacific Sun Advisors Ltd and Mantel, Andrew Pieter in 2015, the Court held that the PI Exemption applies to any advertisement in relation to investment products that are or are intended to be sold to professional investors. Therefore, under the current position, advertisements of investment products that are unsuitable for retail investors can be issued to the general public, even if the intent is only to actually sell the products to professional investors.

The SFC considered the CFA’s wide interpretation of the PI Exemption to be inconsistent with the original intended purpose of section 103 of the SFO, and has proposed to modify the PI Exemption to only exempt from the authorisation requirement those advertisements which are issued only to professional investors. Following the proposed amendments, unauthorised advertisements of investment products that are or are intended to be sold only to professional investors may only be issued to professional investors who have been identified as such in advance by an intermediary, but not to the general public.

Amendments to the insider dealing provisions of the SFO

The current civil and criminal regimes in respect of insider dealing under sections 270 and 291 of the SFO apply to (a) Hong Kong-listed securities or their derivatives; and (b) securities dually-listed in Hong Kong and another jurisdiction or their derivatives. This has resulted in a regulatory gap where the SFC has no direct enforcement power with regards to (a) insider dealing committed in Hong Kong with respect to overseas-listed securities or their derivatives; and (b) insider dealing committed outside Hong Kong in respect of Hong Kong-listed securities or their derivatives.

The SFC has therefore proposed the following key amendments:

  • Modifying the definition of “listed” for both the civil and criminal insider dealing regimes under the SFO to include overseas-listed securities or their derivatives; and

  • Adding new sections to expand the territorial scope of both the civil and criminal insider dealing regimes to cover: (a) any acts of insider dealing involving Hong Kong-listed securities or their derivatives regardless of where they occur; and (b) any acts of insider dealing involving overseas-listed securities or their derivatives if any one or more of such acts occur in Hong Kong.

Take away

The proposed changes to the SFO will have a significant impact on existing business models and the practices of firms operating both in Hong Kong and overseas. For example, firms which issue an open invitation to invest in financial products without first getting authorisation from the SFC, may no longer be able to do so after the amendment to section 103 of the SFO. It is contemplated that, after the conclusion of the consultation, the legislative process will proceed immediately and that the new regime will be in place very quickly. Firms should start reviewing their existing business models and practices and seek independent legal advice on their continued compliance under the new regime.