SFC seeks to strengthen SFO enforcement provisions

The SFC recently announced that it is conducting a two-month consultation on the amendment of the Securities and Futures Ordinance (SFO). These proposed enhancements have potentially far-reaching implications for Hong Kong’s regulatory landscape, with personal liability for misconduct, additional powers to police insider dealing and amendments in relation to advertisement of investment products.

A broadened basis for s.213 of the SFO

One of the proposed amendments introduces an additional ground allowing the SFC to apply for remedial orders where it has exercised any of its disciplinary powers under sections 194 or 196 of the SFO against a regulated person.

This closes a loophole where a regulated person who has only breached the SFC’s Code of Conduct or guidelines resulting in disciplinary action under sections 194 or 196 of the SFO, would find the regulator having no basis to seek remedial orders, even in cases of extreme misconduct.

A wider scope of insider dealing provisions

The SFC is seeking to amend the provision to include any acts of insider dealing involving overseas listed securities or their derivatives in Hong Kong, and any acts of insider dealing involving Hong Kong listed securities or their derivatives regardless of where they occur.

This is aimed at aligning the existing market misconduct provisions with other major jurisdictions. e.g. strengthening the SFC’s power to tackle insider dealing conducted in Hong Kong involving A-shares listed in mainland China.

Amendment to professional investor (PI) exemptions

The PI exemption under s.103(3)(k) of the SFO provides that a person may not advertise an unauthorised investment product to the public unless it is issued or intended to be issued to PIs only.

However, in Securities and Futures Commission v Pacific Sun Advisors Ltd and Mantel, Andrew Pieter, the Count of Final Appeal has given the exemption a wide scope; in that as long as the product is intended for sale only to PIs, the advertisement of unauthorised investment products can be issued to the public. As a result, issues may arise in enforcing the provision to protect retail investors.

In this consultation, the SFC is looking to amend the PI exemption provision, so that know-your-customer procedures are required to establish professional investor status before issuing product advertisements to prospective investors. This amendment would look to prevent the advertisement of unauthorised investment products to the general public.

Assessing the impact

If the proposed amendments are passed into legislation, the SFC will hold more effective statutory enforcement powers to hold firms to account.

Firms should take the opportunity now to start considering the impact of potential changes to current practices, procedures and controls. We can advise on the impact of each of the proposed amendments, conduct reviews and assessments on your existing framework, assist in implementation of enhanced customer onboarding procedures, working alongside our local experts.

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