On 19 December 2014, the Securities and Futures Commission (the “SFC”) launched a consultation on proposed amendments to the Securities and Futures Ordinance (the “SFO”), relating to supervisory assistance to overseas regulators (the “Consultation Paper”). The proposed new powers will enable the SFC to:
- obtain records and documents from a licensed corporation or a related corporation of a licensed corporation that are otherwise not available to the overseas regulator, and
make enquiries about such records and documents and related transactions and activities.
Regulated entities which operate in multiple jurisdictions will need to consider the implications of the proposed new supervisory powers. The Consultation Paper can be accessed here.
The SFC wants:
to enable more effective and comprehensive supervision of regulated entities which operate in multiple jurisdictions and
to secure access for Hong Kong licensed corporations to certain overseas markets, which are only open to jurisdictions that are parties to international cooperation arrangements.
Summary of the Proposal
The SFC already has a power to provide information to overseas regulators but the SFO does not permit it to seek out information on behalf of an overseas regulator unless the request is made in the course of an investigation. This proposal addresses that gap and allows active assistance in a supervisory context. The SFC will be allowed to obtain records and documents and to make enquiries but not to enter premises. Under the proposal, the SFC will only be permitted to obtain information from licensed corporations and their 'related corporations'.
The proposal states that, before using these new powers, the SFC must first be satisfied that the request is for the supervisory purpose(s) of enabling the overseas regulator to ascertain:
the risks to and the impact on the stability of the financial system in its jurisdiction; and/or
compliance with legal or regulatory requirements that it administers in relation to transactions and activities regarding securities, futures contracts, leveraged foreign exchange contracts, collective investment schemes, OTC derivative products or other similar transactions that it regulates.
The relevant supervisory purpose(s) must relate to:
a licensed corporation, that is regulated by the SFC and the overseas regulator; and/or
a related corporation of a licensed corporation where the related corporation is regulated by the overseas regulator.
The information must relate to a regulated activity carried on by a licensed corporation or a transaction or activity undertaken in the course of, or which may affect, a regulated activity carried on by the licensed corporation.
Key Features to Note
One of the key features of the proposal is that where (i) a holding company, (ii) a subsidiary or (iii) a subsidiary of a holding company of the licensed corporation, is regulated by an overseas regulator, that overseas regulator can request information about the licensed corporation’s regulated activities even though the licensed corporation is not itself regulated by that overseas regulator.
This means the SFC will have power to request a licensed corporation to provide information that is unrelated to its compliance with specified Hong Kong requirements, but is otherwise highly relevant for assessing the risks or compliance of its overseas related corporation with overseas requirements.
By way of reciprocity, the SFC will be able to request overseas regulators to obtain information from a Hong Kong licensed corporation’s overseas related corporation (especially the holding companies) in order to assess the risks or compliance of the Hong Kong licensed corporation with Hong Kong requirements.
Powers to assist an overseas regulator in an investigation remain unchanged. Importantly, under the new power, the overseas regulator must give to the SFC, a written undertaking that it will not use the information in any proceedings unless a separate request is made for investigatory assistance, thereby attracting additional statutory protections, including a privilege against self-incrimination. In practice however, a licensed corporation may find itself under considerable pressure to voluntarily co-operate directly with that other regulator in the absence of such a request being made to the SFC.
The proposal will affect Hong Kong licensed corporations that are part of a multi-national regulated group in that (i) it may be required by the SFC to provide information which is unrelated to its compliance with Hong Kong requirements, and (ii) its overseas related regulated entities may be required to provide information which relates to the Hong Kong licensed corporation's compliance with Hong Kong requirements.
The SFC expects that there will be more supervisory cooperation arrangements in future. That is, the SFC will seek to enter into Memorandum of Understandings with more and more overseas regulators to further the supervisory cooperation between them. As a result, the SFC expects that these arrangements may lead to increased requests for information about Hong Kong licensed corporations' overseas activities from other regulators.
The relevant legislative amendments are expected to be completed in the second half of 2015. It is likely that cooperation requests will be made or received by the SFC soon afterwards and statutory requests for information will be issued immediately. As such, Hong Kong licensed corporations should ensure that they have in place a protocol that will allow them to properly handle requests from the regulators.