With effect from 13 November 2015, the Securities and Futures Ordinance (SFO) was amended to give new powers to the Securities and Futures Commission (SFC) to provide supervisory assistance to overseas regulators. The SFC now has the power to compel licensed corporations (LCs) to produce records and documents or provide answers upon the request of overseas regulators in a supervisory context.
The new power is part of the SFC’s attempt to enhance international cooperation with overseas regulators through a series of Memoranda of Understanding (MoU). According to the draft MoU that the SFC will use to negotiate with overseas regulators, the regulators will work much more closely than ever before in their supervision of international firms with group companies that are regulated both locally and overseas. The new powers of the SFC will have far reaching implications for international firms in terms of their operation and compliance.
THE NEW POWERS
- Consultation / amendment bill
The amendment ordinance as promulgated is in the same terms as set out in the consultation paper issued in late 2014. For more details of the new powers, please refer to our earlier bulletins of January and July 2015 on (i) the consultation paper and (ii) the consultation conclusions and amendment bill respectively.
- The powers
In brief, the new powers will allow the SFC to require a LC which is also regulated by the overseas regulator (or its related corporation) to (i) provide any records or documents requested, and (ii) answer any questions posed.
In this context, a “related corporation” includes a holding company, a subsidiary, and a subsidiary of the same holding company.
It should be noted that the SFC will have no power to compel licensed individuals under the new provisions (that is, the provisions only apply to firms, not to their officers and employees).
The new powers mainly target international firms with group companies that are regulated overseas, in particular entities of systemic significance or whose activities could have a systemic impact on the financial markets.
The request must relate to a regulated activity supervised by the SFC carried on by the LC, or any transaction or activity which was undertaken in the course of or which may affect any regulated activity carried on by the LC. The information provided by LCs can only be used by the overseas regulator for supervisory, but not enforcement, purposes. It should be noted that there are separate pre-existing provisions under the SFO, under which the SFC may provide assistance to overseas regulators in enforcement matters. These powers will continue to be available to the SFC in parallel with the new supervisory co-operation powers.
- Criminal and civil liabilities
Failure to comply with a SFC request without reasonable excuse is a criminal offence (maximum penalty of a HK$200,000 fine and 1 year’s imprisonment). Anyone who provides false or misleading information to the SFC may ultimately be subject to a heavier fine and/or longer term of imprisonment. Alternatively (but not concurrently), the SFC may apply to the Court of First Instance to order compliance with a SFC request. We published a bulletin in June 2014 on a landmark case regarding similar action taken by the SFC, which can be accessed here.
- Reasonable excuse / legal professional privilege
LCs may refuse to comply with the request if there is a “reasonable excuse”. The SFC has confirmed that a legitimate claim of legal professional privilege over a document sought by the overseas regulator will amount to a reasonable excuse.
- Privilege against self-incrimination
There is no express provision that allows for a request from the SFC to be refused on the ground of privilege against self-incrimination. As such, it is unclear whether or not a genuine assertion of such privilege would constitute a "reasonable excuse" in law. The contention is that an overseas regulator is required to undertake not to use any information obtained from LCs via the SFC in legal proceedings.
If an overseas regulator wishes to use such information in this manner, it will need to make a separate request to the SFC for assistance in enforcement proceedings. The SFC will then invoke its separate pre-existing powers under the SFO to request the same information from the LCs. Under the existing regime, the LCs will be entitled to make a claim against self-incrimination when providing the information and shall be afforded appropriate statutory protection. It remains to be seen whether the above contention can withstand legal challenge.
DETAILS OF THE COOPERATION BETWEEN REGULATORS
The SFC will seek to enter into MoUs with overseas regulators and a reference document which the SFC will use when it negotiates with overseas regulators can be accessed here.
The aim of the MoUs is to establish ongoing, informal, oral consultation between the SFC and overseas regulators on supervisory matters, which will be supplemented by more in-depth, formal cooperation. Specifically, the MoUs will facilitate written exchange of non-public information and regular/periodic liaison to discuss issues of common interest.
- “Cross-Border Regulated Entitles” (CBREs)
The draft MoU refers specifically to CBREs and the SFC expects that staff contacts from each regulator responsible for particular CBREs will engage in regular or periodic liaison for the purpose of discussing issues of common interest concerning these CBREs.
- Information to be provided by the SFC on a voluntarily basis
The SFC will inform overseas regulators on a voluntary basis of (i) pending regulatory changes that may have a significant impact on the operations, activities, or reputation of a CBRE; and (ii) pending enforcement or regulatory actions or sanctions including revocation, suspension or modification of the regulatory status of a CBRE, which may have a material effect on the CBRE.
More generally, information which “will assist or enable the overseas regulator in the performance of its supervisory functions” may also be provided by the SFC on a voluntary basis even though no request has been made by the overseas regulator.
- Types of information to be requested under the new powers
In terms of the new power to compel LCs to provide records and documents, the SFC expects formal requests from overseas regulators to cover the following categories of information:
- Information relevant to the financial and operational condition of a CBRE (reports of capital reserves, liquidity or other prudential measures, and internal controls procedures);
- Relevant regulatory information and filings that a CBRE is required to submit to a regulator (interim and annual financial statements and early warning notices);
- Information impugning the competence and integrity of a CBRE (regulatory reports, examination reports, compliance review reports on investor complaints, self-reported breaches or sundry referrals from other regulators, and findings or information drawn from such reports); and
- Group-level information of CBRE (group-wide organisational charts, board and management committee minutes, senior management responsibility maps, business model analysis and risk profiles).
- “Cross-Border On-Site Visit” (Visit)
In some jurisdictions, regulators have extra-territorial powers under their laws to conduct on-site visits outside their jurisdictions and all they need is to obtain the consent of the LC in the local jurisdiction (normally a subsidiary of the parent company regulated by the overseas regulator).
Consent from the SFC in relation to such Visits is not required. However, the SFC would like to use the MoUs to regularise the administration of such Visits. In particular, the SFC would like relevant overseas regulators to give notice to the SFC before carrying out such a Visit and to discuss and reach an understanding on the terms of such a Visit. In appropriate cases, the overseas regulator and the SFC will conduct concurrent visits and such visits will be carried out under the supervision of the SFC. The SFC may share with the overseas regulator any relevant examination reports or compliance reviews it may have undertaken in relation to the CBRE. On the other hand, the overseas regulators would inform the SFC of their key findings and observation after the Visits.
The SFC has indicated that it will identify and approach regulators outside Hong Kong that also regulate LCs or their related corporations with a view to entering into, or updating, supervisory MoU arrangements with them. The following jurisdictions were specifically mentioned – Australia, Germany, the Netherlands, Singapore, the UK and the US. Firms with parents or subsidiaries regulated in these jurisdictions should keep themselves updated on any MoU that may be entered into by the regulators.
The SFC stresses that the amount of new information to be collected from LCs in addition to that not already in SFC’s possession should be limited. This shows that the SFC’s focus is to set up a framework of cooperation with overseas regulators and the new power is just one of the means that the regulators may use to achieve their desired regulatory outcome. The key is for regulators to have a coordinated and holistic supervision over CBREs. International firms should take heed of the fact that information available to one regulator will now very likely be made available to other regulators in other jurisdictions quickly and that regulators will work very closely together in order to get a full picture of any regulatory issue.