Cross-border supervision: new SFC proposals
Hong Kong’s Securities and Futures Commission (SFC) proposes to amend the Securities and Futures Ordinance to boost the level of supervisory assistance the SFC can provide to overseas regulators.
Over recent decades, international cooperation among national regulatory bodies has strengthened in response to a number of different trends, most obviously the increasingly crossborder nature of regulated entities. This process has been led by supranational bodies such as the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO).
This month’s second cover story, for example, reports on the efforts of the FSB to establish global principles for how national regulatory authorities can cooperate in resolutions of systemically important financial institutions (see page 16). In 2010, IOSCO issued its Principles Regarding Cross-Border Supervisory Cooperation (IOSCO Report), which includes a set of principles to assist securities regulators to develop and maintain supervisory cooperation arrangements. The IOSCO Report establishes the principle that authorities should share information to assist each other in fulfilling their respective supervisory and oversight responsibilities for regulated entities operating across borders.
These global trends have very significant implications for Hong Kong where so many listed companies are part of international groups or incorporated overseas. The Securities and Futures Commission (SFC) is already actively engaged in cross-border regulatory cooperation. It has entered into bilateral memoranda of understanding (MOUs) with overseas regulators and participates in IOSCO – for example, it has signed up to the IOSCO ‘Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information’.
There is, however, a limitation to how far the SFC can cooperate in supervisory activities with overseas regulators. It can share information in its possession with overseas regulators, but it is not able to exercise its supervisory powers to obtain information for the purposes of assisting an overseas regulator in non-enforcement related matters where a licensed corporation (or its group company) is also regulated by that overseas regulator. The current SFC proposals aim to fill this gap.
The SFC proposals
Under the existing Securities and Futures Ordinance (Cap 571) (SFO), the sections relating to the provision of assistance by the SFC to overseas regulators are:
• Section 186 (which regulates incoming requests, by setting out, amongst other things, the types of overseas regulators the SFC may assist, the types of requests it may accept, the conditions for accepting a request and the investigatory and other enforcement powers that it may exercise if a request is accepted), and
• Section 378(3)(g)(i) (which regulates outgoing provision of non-public information).
Under these provisions, the SFC may assist overseas regulators by providing non-public information essentially in two ways:
1. for enforcement purposes only: the SFC may assist to obtain information pursuant to Section 186 by exercising its relevant enforcement powers (for example, to investigate under Sections 182 and 183), and disclose the same to an overseas regulator through the gateway under Section 378(3)(g)(i), and
2. for enforcement or non-enforcement purposes: if the requested information is already in the possession of the SFC at the time of the request, the SFC may disclose it to an overseas regulator through the gateway under Section 378(3)(g)(i).
As a result, while the SFC may obtain information for its own supervisory purposes under Section 180, there are currently no provisions under the SFO that explicitly enable the SFC to exercise its supervisory powers to obtain information for the purposes of assisting overseas regulators in non-enforcement related matters. The SFC therefore proposes that Sections 180 (in respect of supervisory powers of the SFC) and 186 (in respect of assistance that may be provided by the SFC to overseas regulators) of the SFO be amended so that a narrow form of supervisory assistance could be provided upon request to overseas regulators.
The market response
On 19 December 2014, the SFC issued a public consultation on its proposals – Consultation Paper on Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations. The consultation ended in mid-January 2015 and the SFC published its consultation conclusions last month (5 June 2015).
‘The majority of respondents agreed with the overall objectives of the proposals, including that it is important for global regulators to maintain supervisory cooperation in the regulation of financial corporations,’ the SFC states in its consultation conclusions.
The SFC argues that the amendments to the SFO will enable it to have a more effective and comprehensive supervision of licensed corporations which operate in multiple jurisdictions by being able to engage regulators outside Hong Kong to enter into international supervisory cooperation arrangements including MOUs, adhere better to international regulatory standards and, in certain cases, secure access for Hong Kong licensed corporations to certain overseas markets which are only open to jurisdictions that are parties to supervisory cooperation arrangements. For instance, supervisory cooperation arrangements are required under the Alternative Investment Fund Managers Directive for SFC-licensed asset managers to access the European Union market.
To mitigate against the risks that information provided by the SFC to an overseas regulator may be abused, safeguards have been built into the proposed supervisory assistance measures. The SFC emphasises that such information is not intended to be used for enforcement purposes. The proposed amendments to the SFO therefore require an overseas regulator in all cases to undertake in writing that it will not use the information in any proceedings unless an additional request for investigatory assistance is made in accordance with the SFO.
‘Therefore, in the event that such information (for example, an answer to a question about a document or record) disclosed an apparent breach of the regulatory regime administered by the overseas regulator, and it wished to use the information in proceedings against the person from whom it had been obtained, then the overseas regulator must request enforcement assistance from the SFC under Section 186(1) of the SFO. In these circumstances, the usual protections would apply such as the privilege against self-incrimination which is already provided for in the SFO,’ the SFC states in its consultation conclusions.
Moreover, the proposals only relate to Hong Kong licensed corporations which are regulated overseas and/or have group companies regulated overseas. As such, the proposals will not affect domestic Hong Kong licensed corporations where neither they nor their group companies are regulated by overseas regulators. Further, the proposed amendments will only give the SFC a discretion to provide supervisory assistance to an overseas regulator and will not impose an obligation to do so.
In response to concerns raised during the consultation, the SFC proposes an additional requirement that the regulator outside Hong Kong would need to confirm that it has not been and will not be able to obtain the requested information by any other reasonable means and it is unable to ascertain the specified supervisory matters fully without the information sought. This is designed to guard against the new measures being used for unwarranted, trivial or ‘fishing’ requests from regulators outside Hong Kong.
The ‘Consultation Paper on Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations’ (December 2014), together with the Consultation Conclusions (June 2015), are available on the SFC website: www.sfc.hk.