Background

In late September 2017, the Eastern Magistrates’ Court convicted ETRADE Securities (Hong Kong) Limited (“ETrade HK”), a Hong Kong licensed securities dealer, for actively marketing to the public in Hong Kong United States (“US”) brokerage services provided by E*TRADE Securities LLC (“ETrade US”), which is the affiliate of ETrade HK.

ETrade US is a US-based firm licensed with the Securities and Exchange Commission in the US but it was not a licensee of the Securities and Futures Commission (“SFC”) in Hong Kong. As stated in the news report of the SFC, from around 11 May 2009 to 31 January 2014, ETrade HK had continually marketed the brokerage services provided by ETrade US through newspapers, magazines, and on MTR, television, radio and online. The SFC also discovered that ETrade HK had received revenue from ETrade US for any marketing initiatives and services provided to ETrade US’s Hong Kong-based clients.

SFC had then pursued legal action against ETrade HK for the offence of actively marketing in Hong Kong regulated activities carried out outside Hong Kong without a licence under section 115 of the Securities and Futures Ordinance, Cap 571 (“SFO”). ETrade HK pleaded guilty to aiding and abetting ETrade US in holding itself out as an SFC licensee when it was not.

Applicable laws

Section 115 SFO

Under section 115 of the SFO, subsection (1) provides that:

“If (a) a person actively markets, whether by himself or another person on his behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services that he provides; and (b) such services, if provided in Hong Kong, would constitute a regulated activity, then (i) the provision of such services so marketed shall be regarded for the purposes of section 114(1)(a) as carrying on a business in that regulated activity; [and] (ii) the person’s marketing of such services as referred to in paragraph (a) shall be regarded for the purposes of section 114(1)(b) as holding himself out as carrying on a business in that regulated activity.”

Section 115 of the SFO consists of certain elements that are noteworthy; they include “actively markets”, “public” and “regulated activity”:

• “actively markets” is not defined in the SFO. The SFC would consider and take into account certain factors when determining whether one has actively marketed to the public. For instance, “actively markets” would include  those who frequently call on Hong Kong investors and market their services (including offering products); running a mass media programme targeting at the investing public in Hong Kong; and Internet activities that target Hong Kong investors;
• “public” is defined in the SFO as the public of Hong Kong, including any class of that public; and
• “regulated activity” is also defined in the SFO under Part 1 of Schedule 5 where a list of regulated activities, being Type 1 to Type 12 activities, is expressly specified.

Section 114 SFO

Under section 115 of the SFO, references were made to section 114 of the SFO. As such, it would be helpful to review such section as well. Under section 114(1), no person shall (a) carry on a business in a regulated activity; or (b) hold himself out as carrying on a business in a regulated activity, unless such person is a licensed corporation, authorised financial institution or authorised person, or that such activity is an activity falling under subsections (5) and (6) of section 114 of the SFO.

Penalty

In this present case, ETrade HK was fined HK$20,000 and ordered to pay the SFC’s investigation costs. This is the first criminal conviction secured by the SFC against an entity for such offence.

Takeaway

While some has criticised the SFC for acting slow as ETrade HK had actively marketed in Hong Kong for more than four years, it is no doubt that time was needed to compile the evidence in order to satisfy most, if not all, of the factors of “actively markets”. With the first criminal conviction secured by the SFC, section 115 is certainly no longer a paper tiger. Licensed corporations should take note of this case and ensure that there are no marketing services provided in Hong Kong that would be in breach of section 115 of the SFO.

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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.