Understanding the nature of SFC inquiries and investigations
According to the latest SFC quarterly report, the SFC launched 53 in-depth inspections of licensed corporations, including auditing their compliance and regulatory requirements, and filed 1,929 requests for commercial and accounting records from corporations as a result of market surveillance conducted in the third quarter of 2022. The SFC continues to take enforcement action against licensed corporations for violations and seek convictions in some cases. In the last quarter, the SFC fined four corporations and five individuals. The highest fine imposed on a licensed corporation in the last quarter was as much as HKD 20.1 million. In addition, investigations against certain companies and individuals have been suspended, and those barred from re-entering the industry for a certain period of time due to violations of the law remain eligible to continue their activities. In the event of significant misconduct, the SFC is prepared to impose lifetime bans on licensed individuals if warranted by the circumstances of the case.
This article considers two types of SFC inquiries among the many different options available to that authority to seek information and initiate an investigation. One type of SFC request is a formal request pursuant to Art. 180 of the Securities and Futures Regulations (SFO) in connection with an SFC inspection by the SFC Brokers Department. Such inspections mainly consist of a local or remote review of the activities of a regulated licensed corporation or include oversight focused on topical issues. Section 180 authorizes an SFC officer to enter premises to inspect, copy, record, and ask questions about the business of the corporation or its affiliate, and any transaction or activity within the business of the corporation or its affiliate. Supervision of SFC intermediaries can also refer any possible wrongdoing to the SFC Enforcement Division, which can invoke the full range of investigative powers under Article 182.
Another type of SFC request is a request for information triggered by market surveillance pursuant to Art. 181 SFO, and these initial inquiries are normally undertaken by the SFC Enforcement Division when information and documents are requested from an individual in connection with their commercial activities. This section authorizes the SFC to obtain information regarding securities, futures, leveraged currency contracts and collective investment schemes. The SFC may investigate such cases if it has reasonable grounds to believe that the person may have been involved in embezzlement, fraud, misdemeanor or other misconduct in connection with trading, advising or managing investments in accordance with Art. 182 and 183. In such circumstances, the SFC may disclose material it has obtained from a person under its jurisdiction in Hong Kong for subsequent transfer to a foreign regulatory authority for the purpose of assisting in an investigation of cross-border misconduct pursuant to Article 182 and 183. 186 SFO.
It is important to understand the nature of any notice received by the SFC, as well as its implications and the requirement to comply with statutory confidentiality obligations. Typically, requests for information are subject to short response times, although reasonable requests for an extension of time are usually granted in favor of the entity or individual making the request.
Eberhard Advisory assists clients with a wide range of SFC regulatory inquiries, both routine and non-enforcement-related. If you want more information from us on how we can help you prepare for your routine inspection, as well as deal with potential enforcement proceedings, please contact our team.
