Hong Kong’s Securities and Futures Commission (SFC) has published its consultation conclusions on proposed amendments to enforcement-related provisions of the Securities and Futures Ordinance (SFO) (Note 1).
The SFC seeks to gain new powers to bolster its enforcement capabilities relating to cross-border insider trading cases.
In 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 (SFO). This consultation ended in August 2022.
Amendments to Insider Dealing Provisions of the SFO
The current reach of the SFO’s insider dealing provisions do not extend to offences carried out in Hong Kong where the securities or their derivatives are listed on overseas stock markets. It also does not expressly apply to cases of insider dealing perpetrated outside of Hong Kong relating to Hong Kong-listed securities or their derivatives.
The SFC, therefore, proposed to broaden the scope of the insider dealing provisions of the SFO to include the circumstances mentioned above.
During the consultation period, various questions were raised by respondents, including the principal responsibility where insider dealing must be pursued with cross-boundary regulatory cooperation, jurisdictional reach, and the scope of insider dealing provisions of the Securities and Futures Ordinance (SFO).
Within the consultation conclusion, the SFC noted the importance of obtaining powers to tackle insider dealing in cases where offences carried out in Hong Kong related to overseas securities and derivatives, and Hong Kong-listed securities and derivatives where offences have been carried out internationally.
The regulator clarified that the misconduct would “also need to be unlawful in the relevant overseas jurisdiction”.
In regards to OTC securities, following the implementation of the proposed amendments, the insider dealing regime would apply to OTC transactions in overseas-listed debt securities, as it currently applies to OTC transactions in Hong Kong-listed debt securities.
Over-the-counter (OTC) securities are traded without being listed on an exchange. Marketplaces generally facilitate participants’ trades in this regard, carrying them out by a network of dealers or brokers specialising in OTC markets.
The regulator added the aim of these changes is “to better protect the reputation of the Hong Kong markets”.
The SFC will proceed with the proposal to amend the insider dealing provisions of the SFO. The industry will have the opportunity to review the draft amendments during the legislative process.
Additional items of note in the consultation conclusion include regulatory exemption stipulations for professional investment product advertisements and the powers of SFC to enforce compensation to aggrieved clients in public investment situations. These items are touched on below.
Professional Investment Product Advertisements
Section 103(1) of the SFO states it is an offence to issue advertisements to the public for products that are intended for professional investors.
The SFC had sought to amend this regulation’s professional investor exemption clause 103(3)(k). The proposed amendment to the exemption clause aimed to further protect retail investors in some instances.
As the SFC states, it intended to “enhance investor protection by limiting retail investors’ exposure to unauthorised advertisements of investment products intended for professional investors and by reducing the risk of the professional investor exemption being abused by issuers of advertisements.”
However, respondents had put forward concerns about operational difficulties and the impact of the amendments on business development and marketing processes if this amendment were to take place.
The SFC has decided not to proceed with the amendment in its current form and is reassessing the proposal.
Enforcement of Compensation to Aggrieved Clients
Under proposed changes to section 213 of the SFO, the SFC aimed to “enhance the remedies to protect the investing public in situations where the SFC cannot directly require regulated persons in breach of SFC codes or guidelines to compensate aggrieved clients or for the SFC to seek redress for these investors through section 213 proceedings.”
However, significant complexities raised by respondents have been taken into consideration by the regulator. Therefore, The SFC has placed this proposal on hold while evaluating a range of alternatives to meet the policy objective.
The Next Step Forward in Bolstering Insider Dealing Provisions
Once the legislative amendments have been published, firms will have sufficient time to update their internal compliance policies and manuals, and thus a transition period will not be required.
The SFC notes that the requirements for reporting breaches, as set out within the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), will also apply. It states that “firms should submit a report when they become aware of any suspected breaches and use their best endeavours to obtain the data to submit in their report”.
See the full detail of the SFC consultation conclusions.
And read our in-depth article, How to Reduce Insider Trading Risk and Stay Out of the Headlines, for further ideas on reducing insider trading risk.
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