SFC Guidance on Requirements for Licensing under the Law: Reliable or Not
June 30, 2010
By Timothy Loh and Rose Zhao
Market participants seek guidance from the SFC with a view to ensuring
compliance with applicable laws. Recently, the SFC has begun to take
a more active role in providing such guidance, in many cases
discouraging licensed persons from holding a license or indeed,
indicating that the SFC will not grant a license based on its own
interpretation of the law. As the courts alone can conclusively
interpret laws, the SFC's approach is unsatisfactory, placing
market participants at risk for breach of applicable laws. In this
article, we discuss how market participants should proceed in the
face of this dilemma.
TIMOTHY LOH | Financial Services & Law Review
Vol. 4 (2010)
The past months have seen increasing activism on the part of the
Securities and Futures Commission ("SFC") in providing guidance to the market on the interpretation of the
Securities and Futures Ordinance ("SFO"). Whilst such guidance is often sought and welcomed by the market,
recent guidance from the SFC has been disturbing in the vigor with
which it has discouraged market participants from holding licenses
under the SFO. A recent decision of the Hong Kong Court of Appeal
serves as a reminder that the SFC does not have the jurisdiction to
conclusively interpret the SFO. Where the SFC takes the position
that a market participant does not need a license and refuses to
grant a license based on this position, there is a real possibility
that should the requirement for a license ever be litigated, a court
may ultimately find that the market participant has breached the SFO.
BACKGROUND
Since the enactment of the SFO in 2003, the SFC has issued responses to
frequently asked questions ("FAQs") and circulars to provide guidance on areas within its regulatory
jurisdiction. Some of these FAQs and circulars inform the market of
the manner in which the SFC proposes to exercise its statutory
jurisdiction under the SFO. However, some of these FAQs and
circulars purport to provide definitive interpretations of the SFO.
Licensed Persons Conducting Activities Outside Hong Kong
For example, in April, 2010, the SFC issued a circular ("Non-HK
Activities Circular") which appears to provide definitive guidance on the licensing
provisions of the SFO. The circular provides that:
"the SFO only permits the holder [of a license] to carry on business in a
regulated activity... in Hong Kong. The SFO neither imposes upon
corporations and individuals an obligation to be licensed in relation
to activities which are conducted by them outside Hong Kong, nor
confers upon them, after they have been licensed, the ability to
conduct business outside Hong Kong... Accordingly, by way of
example, individuals who are based in another jurisdiction for the
purpose of performing the function of recruiting new clients from
that other jurisdiction for a corporation that is licensed in Hong
Kong, are not required to be licensed under the SFO."
Licensing Requirements for Sale of ILAS
Similarly, for example, in August, 2009, the SFC issued a circular which sets
out the SFC's view on whether intermediaries who are insurance agents or insurance brokers (together "insurance intermediaries")
are required to be licensed by the SFC where they engage in
promoting, offering or selling investment-linked assurance schemes
("ILAS") to the Hong Kong public. Whilst this circular does not go so far as
the Non-HK Activities Circular to provide a definitive interpretation
of the SFO, it does offer the SFC's interpretation of the SFO and
goes on to provide that the:
"SFC considers that insurance intermediaries need not be licensed under... the SFO... and the SFC does not regard insurance intermediaries as
being in breach of... the SFO for the same reasons that insurers or
corporate insurance brokers promoting, offering or selling ILAS to
the public are not, namely, that they do not carry on a business in a
regulated activity."
The Ng Decision
These SFC circulars appear to be definitive in nature.However, in Ng
Chiu Mui and Anor v. the Securities and Futures Commission
(CACV 141 of 2009, May 26, 2010), the Court of Appeal affirmed that
SFC interpretations of the SFO are not binding as a matter of law.
Facts
In this case, the appellants were licensed persons accredited to Hantec
International Ltd. ("Hantec HK"),a company licensed with the SFC for Type 3 (leveraged foreign
exchange) regulated activity. Hantec HK introduced trades to an
affiliate ("Hantec NZ") in New Zealand which was not licensed by the SFC or any other
regulatory body. The SFC disciplined the appellants on the basis
that they had aided and abetted Hantec NZ in carrying on a business
in leveraged foreign exchange trading without a license. On appeal,
the Securities and Futures Appeals Tribunal ("Tribunal") (AN 7-9 of 2007, May 15, 2009) upheld the SFC's disciplinary
action.
Active Marketing
During the course of the proceedings, the Tribunal addressed the issue of
whether Hantec NZ had actively marketed its services to the public in
Hong Kong in breach of the SFO, ss. 114 and 115. In this regard, the
Tribunal's attention was drawn to the SFC's FAQs on the SFC
website which provide guidance on the ambit of the active marketing
provisions of the SFO. The Tribunal dismissed the FAQs stating:
"I do not consider... the content of the SFC website to represent any
more than straws in the interpretative wind."
Decision
On appeal, finding against the appellants, the Court of Appeal sided
with the Tribunal, stating that:
"the SFC's view can be of no relevance as a matter of law unless it is a
tool of statutory interpretation. Since [counsel] accepts that it is
not such a tool, the Tribunal's approach was plainly correct."
Consequences of Decision
Whilst the decision of the Court of Appeal merely affirms long-standing law,
it is a context specific reminder that interpretations by the SFC are
mere opinions rather than conclusive and binding interpretations at
law. Whilst such interpretations are always relevant because the SFC
is the regulator responsible for enforcing the SFO and it is less
likely that the SFC will enforce the SFO in a manner inconsistent
with its own interpretations, the SFC does not have the exclusive
authority to litigate a breach of the SFO.
A private litigant may, for example, allege a breach of SFO licensing
requirements in proceedings against an intermediary. In this case, a finding by the court that
the intermediary was in breach of the SFO despite compliance with SFC guidance could require
other intermediaries to shut down operations pending licensing.
Equally, for example, the SFC itself is free to change its interpretation
and in this event, the SFC may take the view that a market participant which relied upon the
SFC's interpretation was not entitled to do so as it did not fall within the circumstances
then contemplated by the SFC.
Finally, it is not inconceivable that in an egregious
circumstance, the Secretary for Justice, who is not in any way bound by SFC guidance,
would seek to commence criminal proceedings against an intermediary for breach of licensing
requirements under the SFO despite the intermediary's purported compliance with SFC guidance.
Conclusion
Market participants should remember that legal advice should be sought
before relying upon guidance provided by the SFC. The guidance may
be inapplicable to particular circumstances. Equally, the guidance
may set out an interpretation of the law which may not be upheld by a
court of law. In this latter regard, reliance on SFC guidance does
not afford complete protection from the consequences for a breach of
the law.
Consequences of Licensing Breaches
A breach of the licensing requirements under the SFO is a criminal
offence, punishable on indictment by imprisonment for up to 7 years.
A conservative approach to compliance clearly dictates that market
participants should hold a license whenever there is any risk of
breach without a license.
Forward Action
New market participants should seek legal advice to determine whether
there is any risk of a breach of the SFO if they perform certain
functions without a license on the basis of an interpretation by the
SFC of the SFO. If there is such a risk, they should apply for a
license despite the SFC interpretation and may wish to consider
extending the scope of the functions which they will actually perform
to ensure that they perform functions which the SFC accepts require a
license.
Where the SFC threatens to revoke the license of an existing market
participant, the market participant should again consider extending
the scope of the functions which it will actually perform to ensure
that it performs functions which the SFC accepts requires a license.
At the same time, it may consider whether to challenge the SFC's
interpretation through the Securities and Futures Appeals Tribunal.
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