Hot on the heels of the International Organization of Securities Commission (IOSCO) Task Force on Cross-Border Regulation Consultation Report (IOSCO Report) published in October 2014, the Hong Kong Securities and Futures Commission (SFC) has released a Consultation Paper in relation to providing assistance to overseas regulators in certain situations.

The SFC’s current powers of acquiring information from licensed corporations (Licensed Corporations) in order to cooperate with overseas regulators (Counterparts) are limited. The purpose of the amendments (which are proposed to be made to Sections 180 and 186 of the Securities and Futures Ordinance) is to allow the SFC, at its discretion, to broaden and exercise its supervisory powers to obtain information in order to assist the Counterparts in non-enforcement matters.

Currently, the SFC may obtain information for its own supervisory purposes and may share information in its possession with Counterparts, but it does not have the power to obtain information for the purposes of assisting Counterparts in non-enforcement related matters where a Licensed Corporation is also regulated by that Counterpart.

The proposed amendments aim to extend the powers of the SFC to provide assistance to Counterparts as follows:  

  1. To obtain and enquire information from Licensed Corporations that is not readily available to Counterparts;
  2. To aid Counterparts in ascertaining potential risks and impact to the financial system of its jurisdiction and complying with legal/regulatory requirements in relation to transactions and activities regarding securities[1]in relation to a Licensed Corporation[2];
  3. Where the information to be obtained relates to any regulated activity carried on by a Licensed Corporation or any transaction or activity which was undertaken in the course of, or which may affect, any regulated activity carried on by the Licensed Corporation; and
  4. To implement enhanced safeguards to prevent abuse and to preserve confidentiality of the information obtained by the SFC for the Counterparts in supervisory cooperation[3].

Furthermore, the proposed amendments impose a discretion on the SFC, not an obligation.

It must be noted that the amendments only apply to licensed corporations and not to registered institutions (eg. banks). The Hong Kong Monetary Authority (HKMA) is the supervisory body of registered institutions, therefore it is deemed more appropriate for Counterparts to request assistance directly from the HKMA instead. The amendments also do not apply to domestic Hong Kong licensed corporations which are not regulated by Counterparts.

Reasons for Amendments

The SFC wishes to facilitate supervisory cooperation with Counterparts and engage in a reciprocal arrangement with them when necessary. This can help Hong Kong regulated entities gain access to overseas markets and Counterparts which otherwise could be denied. Furthermore, the SFC, a member of IOSCO, entered into a number of Memoranda of Understanding (MOUs) with various European Union states pursuant to the Alternative Investment Fund Managers Directive[4]. These MOUs, mentioned in the IOSCO Report[5], call for the exchange of certain information, such that members should actively assist each other by sharing information to fulfil supervisory responsibilities for regulated entities operating across borders. The amendments address an obstacle to supervisory information sharing.

The public consultation ends on 16 January 2015.

[1]Including futures contracts, leveraged foreign exchange contracts, collective investment schemes, OTC derivative products or other similar transactions that the Counterpart regulates

[2]In relation to a licensed corporation, that is regulated by the SFC and the overseas regulator; and/or a related corporation of a licensed corporation where the related corporation is regulated by the overseas regulator

[3]For example, the overseas authority would be required to provide written undertakings to the SFC to the effect that the authority will:

  1. Use the information obtained from the SFC because of the request for assistance solely for ascertaining the matters described in sub-paragraph 25(b) above and will not use the information in any proceedings unless the authority or regulatory organisation has sought and the SFC has agreed to provide such information in accordance with section 186(1);
  2. Treat the information as confidential and not disclose it to any other person for any purpose without the consent of the SFC;
  3. Inform the SFC as soon as reasonably practicable in the event that it receives a legally enforceable demand for disclosure of any of the information and assist in preserving the confidentiality of the information by taking all appropriate measures; and
  4. Cooperate with the SFC in any actions or proceedings

[4]Entered into force on 22 July 2013

[5]4.4.2 on page 23