On 10 June 2022, Hong Kong’s Securities and Futures Commission (SFC) announced that it is conducting a consultation into the following three proposed amendments to the enforcement-related provisions in the Securities and Futures Ordinance (SFO):
- An expansion of the basis on which the SFC may request the court to grant remedial orders against a regulated person under section 213 of the SFO;
- An amendment to the professional investor exemption in respect of the issuing of advertisements for investment products; and
- An expansion of the scope of the insider dealing provisions to cover insider dealing in Hong Kong related to overseas listed securities and their derivatives.
These proposed enhancements to the relevant enforcement-related provisions (which have been in place since 2003) are particularly significant as they look to further consolidate and strengthen the SFC’s enforcement powers and are expected to have potentially far-reaching implications for Hong Kong’s regulatory landscape, particularly in respect of the extent of a regulated person’s potential liability for misconduct and the purview of the SFC in policing insider dealing activities. The SFC has requested responses to the consultation by 12 August 2022.
The SFC’s three proposed amendments to the SFO enforcement provisions set out in its consultation paper (PDF download) are as follows:
1. Widening the basis on which the SFC may seek remedial orders against regulated persons under section 213 of the SFO
One of the most noteworthy enhancements is the proposed amendments to section 213 of the SFO. Section 213(1) of the SFO enables the SFC to apply to the Hong Kong Court of First Instance (CFI) for injunctions and various remedial orders to provide remedies for persons affected by contraventions by another person of, among others, any of the “relevant provisions” (e.g., contraventions of the SFO). In particular, the CFI may order the contravening party to restore the parties to a transaction to the position they were in prior to entering into the said transaction (Restoration Order), and/or pay damages to any other person (Damages Order).
As can be seen from recent enforcement actions, ever since the landmark decision rendered by the Court of Final Appeal in SFC v. Tiger Asia Management LLC (2013) 16 HKCFAR 324, the SFC has widely used section 213 of the SFO and successfully obtained compensation orders for investors to combat market misconduct. However, section 213 is subject to various limitations. Based on the current regime, breaches of the SFC’s Code of Conduct or guidelines by a regulated person resulting in the SFC taking disciplinary actions under sections 194 or 196 of the SFO cannot currently be the sole basis for seeking remedial orders under section 213, even if the misconduct is highly egregious.
The SFC therefore proposes to widen the scope of section 213 as follows:
(a) The SFC may apply for remedial orders under section 213 in circumstances where it has exercised its enforcement powers under sections 194 or 196 against a regulated person (including seeking Restoration Orders and/or Damages Orders).
(b) A regulated person who is a director, investment manager, custodian or sub-custodian of an open-ended fund company may be subject to the remedial orders.
(c) The CFI may order the regulated person to pay damages instead of, or in addition to, granting the injunctive or remedial orders.
(d) Remedial orders sought under the amended provisions may be made against regulated persons regardless of whether such regulated persons intend or continue to engage in the misconduct that gave rise to the SFC’s disciplinary action.
2. Amending the professional investor exemption from the prohibition of certain advertisements under section 103 of the SFO
Section 103(1) of the SFO prohibits the issue of advertisements and other documents containing prescribed content unless authorised by the SFC. This provision was intended to regulate advertising as opposed to the sale of SFC-authorised regulated products, and mainly served the purpose of protecting public investors from investing in products that are particularly risky.
There are certain exceptions that apply, including section 103(3)(k), which states that the prohibition does not apply where the relevant advertisement was targeted only to professional investors (PI Exemption). The reason for creating the PI Exemption was because professional investors typically do not require the same level of statutory protections as retail investors.
In 2015, the Court of Final Appeal (CFA) handed down a judgment in the case of SFC v. Pacific Sun Advisors Ltd et. al. (2015) 18 HKCFAR 138, which concerned the interpretation of the PI Exemption. The CFA determined that even if an advertisement is issued to the public, the PI Exemption still applies whenever the advertisement has “some connection or relation to” investment products that are or are intended to be disposed of only to professional investors.
In light of this development, the SFC considers the PI Exemption to be unsatisfactory because:
(a) Advertisements for risky or complex investment products may be issued to the public without the SFC’s approval provided that they are intended to be disposed of by professional investors only. This exposes retail investors to potentially unsuitable products.
(b) While it was intended that the liability under section 103(1) would be triggered at the point of issue of the advertisement, application of the PI Exemption can only be determined at the disposal of the investment product (i.e., whether or not it is only sold to professional investors). This presents difficulties for enforcement.
Therefore, the SFC proposes to amend the PI Exemption under section 103(3)(k) so that it applies exclusively to advertisements issued to professional investors, such that the exemption is triggered at the point in time when the advertising materials are issued. The effect is that exempted advertisements are only issued to professional investors who have been identified as qualifying for such status under an intermediary’s know-your-client procedures. Likewise, to ensure the consistency of approach, the SFC also proposes to make similar amendments to the exemption under section 103(3)(j), which concerns advertisements of investment products sold or intended to be sold only to persons outside Hong Kong.