Introduction

Back in 2014, the Securities and Futures Commission (“SFC”) and China Securities Regulatory Commission (“CSRC”) entered into a Memorandum of Understanding (“MOU”) on strengthening cross-boundary regulatory and enforcement cooperation under the then proposed Shanghai-Hong Kong Stock Connect (“Stock Connect”) to strengthen cross-boundary regulatory and enforcement cooperation. As published in our May 2017 newsletter, on 10 March 2017 the CSRC published a decision sanctioning two individuals for the manipulative trading of securities committed through the Stock Connect, relying on evidence from the SFC. Recently, the cooperation between the SFC and the CSRC on this matter was considered by the Hong Kong Court in Tang Hanbo v The Securities and Futures Commission and another [2017] HKCU 2895.

Regulatory Framework for Mutual Assistance

MOU

The MOU established an enhanced platform for the SFC and the CSRC to provide mutual assistance to combat cross-boundary trading crime and misconduct in both the Hong Kong and Shanghai Stock Exchange. Among other provisions, the MOU provides that:

• The SFC and the CSRC would alert one another immediately to any information concerning suspected misconduct in the other’s market once it was identified. (paragraph 3)
• Each of them would notify the other when it commenced an investigation with a cross-boundary element. (paragraph 4)
• In respect of significant and urgent cases relating to both jurisdictions, or where the suspects, witnesses or evidence were located in both jurisdictions, the parties might commence a joint investigation. Once a joint investigation was commenced, a joint task force should be set up. The joint task force should normally convene an initial coordination meeting. (paragraph 6)
• When engaging in cross-boundary enforcement cooperation, the parties must comply with the existing laws and regulations in their respective jurisdiction. The parties would actively facilitate, provide support and coordination with each other in respect of the use of information. (paragraph 7)

MMOU

In addition, the SFC is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding (“MMOU”), which provides for mutual investigatory and other assistance and exchange of information between securities regulators around the world including the CSRC, the Financial Conduct Authority and the United States Securities and Exchange Commission. This is also reflected in section 186 of the Securities and Futures Ordinance (“SFO”) which empowers the SFC to exercise its investigatory powers to obtain information and documents requested by non-Hong Kong regulators, and section 378 of the SFO which allows the SFC to share confidential information and documents in its possession with such regulators. In July 2017, the SFC and the UK Financial Conduct Authority entered into a memorandum of understanding that provides for consultation, cooperation and exchange of information in connection with the supervision and oversight of regulated entities that operate on a cross-border basis in Hong Kong and the UK.

Among other provisions, the MMOU provides that:

• The regulatory authorities would provide each other with the “fullest assistance permissible”. (paragraph 7(a))
• Requests for assistance would be made in writing. (paragraph 8(a))
• In urgent circumstances the requests might be effected by other means provided that the communication was confirmed through an “original, signed document”. (paragraph 8(c))

From the above, it can be seen that the SFC has the power under the law to share information with or provide assistance to or engage in joint investigation with the CSRC and other overseas securities regulators.

Background of the Case

Common Subject of Investigations by Regulators

The applicant (“Tang”) is a PRC national resident in Hong Kong. In March 2016, the SFC started an investigation involving him and the trading of shares in Aluminium Corporation of China Limited (“ACCL”), a company listed on the Stock Exchange of Hong Kong (“SEHK”). The investigation relating to ACCL led to the identification of Tang and his wife as traders in the shares of 2 other companies listed on SEHK, namely, Heng Xin China Holdings Limited (“Heng Xin”) and Tian Ge Interactive Holdings Limited (“Tian Ge”). In particular, the SFC was concerned that the trading by Tang and his wife in Heng Xin and Tian Ge during the period from 1 August 2015 to 24 June 2016 might have breached the Hong Kong Codes on Takeovers and Mergers and Share Buybacks, the requirements of disclosure of interests under Part XV of the SFO and section 300 of the SFO. At the same time, the CSRC was investigating Tang and Mr. Wang Tao (“Wang”) for alleged market misconduct in the Mainland in relation to trading in the shares of Zhejiang China Commodities City Group Co Limited (“Zhejiang China”), a company listed on the Shanghai Stock Exchange, during the period from 4 February 2016 to 26 April 2016.

The Search

By a document dated 14 June 2016, the CSRC sent a request (the “1st Request”) to the SFC requesting investigatory assistance of SFC to obtain various pieces of information about Tang’s computers and trading records in Hong Kong. In response to the 1st Request, on 27 July 2016 the SFC obtained a warrant (the “Warrant”) from the Eastern Magistracy which authorised the SFC to seize materials located in Tang’s residence which were or might be relevant to the SFC’s investigation into the Heng Xin and Tian Ge matters during the period from 1 August 2015 to 24 June 2016. On 28 July 2016, the SFC executed the Warrant and seized, among other things, 7 computers and some mobile phones from Tang’s residence (the “Search”). During the Search, the SFC officers updated the CSRC officers about what had been seized and what appeared to be in the computers.

Information Sharing

Upon the SFC’s forensic examination of the seized computers and mobile phones, the SFC discovered materials which appeared to be relevant to CSRC’s investigation, and made arrangements for CSRC officers to come to Hong Kong to inspect the information. The CSRC made a second request (“2nd Request”) requesting the SFC to obtain further information from securities companies. On 9 September 2016, the CSRC made a third request (“3rd Request”) to the SFC requesting the SFC to contact Tang with the view to arranging an interview. By a letter dated 14 September 2016, the CSRC made a fourth request (“4th Request”) seeking the transmission of some of the seized materials to it. On the same day, the SFC forwarded to CSRC the requested materials.

On 16 and 18 November 2016, the CSRC issued 2 notices entitled “Advance Notification of Administrative Penalty” to Tang about the Mainland matter and proposed to confiscate from him profits of RMB240 million and fine him RMB800 million. The terms of the 1st Notice referred to the Search and materials seized therefrom. On 2 March 2017, after a trial pursuant to the 2 notices, both Tang and Wang were convicted and penalties totalling RMB1.2 billion were imposed by the CSRC. The CSRC’s investigation on Tang was the first case involving manipulation via the Stock Connect.

Tang’s Case

Tang applied for judicial review to challenge (1) the Warrant obtained by the SFC to search his residence and to seize relevant records and documents; and (2) the decision of the SFC to transmit materials seized to the CSRC. Tang contended that the Warrant had been obtained by material non-disclosure and a misleading description of the true purposes behind it. In particular, Tang argued that the SFC informed the Magistrate that the Warrant was for investigating suspected breaches of Hong Kong laws and regulatory codes in relation to two Hong Kong listed companies, but in fact it was primarily or at least significantly for assisting the CSRC in their investigation of alleged breaches of Mainland laws in relation to Mainland shares. Tang became aware of this after materials seized from the Search were deployed by the CSRC against him in Mainland regulatory proceedings.

The Ruling

The issue at trial was whether Tang can prove to the Court’s satisfaction that the Search was primarily or at least significantly to assist the CSRC’s investigation and not the SFC’s own investigation.

The Court rejected Tang’s arguments and was of the view that there was no reason for the SFC to have deliberately misled the Magistrate by concealing the true purpose of the Warrant when the SFC was entitled to render assistance to the CSRC. Also, the Court held that even though the SFC had the power to conduct search operations as part of the assistance to overseas regulators, the SFC would require them to make a written request, especially in view of the advance preparation and resources required, but the CSRC has never made any written request to the SFC to conduct a search operation to assist with the CSRC’s investigation. The Court further examined the meeting agenda, meeting notes, minutes and emails between the SFC and the CSRC, and concluded that these documents merely recorded the discussions in meetings between two regulatory authorities over the investigations of a common subject. The Court rejected the argument that such meeting was a coordination meeting conducted in accordance with paragraph 6 of the MOU to form a joint task force, because having such meeting was reasonable for a matter that was the first case involving manipulation via the Stock Connect.

The Court also examined a briefing note given by a SFC officer to the search team, and found that under the header “case background” in the briefing note, there was only one paragraph headed “more background information on Tang” which referred to the Mainland matter providing only limited information. From that paragraph the search team would have a general idea that the Mainland matter related to trading in Zhejiang China and that the SFC was providing assistance to the CSRC. Apart from that paragraph, the briefing note was entirely about the SFC’s own investigation. Importantly, the briefing note did not task the search team to look for evidence to assist the CSRC’s investigation. In the Court’s view, if the Warrant was primarily or significantly for the investigation of the CSRC, it is inconceivable that the search team was not briefed to look for evidence relevant to the CSRC’s investigation.

The Court reasoned that the fact that the information obtained from the Search was relevant to the CSRC’s investigation and later supplied to the CSRC under the 4th Request cannot by itself suggest that there was a joint investigation or joint search by the SFC and the CSRC. The SFC was conducting its own investigation and at the same time trying to cooperate with CSRC on their investigation. Accordingly, the Court found that there was no joint task force formed but assistance by the SFC as empowered by the law, and dismissed Tang’s application.

Conclusion

In its judgement, the Court affirmed the SFC’s procedural integrity when conducting its operation and providing assistance to the CSRC. Indeed, more cross-border investigations by the regulators would hardly be a surprise in today’s globalised financial markets.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.