The Securities and Futures Commission recently issued a consultation paper on proposed enforcement-related amendments to the Securities and Futures Ordinance, the principal legislation that regulates the securities and futures industry in Hong Kong. The proposal is a significant step toward aligning the regulatory regime with other major common law jurisdictions and a legislative development not seen in Hong Kong since the law was enacted and came into force in 2003.
The current insider dealing regime in the Securities and Futures Ordinance (SFO) only applies to insider dealings concerning Hong Kong–listed securities or their derivatives as well as securities dually listed in Hong Kong and another jurisdiction or their derivatives perpetrated in Hong Kong.
The Securities and Futures Commission (SFC) currently has to rely on the fraud and deception provisions (Section 300 of the SFO) to prosecute defendants for their insider dealings concerning overseas-listed securities or their derivatives perpetrated in Hong Kong. The fraud and deception provisions are comparable to Rule 10b-5 in the United States, which regulates securities fraud by criminalizing fraudulent or deceptive acts, practices, schemes, or devices. However, while the provisions are widely drafted, the conceptual difference affects the nature of the relief that can be sought. Where overseas-listed securities or their derivatives are concerned, the SFC can only deal with transactions involving specific persons rather than conduct that impacts the integrity of the wider market. In some circumstances, the SFC even fails to bring enforcement action, as it is unable to establish evidence of fraudulent or deceptive acts.
The SFC proposes addressing the regulatory lacuna to include insider dealings perpetrated in Hong Kong concerning overseas-listed securities or their derivatives and those perpetrated outside Hong Kong concerning Hong Kong–listed securities or their derivatives within the scope of insider dealing. This may well follow the trend of market convergence and strengthen the SFC’s enforcement powers in tackling insider dealings conducted in Hong Kong involving A-shares listed in mainland China.
Section 213(1) of the SFO currently enables the SFC to apply to the Court of First Instance to seek and obtain various orders for persons affected by contraventions by another person of “relevant provisions” as broadly defined in Schedule 1 of the SFO. These orders may include:
Under the current regime, the SFC can only apply for such orders when a regulated person (e.g., a licensed person, a registered institution, a responsible officer of a licensed corporation or an executive officer of a registered institution) has been found guilty of misconduct or not to be a fit and proper person to remain a regulated person under Section 194 or 196, respectively, and the conduct which gave rise to the finding also constituted a contravention of certain “relevant provisions.” However, the SFC’s codes and guidelines (e.g., the Code of Conduct for Persons Licensed by or Registered with the SFC) are not included in the “relevant provisions.”
Given the SFC has a range of disciplinary powers under Sections 194 and 196, the SFC in practice has relied upon the issue of codes and guidelines. What this means in practice is that a regulated person who has been found by the SFC guilty of misconduct or not be a fit and proper person under Section 194 or 196, might not be in contravention of any “relevant provisions,” which provides no ground for the SFC to seek orders under Section 213.
Among other things, the proposed amendments will:
Section 103(1) of the SFO criminalizes the issue of advertisements and other documents containing an invitation to the public to enter into agreement to deal in securities or any other structured products without getting the authorization of the SFC. The professional investor (PI) exemption is available where the advertisements of investment offers are disposed of, or intended to be disposed of, only to PIs. With the construction by the Court of Final Appeal, the PI exemption applies to any advertisement having some connection or relation to investment products that are or are intended to be disposed of only to PIs, even though the intention is not clearly stated in the advertisements.
The construction is wide, as a mere intention to sell products to PIs would suffice, which may expose retail investors to unauthorized offers or solicitations to invest in risky products unsuitable for them. In addition, enforcement action in practice has to be taken until the sale of investment products has taken place to determine to whom the products have been sold and whether the PI exemption applies. The difficulty in enforcement contradicts the intention and purpose of Section 103.
The proposed amendments make the PI exemption only available where the advertisements are issued only to PIs who have been identified in advance by an intermediary through its know-your-client and related procedures.
These proposed amendments to the provisions on seeking orders, advertising of investment products and insider dealing enable the SFC to take more effective enforcement action in the future. The widening powers of the SFC is a herald of a tightened securities enforcement landscape in Hong Kong and deserves the close attention of all market players. The consultation paper is open for comments until August 12, 2022.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Billy Wong.
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