Introduction

To protect and maintain the integrity of the global financial system, regulators of different jurisdictions co-operate with each other in investigations across the border. In AA and Another v The Securities and Futures Commission [2019] HKCFI 246, the Court of First Instance had to decide on the lawfulness of the transmission of compelled answers, testimony and documents obtained by the Securities and Futures Commission (the “SFC”) to overseas regulators, as well as the constitutionality of the SFC’s power to compel information relating to transactions for investigations.

Background

In September 2013, a corporation licensed in Hong Kong under the Securities and Futures Ordinance (Cap. 571) (the “SFO”) (referred as “AA” in the judgment) conducted a series of trades of securities in a Japanese listed company, a constituent member of the Nikkei Index in Japan, purportedly to perform an “index rebalancing” exercise.  The share trading activity led to a series of inquiries from the SFC, which invoked its investigative powers for provision and disclosure of information and materials from AA.

During the course of investigation, the SFC received a request for assistance from the Japanese regulators for the securities market. Pursuant to sections 186(1) and 186(5)(a) and 186(5)(b) of the SFO, the SFC, among other things, supplied the compelled materials it had gathered in its investigations to the Japanese regulators.  Subsequently, the Japanese regulators imposed an administrative monetary penalty against AA for market manipulation.

Grounds for judicial review

AA and its substantial shareholder (referred as “EA” in the judgment) brought a judicial review against the SFC’s transmission of the compelled materials to the Japanese regulators. In particular, AA and EA challenged that:-

• The SFC acted unlawfully by transmitting to the Japanese regulators materials derived through compulsion for use in criminal proceedings in Japan;
• The SFC acted unlawfully by transmitting information and materials to the Japanese regulators without ensuring adequate secrecy as required under the SFO; and
• Section 181 of the SFO contravenes the constitutional right to privilege against self-incrimination.

Use of compelled materials outside Hong Kong

It is clear that section 186(6) of the SFO and the right to privilege against self-incrimination prevent the compelled information from being used in a criminal proceeding against the disclosing party. In this case, whether the transmission of the compelled material to the Japanese regulators was lawful depends on whether the action taken by the Japanese regulators against AA was criminal in nature.

In this regard, the Court applied the following three criteria adopted in Koon Wing Yee v Insider Dealing Tribunal (2008) 11 HKCFAR 170:

• the classification of the offence under domestic law;
• the nature of the offence; and
• the nature and severity of the potential sanction.

For the first criterion, it was agreed by AA and EA that the Japanese proceedings are classified as administrative under Japanese domestic law. As to the second and the third criterion, the Court found that the Japanese proceeding was civil in nature for a preventative purpose (rather than punitive or deterrent purpose) by imposing administrative monetary penalty order seeking to disgorge illicit profits made by AA. Thus, it was held that the provision of the compelled materials by the SFC to the Japanese regulators for the administrative proceedings in Japan was lawful.

SFC’s duty to ensure adequate secrecy  over compelled materials

Section 378(6)(b) of the SFO provides that disclosure to an overseas regulator should be subject to adequate secrecy provisions. To comply with this provision, the SFC should have reasonable expectation and should take all reasonable steps to ensure that the overseas regulator would comply with its obligations of confidentiality.

In this case, the Court held that the SFC had taken all reasonable steps and implemented all reasonable measures necessary to ensure that the secrecy provisions under the SFO were adhered to by the Japanese regulators. In particular, the Court found that the SFC disclosed the compelled materials upon repeated reminders to and reassurance and undertaking from the Japanese regulators that such privileged information would not be disclosed to any other person without the SFC’s consent.

Constitutionality of Section 181 of the SFO

Section 181 of the SFO empowers the SFC to demand for disclosure of information. A person who fails to comply with such demand without reasonable excuse commits a criminal offence.  It was argued that the demand under section 181 of the SFO in effect compels production of potentially self-incriminatory materials.

The Court held that the privilege against self-incrimination is a reasonable excuse for non-compliance with the demand and thus it is the legislative intent that section 181 of the SFO does not override or abrogate the privilege. In obiter, the Court commented that the SFC should warn and caution the requested person of the privilege in the future.

In any event, the Court was satisfied that section 181 of the SFO is a proportionate intrusion to the privilege against self-incrimination, if any. Section 181 of the SFO serves a legitimate aim to facilitate more effective regulation of financial services industry.  Besides, given that section 181 of the SFO only empowers the SFC to request information related to the transaction from persons engaged in securities dealing, the Court held that section 181 of the SFO strikes a fair, reasonable and proportionate balance between the legitimate aim of the SFC’s power and the right to privilege against self-incrimination.

Conclusion

In conclusion, the CFI reaffirms the SFC’s statutory power to compel information notwithstanding the constitutional right to privilege against self-incrimination. More importantly, the CFI is satisfied that the relevant provisions in the SFO and the SFC’s disclosure of compelled information to overseas regulators are lawful. This judgment is welcomed by the SFC given the paramount importance of cross-boundary cooperation for safeguarding the integrity of the international financial market.

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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.