SFC’s Proposal to Strengthen Enforcement Provisions
In line with its mission to “strengthen and protect the integrity and soundness of Hong Kong’s securities and futures markets for the benefit of investors and the industry,” the Securities and Futures Commission (“SFC” or “the Commission”) has continuously issued consultation papers and circulars on different subjects over the years.
One of such consultation papers was released in June 2022 is titled ‘Consultation Paper on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance’ (“Consultation Paper”).
Subsequently on 8th August 2023, the SFC issued its Consultation Conclusions. In summary, as per the SFC’s intents, these proposed amendments aim to overcome existing limitations and strengthen current investor protection provisions in line with the SFC’s mission.
PDF version: SFC’s Proposal to Strengthen Enforcement Provisions
Introduction
In the Consultation Paper released in June 2022, the SFC proposed amendments to certain provisions in the Securities and Futures Ordinance (Cap. 571) (“SFO”), particularly in relation to the following:
- Section 213 of the SFO: SFC’s legal authority when enforcing any actions to seek injunctions and orders, specifically for restoring parties to their previous positions and compensating for any resulting losses
- Section 103 of the SFO: Provide clarity on the professional investor (PI) exemption in advertising regulations, ensuring that unauthorized advertisements targeting PIs do not reach the general public.
- Section 300 of the SFO: SFC’s expansion on the insider dealing provisions to address gaps in the current regime relating to cross-border acts.
However, industry respondents raised concerns with regards to the proposed amendments to Sections 103 and 213 of the SFO. In response, the SFC acknowledged the warranted perspectives and has opted to solely implement amendments to the insider dealing provisions for the time being.
In this publication, we present a comprehensive overview of original proposed changes and explore the rationale underpinning the SFC’s decision, based on industry feedback, to implement amendments solely to requirements pertaining to insider dealing at this stage.
Amendments to Insider Dealing Provisions of the SFO
The SFC proposed expanding the insider dealing provisions of the SFO to address certain limitations in the existing regime. At present, the civil and criminal regimes for insider dealing under the SFO only apply to insider trading involving securities listed on Hong Kong’s stock market or their derivatives. However, these regimes do not extend to insider dealing activities on overseas-listed securities or their derivatives, nor does place sufficient culpability on acts of insider dealing conducted outside of Hong Kong involving Hong Kong-listed securities or their derivatives.
To address these gaps and to effectively combat cross-border securities crimes and market misconduct, the SFC sought to expand the regulatory scope of insider dealing provisions. The rationale for this is on the basis that, given the growing interconnectivity of global financial markets and Hong Kong’s role as a financial hub, there is significant exposure to reputational risks due to such cross-border market misconducts.
Limitations and Case Examples
Notably, from 2017 to 2021, approximately 61% of insider dealing cases handled by the SFC involved instances of insider dealing perpetrated outside Hong Kong in relation to Hong Kong-listed securities or their derivatives.
Comparison with Major Jurisdictions and other Market Misconduct Provisions
In other major common law jurisdictions, such as Australia, Singapore, and the UK, insider dealing laws cover both local and overseas conduct related to securities.
- Australia’s laws apply to conduct outside the country concerning financial products issued by Australian businesses or companies, as well as conduct within Australia regardless of the issuer’s location.
- Singapore’s laws similarly cover acts occurring within the country regarding securities of corporations formed or conducting business in Singapore, as well as acts occurring outside Singapore involving such securities.
- The UK’s legislation also shares a similar territorial scope for insider dealing offenses to that of Australia and Singapore.
Comparatively, other market misconduct provisions in the SFO such as false trading, price rigging, and stock market manipulation, also follow a similar approach in terms of territorial scope. These provisions explicitly cover acts committed in Hong Kong or elsewhere that impact Hong Kong’s financial markets, as well as unlawful acts committed in Hong Kong that affect non-Hong Kong financial markets. To align with the practices in other jurisdictions and the existing market misconduct provisions of the SFO, it is therefore desirable to broaden the scope of the SFO’s insider dealing provisions.
Consultation Conclusion and Proposed Amendments to Part 3 of the SFO
Having reviewed industry feedback and clarifications, the SFC will move forward with implementing the proposed amendments without changes, as summarised below. The industry will also be able to examine the draft amendments during the legislative process.
- Amendment to the definition of “listed” to include overseas-listed securities or their derivatives
- New sections would be added to the SFO to expand the territorial scope of the insider dealing regimes. These amendments would cover acts of insider dealing involving Hong Kong-listed securities or their derivatives regardless of their location and acts of insider dealing involving overseas-listed securities or their derivatives if any such acts occur in Hong Kong.
- Repeal of provisions that may become redundant (i.e., provisions that currently extend the scope of insider dealing to dually listed Hong Kong securities on foreign stock markets).
- Inclusion of a subsection that clarifies that insider dealing in respect to overseas-listed securities or their derivatives would be considered unlawful in Hong Kong if it would also be unlawful in the relevant overseas jurisdiction.
- Extension of certain defences available for insider dealing to cover insider dealing involving overseas-listed securities or their derivatives when transaction counterparties have information symmetry.
In its Consultation Paper, the SFC proposed amendments to Section 213 of the SFO, with the aim to empower the SFC with the ability to seek further injunctions and other orders from the Court of First Instance (“CFI”).
- Section 213(1) of the SFO currently allows the SFC to apply to the CFI to provide remedies for individuals affected by violations of relevant provisions, requirements, license conditions, or other conditions under the SFO.
- Section 213(2) of the SFO outlines the orders, including restraining orders, specific performance orders, appointment of administrators, voiding of contracts and enforcement of court judgements or orders.
- Section 213(8) of the SFO further empowers the CFI to issue restorative orders in addition to or instead of previously mentioned orders.
Concerns with Proposed Amendments to Section 213
Proposed Amendments to Section 213
At present, although Sections 194 and 196 of the SFO grant the SFC with disciplinary powers, it does not grant the SFC with authority to enforce restorative or compensatory measures to protect the interests of adversely impacted investors or clients. Therefore, the SFC’s intention with the proposed amendment was to broaden the scope of Section 213 and allow for the introduction of specific performance orders by the Court of First Instance where the SFC has exercised its disciplinary powers against the regulated person, including directors, investment managers, custodians, or sub-custodians of an open-ended fund company.
However, the SFC has put the proposal on hold after considering industry feedback and recognizing potential complications. These issues involve legal concerns when breaking non-statutory SFC codes leads to legal actions, confusion between the disciplinary regime and section 213, concerns about fairness, and the effect on Hong Kong’s status as a global financial hub. The Commission will review existing ways to address problems and explore different solutions to achieve its goals.
Section 103(1) of the SFO states that advertisements and documents with designated content should not be issued to the public without SFC authorization. However, there are exemptions listed in the subsequent subsections. Essentially, specific marketing materials require SFC authorization before being sent to the public, except when exempted.
The SFC originally proposed amendments to Section 103 in the Consultation Paper due to its concerns that a judgement delivered by the Court of Final Appeal (“CFA”) could potentially pose challenges in protecting retail investors. The SFC’s concerns arose due to their view that the CFA’s interpretation of Section 103(3)(k) of the SFO was broader than intended by the legislation.
Proposed Amendments to Section 103
Concerns with Proposed Amendments to Section 103
To address the concerns raised with the CFA’s interpretation of Section 103(3)(k), the SFC proposed an amendment with the aim to restore clarity on the PI exemption. The proposed amendment would exempt advertisements that are exclusively issued to PIs from the requirement of SFC authorization. This means that unauthorised advertisements of investment products intended solely for PIs can only be distributed to PIs who have been identified in advance through appropriate know-your-client procedures, regardless of whether the intention to sell to PIs is stated in the advertisements.
Additionally, the SFC suggests that Section 103(3)(j), which provides an exemption for investment products sold or intended to be sold outside Hong Kong, to be amended to be identical to the proposed PI exemption clause to avoid confusion.
Conclusion
The proposed amendments (if it goes into effect) presents significant changes to the enforcement provisions. By empowering the SFC with powers to seek injunctions, orders, and compensatory measures, investor protection is strengthened, and enhance deterrence for misconducts.
The clarification of the PI exemption in advertising regulations ensures that advertisements for investment products exclusively targeting PIs are properly regulated and not accessible to retail investors. Notwithstanding, this may introduce complexities for intermediaries to navigate, and so far, the SFC has taken feedback obtained from its consultation and has placed the proposal on hold.
Expanding the insider dealing provisions to cover cross-border securities crimes is a welcome step in combating market misconduct and upholding the integrity of Hong Kong’s financial markets. These proposed amendments reflect the commitment of the SFC to maintaining a robust regulatory framework and safeguarding the interests of investors and the financial industry
