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Authored by: Karen Lo
Understanding the nature of SFC enquires and investigations
According to the SFC’s latest Quarterly Report, the SFC commenced 53 in-depth inspections of licensed corporations involving the audit of their compliance and regulatory requirements, and made 1,929 requests for trading and account records from corporations triggered by market surveillance conducted in Q3 of 2022. The SFC continues to take enforcement action against licensed corporations for regulatory breaches and seek criminal convictions. The SFC has disciplined four corporations and five individuals during the last quarter; the highest fine imposed on a licensed corporation over the past quarter was HK$20.1 million. In addition, the licences of some ROs and individuals were suspended and individuals banned from re-entering the industry for a certain period of time for failing remain fit and proper. In the case of material failings the SFC is prepared to impose lifelong bans against the licensed individuals where warranted.
This article considers two types of SFC enquiries among a number of different options available to the SFC in seeking information and commencing an investigation. One type of SFC enquiry is a formal request pursuant to s.180 of the Securities and Futures Ordinance (SFO) in connection with an SFC inspection undertaken by the SFC Intermediaries Division. Such inspections mainly involve an onsite or remote review of a licensed corporation’s regulated activities, or cover a thematic surveillance focused on topical issues. Section 180 empowers an SFC officer to enter premises to inspect, copy, record and make inquiries about the business conducted by the corporation or their associated entity and any transaction or activities in the course of the business conducted by the corporation or its associated entity. The SFC Intermediaries Supervision can also refer any possible wrongdoing to the SFC Enforcement Division which can invoke a full range of investigative powers under s.182.
Another type of SFC enquiry is an information request triggered by market surveillance under the s.181 of the SFO, and these preliminary enquiries are normally undertaken by the SFC Enforcement Division when requesting information and documents from a person in relation to their trading activities and /or records. This section empowers the SFC to obtain information relating to securities, future contracts, leverage foreign exchange contracts and collective investment schemes, and the SFC can investigate where it has reasonable cause to believe that an individual may have engaged in defalcation, fraud, misfeasance or other misconduct activities in connection with dealing, giving advice or investment management pursuant to s.182 and s.183, including enforcement proceedings. In such circumstances the SFC may disclose the materials which it has compelled a person to provide in Hong Kong to an overseas regulator in providing assistance with the investigation of cross-border misconduct activities pursuant to s.186 of the SFO.
It is important to understand the nature of any notice received by the SFC as well as its implications and the requirement to adhere to statutory secrecy obligations. Typically, requests for information are subject to short deadlines for responding although reasonable requests for extensions are normally entertained.
Deacons assists clients across a wide range of regulatory enquires from the SFC, some routine and others in relation to enforcement proceedings. If you would like more information as to how we can assist you prepare for a routine inspection as well as deal with potential enforcement proceedings, please contact us.
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