Introduction

The Securities and Futures Commission (the “SFC”) is vested with the intervention power to restrict business and the dealing of property by licensed corporations (the “Restriction Notice”) under sections 204 and 205 of the Securities and Futures Ordinance (the “SFO”) by way of administrative order, without recourse to a court or tribunal.

In recent years, there have been numerous cases where the SFC have seen to issue Restriction Notice to brokerage firms to prohibit them from dealing with or processing certain assets held in their clients’ trading accounts, which are related to suspected market misconducts.

The gist of the Restriction Notice is to prohibit brokerage firms, without the SFC’s prior written consent, from disposing of or dealing with, or assisting, counselling or procuring another person to dispose of or deal with, any assets in any way in the trading accounts. The Restriction Notice is usually issued in the interest of the public interest.

In this article, we will examine who are in the position and what the ways are to request the SFC to withdraw the Restriction Notice. We will examine the same by reference to the case relating Zhou Ling (as seen in Zhou Ling v Securities and Futures Commission (Application No. 5 of 2020); and the SFC’s refusal to withdraw the Restriction Notices dated 31 December 2020).

The powers under sections 204 and 205

Sections relating to the Restriction Notice include:-

1.        Section 204, which enables the SFC by notice in writing to (a) prohibit a licensed corporation from entering into transactions, soliciting business from persons and carrying on business and (b) require a licensed corporation to carry on business. The aforementioned restrictions may relate to among others transactions entered into in connection with the business which constitutes a regulated activity for which the licensed corporation is licensed (the “Regulated Business”).

2.        Section 205, which enables the SFC by notice in writing to (a) prohibit a licensed corporation from disposing of or dealing with any relevant property and assisting, counselling or procuring another person to do the same and (b) require a licensed corporation to deal with any relevant property. Such “relevant property”, refers to among others any property held by the licensed corporation, acting within the capacity for which the licensed corporation is licensed, on behalf of any client of the licensed corporation.

3.        Under section 208, the SFC can withdraw, substitute or vary any restriction it has imposed under sections 204 and 205, whether of its own volition or upon the request of the person on whom the restriction is imposed or any other person affected by the restriction.

Facts

In the case of Zhou Ling, Mr Zhou Ling (the “Applicant”) first applied to the Securities and Futures Tribunal (the “Tribunal”) for a review of the SFC’s issuance of two restriction notices dated 13 August 2020 (the “Notices”), and later, requested the SFC to withdraw the Notices.

On 3 September 2020, the Applicant filed a Notice of Application for Review with the Tribunal in respect of the Notices issued by the SFC to China Gather Wealth Financial Company Limited and Power Securities Company Limited (the “Companies”) respectively.

The Notices prohibited each of the Companies, inter alia, from (a) entering into any transactions including processing the withdrawal of and/or transferring any money arising from the disposal of and (b) on the instructions of the Applicant, disposing or dealing with shares of New Ray Medicine International Holdings Limited (“New Ray”) (the “Shares”) held in the Applicant’s account at each of the Companies (the “Accounts”). The said Notices also required the Companies to notify the SFC of any request made by or on behalf of the Applicant to withdraw the shares and/or to transfer monies arising from the disposal of the Shares and/or any requests to dispose of or deal with the Shares.

The SFC asserted that it had reached the view based on the suspicion that the Applicant, as the former executive director and chairman of New Ray, had committed “misconduct and obtained secret profits” from certain transactions which he caused New Ray to enter into between 2015 and 2017. It was necessary to prevent the Applicant from withdrawing the Shares and/money arising from their disposal “in order to ensure that the Applicant will be able to pay compensation to New Ray if ordered to do so by the court” which was considered “desirable in the interest of the investing public or in the public interest”.

Pursuant to section 209(4), the Applicant was informed by the SFC of the said Notices and statements of reasons (the “Statements”) issued to the Companies in relation to his Accounts on 14 August 2020 by letter. The letter also set out that “any person affected by the prohibition and/or requirement” set out in the said Notices may apply to the SFC that the prohibition and/or requirement be “withdrawn, substituted or varied” pursuant to section 208.

Issue

Before the Tribunal, it was determined whether the Applicant had locus standi to file and the Tribunal had jurisdiction to receive the Notice of Application for review pursuant to section 217(1), which states that a person aggrieved by a specified decision of the relevant authority made in respect of him may apply to the Tribunal for a review of the decision.

There was no dispute that the Notices were specified decisions of the SFC and the Applicant was a person aggrieved by them. The issue was whether the two decisions were ones “made in respect of him” since the Notices were issued to the Companies.

The Tribunal’s determination

The Tribunal held that there was no jurisdiction for the Tribunal to entertain the Applicant’s Notice of Application for Review for the following reasons:

1.        The expressed intent to provide rights of appeal to the Tribunal for those made subject to specified decisions of the SFC has been carried through to the legislation. Those that might be aggrieved in consequence of specified decisions of the SFC imposed on others are not afforded the right to give notice of an application for review of those decisions to the Tribunal.

2.        The SFC’s decisions reflected in the Notices concerned the imposition of prohibitions and requirements on two licensed corporations in the exercise of its regulatory powers over those corporations. They were not made in respect of the Applicant.

3.        It was available to the Applicant an avenue of redress to request the SFC to withdraw the prohibitions and requirements under section 208. If the SFC was to refuse such an application, section 209(3)(b) requires the SFC to serve on the Application “a notice of its refusal, together with a statement specifying the reasons for its refusal”. It is to be anticipated that in such a statement, it will be necessary to provide more details of the SFC’s reasoning than had been provided in the Statements to the Companies.

4.        If the Applicant makes that application and is met with a refusal by the SFC, the Applicant can then file a Notice of Application of Review of the refusal under section 217(1).

Follow-up actions by Zhou

In light of the decision of the Tribunal, Zhou Ling filed a written notice under section 208(1) requesting the SFC to withdraw the Restriction Notices on 23 October 2020 (the “Application”). However, the SFC subsequently decided to refuse the Application and thus, the effect of the Notices remained intact. Meanwhile, legal proceedings were commenced in around late November 2020 by the SFC to seek disqualification orders against among others Zhou Ling for allegedly committing corporate misconduct and breaching their duties towards New Ray.

Takeaway

In general, the procedure for requesting the SFC to withdraw the Restriction Notice under section 208(1) applies to both brokerage firms as “person on whom the prohibition or requirement is imposed” and account holders as “person affected by the prohibition or requirement”. In other words, anyone affected by the Restriction Notice should first file a written notice to the SFC should they wish to request for the withdrawal of the Restriction Notice.

The Tribunal clarified that a person aggrieved by the SFC’s Restriction Notice cannot apply to the Tribunal for a review of that decision which is not made in respect of him. Instead, such person should apply to request the SFC to withdraw, substitute or vary the restriction under section 208.

In view of the increasing use of the Restriction Notice by the SFC, it is important to ensure that the procedures for requesting the withdrawal of the Restriction Notice are duly observed and complied with so that there will not be any unnecessary time and costs incurred.