Adoption of proposed amendments to the “insider dealing” provisions of the SFO
Insider dealing of “listed securities” is prohibited under section 270 (civil liability) and section 291 (criminal liability) of the SFO. The term “listed securities” covers only securities listed on the Hong Kong stock market, securities dually listed in Hong Kong and other jurisdictions and their derivatives.
The regime does not apply to insider dealing taking place in Hong Kong with respect to overseas-listed securities or their derivatives. This limited coverage might damage the reputation of Hong Kong's financial markets and its status as an international financial centre.
The SFO also does not expressly apply to insider dealing perpetrated outside Hong Kong in respect of Hong Kong-listed securities or their derivatives. But approximately 61% of the insider dealing cases handled by the SFC between 2017 and 2021 concerned insider dealing perpetrated outside Hong Kong in respect of Hong Kong-listed securities or their derivatives.
To close the loophole, the SFC proposed to include (i) any acts of insider dealing involving overseas-listed securities or their derivatives if any one or more of such acts occur in Hong Kong; and (ii) any acts of insider dealing involving Hong Kong-listed securities or their derivatives regardless of where they occur.
Respondents to the consultation generally welcomed the proposal. Accordingly, the SFC decided to proceed with the amendments, the actual wordings of which will be available for review during the forthcoming legislative process.
SFC put on hold the proposed expansion of its power towards regulated persons
If the regulated person (i.e. an individual or institution carrying on SFC regulated activities) is guilty of misconduct or the SFC is of the opinion that such person is not a fit and proper person to remain the relevant type of regulated person, the SFC may take disciplinary actions including suspension or revocation of such person’s licence or registration, imposing fines and issuing reprimands.
Section 213 of the SFO empowers the SFC to apply for court orders against the regulated person in the case of contravention with SFO provisions or licensing/registration conditions. The SFC’s codes and guidelines do not carry legal force, and thus a breach of those codes and guidelines by a regulated person, however serious, does not give the SFC a right to apply for a court order against the person.
The SFC proposed to amend section 213 of the SFO so that the SFC may apply for a court order after exercising its powers against the regulated person. This proposal aroused serious public concerns. Some respondents commented that it would give rise to “legal” remedies based on breaches of “non-statutory” SFC codes and guidelines. Some raised the concern that all forms of SFC disciplinary actions might potentially trigger section 213 court order applications, which might be disproportionate or unfair to regulated persons.
Having considered the public submissions, the SFC decided to put this proposal on hold and will consider a full range of other options to achieve the policy objective including strengthening its disciplinary regime.
SFC put on hold the proposed amendment to the advertisement authorisation exemption for financial products
At present, section 103 of the SFO prohibits the issue of advertisements of financial products or collective investment schemes unless the issue has been authorised by the SFC or any exemption in such section applies (a common one is the professional investors exemption).
Generally, if an advertisement of investment products is issued to the general public but the products are sold only to professional investors, such advertisement is still exempted from SFC authorisation. However, the SFC worried that retail investors may still be exposed to unauthorised offers to invest in risky or complex products which are only suitable for professional investors.
Thus, it sought to amend section 103 of the SFO so that advertisements (if not authorised by the SFC beforehand) of products to be sold to professional investors can only be issued to professional investors who have been identified as such in advance through know-your-client procedures, i.e. such advertisements cannot be issued to the general public at all.
A majority of respondents raised concerns over this proposal. Some doubted whether such amendment is necessary when retail investors are not exposed to risks of investment products which cannot be sold to them. Many respondents highlighted that the amendment would bring about increased operational difficulties and impact on intermediaries’ marketing processes.
Before sending the advertisement, the intermediary would have to conduct pre-checks to ensure all target recipients are professional investors. This might limit the recipient groups for smaller intermediaries vis-a-vis large financial institutions which already have sizeable pre-existing professional investor base to market their new products.
The SFC eventually decided not to proceed with this proposal but reminded that, to invoke the professional investor exemption, the intermediary must demonstrate a clear intention to sell the products only to professional investors.
