(5 min. read)
Consultation on proposed amendments to enforcement-related provisions of the Securities and Futures Ordinance
For the first time in 20 years, the Securities and Futures Commission (the “SFC”) has proposed important changes to certain enforcement-related provisions of the Securities and Futures Ordinance (Cap. 571) (“SFO”). The proposed amendments are intended to better protect the interests of the investing public and uphold the reputation of Hong Kong’s financial markets through more effective enforcement action.
The SFC has invited the public to review and provide comments on the proposed amendments set out in its consultation paper dated 10 June 2022, which aim at:
(a) strengthening the connection between SFC and the Court of First Instance (the “CFI”);
(b) expanding the powers to apply for injunctions and other court orders (s 213, SFO);
(c) imposing stricter requirements on advertisements of investment products for professional investors (s 103, SFO); and
(d) broadening the scope of insider-dealing provisions with respect to overseas-listed securities and insider dealing perpetrated outside of Hong Kong (ss 270 and 291, SFO).
Unlike the SFC’s codes and guidelines (e.g. the Code of Conduct and Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission) which do not have the force of law, statutory amendments to the SFO provide the SFC with powers to apply for court orders as a direct means to take enforcement action against licensed corporations (“LCs”) and licensed representatives, as applicable.
The two-month consultation invites public opinion on following:
1. Expanding the basis for SFC’s remedial action through broadening the scope of section 213 of the SFO
- Under the current regime, the SFC could not obtain court orders unless the alleged misconduct of the LC or regulated person violated relevant provisions of the SFO (or any notice, requirements, terms and conditions of any license or registration). However, these do not include the SFC’s codes and guidelines as mentioned. The proposed amendments therefore include:
- Additional ground and order – amendments to sections 213(1)(c) and 213(2) respectively, to make it easier for the SFC to apply to the CFI for various orders, with a view to strengthening the SFC’s ability to help restore investors back to their original position prior to entering into transactions, being the subject of misconduct.
- Consistent treatment for open-ended fund companies and regulated persons –consequential amendments proposed in respect of sections 213(3A), 213(7) and 213(11), in order to hold open-ended fund companies and regulated persons to the same standards in line with the amendments to sections 213(1)(c) and 213(2) above.
- Consequential effect – after the amendments to sections 213(1), (2) and (3A) have been implemented, section 213(8) would enable the CFI to make an order against a regulated person to pay damages where the SFC has exercised any of its disciplinary powers against the regulated person.
2. Regulating the advertisements of investment products targeted to only professional investors (“PIs”) through section 103 of the SFO
Following the Court of Final Appeal case of Pacific Sun, the SFC believed that unauthorised advertisements of investment products which may not be suitable for retail investors may, in fact, be issued to the general public even though the products are intended for sale only to PIs.
To protect retail investors from investing in risky or complex products unsuitable for them:
- The SFC proposed an amendment to section 103(3)(k) to restore the PI exemption from authorisation to the original point in time when the advertising materials are issued, by exempting advertisements which are issued only to PIs.
- LCs and regulated person shall have a know-your-client policy and related procedures in place, to identify PIs in advance, such that no unauthorised advertisement of investment products which are or are intended to be sold only to PIs are not issued to the general public.
3. Addressing insider dealing
Some key proposed amendments to the insider dealing provisions of the SFO include:
- Broader definition of the term “listed” and territorial scope of insider dealing regimes under Parts XIII and XIV of the SFO – the term “listed” currently does not include overseas-listed securities or their derivatives under sections 245(3) and 285(2) of the SFO. The SFC wishes to widen the scope to over overseas-listed securities and derivatives outside of Hong Kong for greater oversight.
- Consistent legal position – proposed amendments to sections 282 (civil regime) and 306 (criminal regime) to hold a person liable for committing insider trading in Hong Kong in respect of overseas-listed securities or their derivatives, if such conduct would have also been unlawful had it been carried out in the relevant overseas jurisdiction.
- Same rights shall be enjoyed by overseas-listed securities – defences available under the SFO for insider dealing shall be made available for insider dealing involving overseas-listed securities and their derivatives as well (e.g. “off-market transaction” exemption under s 271(5), SFO).
The consultation has put forward important changes to the SFO with wide-ranging impact to LC’s businesses. Market participants are encouraged to submit feedback to the SFC by 18 August 2022.
The SFC believes these amendments help better combat cross-border market misconduct and safeguard the integrity and reputation of Hong Kong’s financial industry and markets.
Please feel free to contact us for more information and advice on the proposed amendments to the SFO may affect your business.
This article is provided for informational purposes only. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.