Introduction

On 10 June 2022, the Securities and Futures Commission (the “SFC”) launched a two-month consultation on the proposed threefold amendments to the Securities and Futures Ordinance (the “SFO”) to enable it to take more effective enforcement action and thereby better protect the interests of the investing public and uphold the reputation of Hong Kong’s financial markets.

The threefold proposed amendments

1.       Broadened basis for section 213 of the SFO

a.       Limitation of section 213 of the SFO

Section 213 of the SFO allows the SFC to apply for injunction and other orders from the Court of First Instance (“CFI”).  Under the current legislative regime, the SFC can only apply for the orders listed in section 213 SFO under various specified situations, and these situations do not include a breach of the SFC’s codes and guidelines. Therefore these orders under section 213 are of no avail to the SFC in exercising its powers to instigate disciplinary actions and thus revoke or suspend registration of a regulated person pursuant to sections 194 and 196 of the SFO (“Disciplinary Powers”), with respect to his misconduct or breaches of the SFC’s codes and guidelines, unless such misconduct or breaches falls under one of the specified situations.

In addition, the SFC’s Disciplinary Powers are rather limited and to the exclusion of the power to require the regulated person to take any steps to restore, compensate or otherwise protect the interests of investors or clients who may have been adversely affected by the regulated person’s conduct.  

b.       Key proposed amendments

In light of the above limitations, the SFC proposed several amendments which are highlighted as follows:

	Current legislation regime	Proposed amendments
Grounds for SFC to apply to CFI for various orders [section 213(1), SFO]	Contravention of ·         any of the relevant provisions (including SFO and its subsidiary legislation) (“Relevant Provisions”) ·         any notice or requirement given or made under or pursuant to any of the Relevant Provisions ·         any of the terms and conditions of any licence or registration under the SFO ·         any other condition imposed under or pursuant to any provision of the SFO	Introduction of an additional ground for the SFC to apply for orders where it has exercised any of its Disciplinary Powers
Orders available under section 213(2), SFO	·         order restraining or prohibiting a breach of the relevant provisions ·         an order requiring a person to take such steps as the CFI may direct, including steps to restore the parties to any transaction to the position in which they were before the transaction was entered into ·         an order restraining or prohibiting a person from dealing in a specified property ·         an order appointing an administrator ·         an order declaring that a contract is void or voidable ·         order directing a person to do or refrain from doing any act to ensure compliance with any other court order made ·         order for damages	Introduction of an additional order that may be made by the CFI to restore the parties to any transaction to the position in which they were before the transaction was entered into, where the SFC has exercised any of its Disciplinary Powers
Additional Order for damages [section 218(8), SFO]	The CFI may, in addition to or in substitution for an order made against a person under section 213(1) or 213(3A), make an order requiring the person to pay damages to any other person	By virtue of the above amendments, section 213(8) would, without any further amendments, also enable the CFI to make an order against a regulated person to pay damages where the SFC has exercised any of its Disciplinary Powers against the regulated person
Definition of “Regulated Person”	Not specifically defined under section 213 of the SFO	Addition of the definition of “regulated person” to section 213(11) which would have the meaning given to it by section 194(7) or 196(8) of the SFO

2.       Exemption to section 103(1) of the SFO 

a.       Turmoil following CFA judgment

Section 103(1) of the SFO prohibits the issue of advertisements and other documents containing prescribed content unless the issue has been authorised by the SFC. Section 103(1) is subject to a number of exemptions, including the issue, or the possession for the purposes of issue “of any advertisement, invitation or document made in respect of securities or structured products, or interests in any collective investment scheme, that are or are intended to be disposed of only to professional investors” (“PIs Exemption”).

In a recent proceedings instituted by the SFC against a licensed corporation and its chief executive officer for breach of section 103(1) of the SFO, the defendants had issued advertisements of a collective investment scheme to the public which had not been authorised by the SFC. The defendants relied on the PIs Exemption and contended that whilst the advertisements were issued to the general public, the fund was intended to be sold and had been sold only to professional investors (“PIs”), even though this intention was not expressly stated in the advertisements.

On appeal, the Court of Final Appeal (“CFA”) acquitted the defendants, finding that by virtue of the phrase “that are or are intended to be disposed of”, the PIs Exemption applies to any advertisement having some connection or relation to investment products that are or are intended to be disposed of only to PIs.

The position following the CFA judgment is that unauthorised advertisements of investment products which may not be suitable for retail investors may be issued to the general public even though the products are intended for sale only to PIs. As such, retail investors may be exposed to unauthorised offers or solicitations to invest in risky or complex products which are unsuitable for them.

a.       Key proposed amendments

 

In view of the foregoing unsettled position, the following amendments are proposed to ensure the legislation accords with the original intended purpose:

 

 

	Current legislation regime	Proposed amendments
PIs Exemption   [section 103(1)(k), SFO]	The PIs Exemption applies to issue of any advertisement, invitation or document made in respect of securities or structured products, or interests in any collective investment scheme, that are or are intended to be disposed of only to professional investors	The PIs Exemption applies to any advertisement which are issued only to PIs     Effect of amendments: unauthorised advertisements of investment products which are or are intended to be sold only to PIs may only be issued to PIs

3.       Broadened scope of insider dealing provisions

a.       Geographical limitations of insider dealing provisions

The current civil and criminal regimes with respect to market misconduct or the offence of insider dealing are subject to geographical limitations, which do not apply to: (1) insider dealing perpetrated in Hong Kong with respect to securities listed on overseas stock markets or their derivatives (overseas-listed securities or their derivatives); and (2) acts constituting insider dealing perpetrated outside Hong Kong in respect of Hong Kong-listed securities or their derivatives.

b.       Key proposed amendments

With a view to extending its reach to tackle cross-border securities crimes and market misconduct, the SFC proposed the following amendments:

	Current legislation regime	Proposed amendments
Definition of “listed” under civil and criminal regimes  [sections 245(2) and 285(2), SFO]	“listed” is defined to mean listed on a recognized stock market, i.e., a stock market operated by The Stock Exchange of Hong Kong Limited	Amended to include overseas-listed securities or their derivatives
Acts of insider dealing for Hong Kong-listed securities & acts of insider dealing perpetuated in Hong Kong	No such provisions	A new section be added to the SFO to expand the territorial scope of the insider dealing regimes to include: (i)    any acts of insider dealing involving Hong Kong-listed securities or their derivatives regardless of where they occur; and (ii)   any acts of insider dealing involving overseas-listed securities or their derivatives if any one or more of such acts occur in Hong Kong.

 

Conclusion

The public is invited to submit their comments to the SFC no later than 12 August 2022 whereafter, an amendment bill will be introduced into the Legislative Council for legislative process subject to the public feedback received. Market players should stay abreast of the potential changes to the SFC’s enforcement landscape.

 

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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.

Published by ONC Lawyers © 2022