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Authored by: Pinky Siu and Goofy Chan
On 10 June 2022, the Securities and Futures Commission (SFC) issued the Consultation Paper on Proposed Amendments to Enforcement-related Provisions of the Securities and Futures Ordinance (Consultation Paper). While the key amendments proposed in the Consultation Paper relate to enforcement and insider dealing provisions under the Securities and Futures Ordinance (Cap. 571) (SFO), the SFC also proposes to clarify the exemption in section 103 of the SFO relating to the issue of advertisements of investment products to professional investors (PIs).
Proposed amendments relating to advertisements of investment products
Section 103(1) of the SFO prohibits the issue of advertisements, invitations or documents relating to investment products unless the issue has been authorised by the SFC, subject to certain exemptions. In particular, section 103(3)(k) provides an exemption to section 103(1) for 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 of interests in any collective investment scheme, that are or are intended to be disposed of only to PIs (PI Exemption).
In Securities and Futures Commission v Pacific Sun Advisors Ltd and Mantel, Andrew Pieter, in which the interpretation of the PI Exemption under section 103(3)(k) of the SFO was the subject matter of the appeal, the Court of Final Appeal (CFA) held that the PI 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 effect of the CFA’s interpretation is that, advertisements of investment products, albeit not authorised by the SFC, may nevertheless be issued publicly as long as the products are intended for sale only to PIs.
The SFC considers that the CFA’s interpretation of the PI Exemption under section 103(3)(k) of the SFO may result in retail investors being exposed to unauthorised offers or solicitations to invest in risky or complex products which are unsuitable for them. The relatively lower threshold of qualifying for the PI Exemption (i.e. a mere intention to sell investment products only to PIs) makes the statutory regime extremely difficult, in the SFC’s view, to enforce and it appears to contradict the intended purposes of Part IV and section 103(1) of the SFO, namely to regulate the advertising of (as distinct from the sale of) investments products which have not been authorised by the SFC.
The SFC therefore seeks to amend section 103(3)(k) of the SFO to the effect that the PI Exemption will only apply to advertisements which are issued only to PIs. As such, following the proposed amendments, unauthorised advertisements of investment products which are or are intended to be sold only to PIs may only be issued to PIs who have been identified as such in advance by an intermediary through its know-your-client and related procedures, regardless of whether or not such an intention has been stated on the advertisements.
In addition, the SFC also proposes to amend the exemption under section 103(3)(j) of the SFO (applicable to issue of advertisement, invitation or document to person outside Hong Kong) which is phrased in terms which are identical to the PI Exemption to reflect the same amendments made to section 103(3)(k) of the SFO for consistency.
While the SFC has not yet set out the exact manner in which sections 103(3)(j) and 103(3)(k) of the SFO are to be amended in the Consultation Paper, the proposal may trigger a need for fund managers to review the existing practice in issuing or distributing advertisements relating to investment products which are only intended for sale to PIs. As indicated in the Consultation Paper, the SFC will expect advertisements relating to products for sale or intended for sale to PIs to be issued to a particular group of prospective investors which have been identified to be qualified as such in advance through know-your-client and related procedures. Enhanced measures in controlling the audience to which such advertisements are made available may be required.
Proposed amendments to the SFC’s power to apply for court orders
The Consultation Paper also covers proposed amendments to section 213 of the SFO, which empowers the SFC to apply to the Court of First Instance (CFI) for various orders (Section 213 Orders) to provide remedies for persons affected by contraventions by another person of certain provisions under the SFO or requirements or conditions imposed by the SFC. Such Section 213 Orders may include, for example, an order restraining or prohibiting a breach of the relevant provisions, an order requiring a person to take steps to restore the parties to any transaction to the position in which they were before the transaction was entered into, and an order requiring a person to pay damages to any other person.
Under the current regime, the SFC has no power to apply for Section 213 Orders from the CFI when a regulated person has been found guilty of misconduct or not to be fit and proper to remain a regulated person under sections 194 or 196 of the SFO unless the conduct also constituted a contravention of one of the relevant provisions, requirements or conditions described above (which would not cover circumstances where there is a breach of the SFC’s codes and guidelines by a regulated person, however serious the nature of such breach is). The SFC also has no statutory powers at present to directly 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.
It is now proposed to allow the SFC to apply for Section 213 Orders where the SFC has exercised any of its powers under sections 194(1), 194(2), 196(1) or 196(2) of the SFO (collectively, the Relevant Provisions) against a regulated person. Consequentially, the SFC also proposes to amend section 213(3A) of the SFO to enable the SFC to apply for Section 213 Orders where it has exercised any of its powers under the Relevant Provisions against a regulated person who is a director, investment manager, custodian or a sub-custodian of an open-ended fund company (OFC). Key operators of an OFC should take note of the expanded scope of the SFC’s enforcement powers, should the proposed amendments to section 213 of the SFO materialise.
SFC is currently inviting the public to submit comments no later than 12 August 2022 on the proposed amendments set out in the Consultation Paper.
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