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Donald Lai ACIS ACS, Solicitor, CPA, argues that there is a need for more clarity on employees’ rights and obligations during search operations of residential premises conducted by the Securities and Futures Commission (SFC).

During the current COVID-19 pandemic, technology has made it possible for employees to access the office system and carry on their job duties from home, but, as this arrangement has become more commonplace, some unexpected consequences have started to emerge. This article looks at one such consequence – the question of employees’ rights and obligations during search operations of residential premises conducted by the SFC.

What are the SFC’s powers?

The SFC has the power to apply to a Magistrate for a warrant to carry out search operations at a private residence and to request the production of records or documents from a search target. Section 191(2) of the Securities and Futures Ordinance (Cap 571) (SFO) and Section 17(2) of the Anti–Money Laundering and Counter–Terrorist Financing Ordinance (Cap 615) (AMLO) make it clear that, under this ‘production power’, an SFC officer can ask the person on the premises to provide the required information rather than having to conduct a full search.

The maximum penalty for breaching a Magistrate’s search warrant is a fine of HK$1 million and imprisonment for two years under Sections 191(6)&(7) of the SFO and Sections 17(9)&(10) of the AMLO. Similar production power is not available in the search warrants granted to the police or the Independent Commission Against Corruption (ICAC).

The exercise of the SFC’s production power is subject to two reasonable caveats. Firstly, the SFC officer must reasonably believe that the person on the premises is employed in connection with the business, which is, or which has been, conducted on the premises. Secondly, the SFC officer must reasonably believe that the record or document in possession of the person is required to be produced under Part 8 of the SFO.

The second caveat attracts little dispute as any records or documents relevant to the investigation are required to be produced on request under Part 8 of the SFO, but does the first caveat essentially exclude the SFC from exercising its production power on residential premises? After all, under normal circumstances, no business would be conducted therein.

The key issue is whether the SFC believes a search target is ‘carrying on a business’ in such premises. In the CL Management Services Ltd case [2016] HKCFI 940, the court held that ‘carrying on a business is a matter of fact and degree’. But where an employee is working ‘bits and pieces’ for his or her company at home, would this amount to carrying on business activities there? This uncertainty is likely to become more important to resolve since an employee’s home, under a home-office arrangement, is likely to be used to conduct business.   

There is further uncertainty in cases where the SFC officer demands a mobile phone – which can be considered as ‘records or documents’ as per the Cheung Ka Ho Cyril case [2020] HKCFI 270. The SFC officer is entitled to seize any mobile phone left unattended anywhere in a residential premises. But if a search target has the mobile phone in his or her pocket, the SFC officer has no legal power to demand the production of the mobile phone or conduct a physical search of the person to seize the phone. The SFC officer can request voluntary production, but the person is under no legal obligation to comply with such a request and a refusal would not amount to an obstruction.

The work-from-home arrangement might therefore open an alternative interpretation of the SFC’s production power since there is still some uncertainty in the case law relating to the production powers of the SFC when searching residential premises.

The implications for governance professionals

How the SFC will interpret their production powers in their search operations of residential premises is uncertain, but governance professionals, in particular company secretaries, should be alerted to the potential implications of these issues. Companies generally have standard guidelines on how employees should respond to SFC search operations of business premises, but such operations conducted in residential premises may be more of a grey area. As part of their risk assessment processes, company secretaries should strengthen internal policies and procedures to guide employees on how to respond to SFC search operations at their homes.

Employee training should highlight the investigative powers of SFC officers and the implications of the alternate interpretation they may have of these powers when conducting searches of residential premises. Companies may also want to separate office equipment and employees’ electronic devices as much as possible. Companies should discourage employees from using their own electronic devices to carry out office work and avoid saving office records or documents on their personal electronic devices.

Where possible, the company should provide office equipment for employees to work on at home. Office records and documents should be saved in a centralised office network server. Employees should also be encouraged to keep a regular backup of their electronic devices to mitigate disruption to their daily lives. That way, even if an SFC officer seizes their electronic devices, the employee can restore the backup data on a new device.    

Conclusion

COVID-19 has changed our modes of working permanently. The work-from-home arrangement may well remain the new normal after the pandemic is over. In this context, the questions raised in this article surrounding the SFC’s production powers when searching residential premises will become increasingly important to address. As business will be increasingly conducted at home, employees need to know their rights and obligations during SFC search operations. Governance professionals, and in particular company secretaries, should be well prepared to give guidance on these important issues.

Donald Lai ACIS ACS, Solicitor, CPA


Donald Lai is a securities law specialist and a contributing editor to Securities and Futures Ordinance (Cap 571): Commentary and Annotations (2019 Edition), published by Sweet & Maxwell.

Do you have issues you would like to raise, or expertise you would like to share, with fellow members of the Institute? Members of the Institute are welcome to submit articles to CSj. Please contact the CSj Editor, Kieran Colvert, by email: kieran@ninehillsmedia.com.

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