The January, 2020 SFC licensing circular suggests some activities undertaken by private equity firms may trigger SFC licensing obligations
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The appearance of an SFC investigative team at your door in the early morning is an intimidating experience. Are you obliged by law to let them enter your premises or do you have the right to refuse them entry? What records and documents can they inspect, copy and seize? Do you have to cooperate with them and if not, should you cooperate with them? What steps should you take to protect your legal rights? In this article, we provide a brief background to the applicable law and give high level guidance on what to do to plan for and to handle a search warrant.
The Securities and Futures Ordinance (“SFO’”) empowers the Securities and Futures Commission (“SFC”) to investigate a wide range of offences and other misconduct involving companies listed on the Stock Exchange of Hong Kong (“SEHK”) as well as firms (“SFC regulated firms”) licensed or registered with the SFC.
Under section 182 of the SFO, each SFC investigation begins with a direction to its employees or, with the consent of the Financial Secretary, other persons to investigate those offences (together “investigators”). Investigators have substantial powers under section 183 of the SFO, including the power to require a person to:
A person who, without reasonable excuse, fails to comply with a requirement of an investigator, as set out above, commits a criminal offence (section 184 of the SFO).
Section 191 of the SFO supplements these investigation powers with powers, under the authority of a search warrant, to enter premises, by force if necessary, and to search for, seize and remove records or documents.
Companies listed on the SEHK and SFC regulated firms should establish a response plan in the event that the SFC arrives at their premises. A response plan will not only help to ensure that the legal rights of the organization being searched are respected but that the organization will not be subjected to unnecessary burdens – burdens which could, in worst case scenarios, paralyze critical functions of its business.
Ideally, the response team will include at least (i) one member of the senior management team who will take responsibility on behalf of the organization for the search, (ii) one or more members of the secretarial or administrative team who have good familiarity with the location of documents and who can assist with note-taking and the photocopying of records and documents, (iii) a member of the information technology team who can assist with the production of electronic records, if required, and (iv) a legal adviser.
An external legal adviser can provide an independent and objective assessment of the situation and advice on the minimum requirements to comply with legal obligations under the investigation and search warrant, the desirability of cooperating further with the investigators and other measures that may be necessary to protect the organization being investigated. If a decision is made to retain an external legal adviser, it is highly desirable to identify one well before a search warrant is executed. There is little time when a search warrant is being executed to shop around for a legal adviser and for the legal adviser to take instructions to understand the business of the organization whose premises are being searched.
Search warrants are generally executed in the early morning. For business premises, staff most likely to arrive first to the office should know who to call if they arrive to find investigators at the door. Investigators may also execute search warrants at the homes of executives who may have sensitive information in their possession. Again, such executives should know who to call if they encounter investigators at the door in the early morning. If the response team comprises a number of individuals, it may be desirable to establish a call tree.
During the execution of a search warrant, investigators may seize hard disk drives, email servers and file servers. If the organization being searched does not have data and application redundancy, the seizures may paralyze its business. Ideally, data and applications will be mirrored well in advance of any search so that the removal of one mirrored set will not disrupt normal business activities.
A search warrant only permits the seizure of records or documents relevant to an investigation. Obviously, if there are no such records or documents, there is nothing to seize. As a result, an organization’s record retention policy will undoubtedly affect the overall efficacy of a search warrant.
Naturally, no right thinking person advocates the destruction of records or documents to pervert the course of justice. Indeed, it is unlawful to destroy records or documents which might otherwise be seized at the time of the search. However, storage considerations aside, every organization is entitled to manage its records and documents to ensure that the state of its records and documents do not unfairly prejudice it in legal proceedings. For example, a document out of context may give the wrong impression but, owing to the passage of time, memories may have faded or the authors and parties familiar with the background to the document may have left the organization. An organization may not wish to keep such a document. Equally, for example, an email may have been authored as part of a casual discussion and the author may not have given the same degree of care in selecting his or her words as he or she would have in a formal communication. Nevertheless, by its very nature, the email has the same permanence as a formal communication. Again, an organization may not wish to keep such an e-mail.
Similarly, every organization is entitled to maintain confidentiality of its information. An organization may not, for example, wish to disclose information about its business that, if disclosed, would place it at a competitive disadvantage. Whilst investigators must hold all information acquired subject to statutory secrecy provisions, there are well defined exceptions to these secrecy obligations. It is not unforeseeable that information in records or documents seized under a search warrant may ultimately end up in the public domain. An organization may wish to limit the type, extent and kind of records or documents it keeps which may contain such information.
Given the foregoing, organizations should give careful consideration to a record retention policy which balances compliance with statutory record keeping requirements and the need to create and keep documents available for defensive purposes against the desirability of maintaining a smaller and more manageable set of records and documents.
Organizations who value legal professional privilege should give early consideration to how they will maintain privilege in a practical way. Where investigators gain access to a privileged document, the benefit of privilege may be lost. However, it is generally not credible to make a blanket claim that everything sought to be seized under a warrant is privileged and therefore, should be sealed pending a judicial determination as to which of such records or documents are in fact privileged.
Organizations may wish to establish a policy of marking documents which may be potentially subject to legal professional privilege. For example, where a project binder contains privileged information, it may be desirable to include a cover sheet in the binder indicating that the binder contains privileged materials. This enables the response team in the heat of the moment to make a credible decision to claim privilege and to protect against the accidental disclosure of privileged materials.
When the SFC arrives at the premises, the occupier of the premises should immediately activate the response plan.
The occupier should call the legal adviser designated in the response plan and ask them attend at the premises as soon as possible. The occupier of the premises may request the investigators to wait (preferably in a closed conference room) until the legal adviser arrives but the investigators are not bound to do so.
The occupier should confirm that he or she is in fact dealing with the SFC, rather than the police. The powers of the police and the SFC are different. In this article, we assume that the investigation team is an SFC team.
The occupier should verify that the investigators have the authority to enter the premises. In this regard, the occupier should verify that the investigators have a search warrant issued by a magistrate by asking to see and taking a photocopy of the warrant. The SFC and its investigators have no right to enter any premises, whether residential or business, without the occupier’s consent or other proper authority. A mere direction from the SFC appointing individuals as investigators does not authorize those individuals to forcibly enter premises. If the occupier is unable to verify the existence of a valid warrant, he or she should contact the police and seek legal advice.
The search warrant must meet basic threshold requirements.
The occupier should verify that the SFC’s search is being conducted in the correct location. If the address on the search warrant does not match the premises being searched, the warrant may be invalid for execution at those premises.
The occupier should verify that the individuals seeking entry to the premises are in fact authorized to enter the premises. In this regard, the occupier should ask to see and take a photocopy of the identification documents of each of the individuals proposing to enter the premises and should ensure that such individuals are either named in the search warrant or fall within a class of persons listed in the warrant. Any person not authorized by the warrant to enter the premises has no authority to enter and the occupier may refuse that person entry.
It is important to keep copies of records or documents which are seized, both because of the possible need to refer to those records or documents in the normal course of business and because of the need for legal advisers to know what information the investigators may have in their possession. At the same time, it is important to ensure that the investigators execute the warrant within the scope of the authority granted to them.
Members of the response team should accompany the investigators throughout the execution of their search warrant. Naturally, in so doing, the response team should not impede the investigators in executing the warrant in accordance with the authority granted to them. However, the investigators have no authority to prevent the response team from accompanying them.
A member of the response team should keep written notes of the search, including details as to where the investigators have visited, whom the investigators have spoken to, what, if anything, the investigators have said or been told and what records or documents the investigators have asked for, inspected, copied or seized. At the same time, a member of the response team should make a copy of all documents seized. Investigators are generally obliged to allow the response team to make copies of documents seized.
The notes of the search and document copies will assist legal advisers going forward to ascertain the focus of the investigation and to know what information the investigators may possess and will serve as evidence in the event that there is a need to judicially challenge the actions of the investigators.
At the end of the search, the investigators may produce an inventory list of records and documents seized and ask a member of the response team to sign the inventory list. The response team should carefully review the inventory list against their own records as to what was copied and seized and should only sign the inventory list if they believe it is an accurate and complete record.
The search warrant should specify what records or documents the investigators may take though the specification may be in broad terms. It likely suffices, for example, if the warrant states “any record or document believed to contain or is likely to contain information relevant to the investigation of persons who are reasonably believed to have engaged in insider dealing contrary to section 270 of the SFO”.
The investigators have no power to search for, seize or remove any records or documents which fall outside what is specified in the search warrant. If there is any doubt or question as to whether particular records or documents fall within the warrant, the response team should object to the search for, seizure or removal of such documents, make a note of the objection and, if the investigators persist, seek to seal them pending a court hearing. However, the investigators have the discretion to search for, seize and remove these records or documents and any questions as to the propriety of their action must be addressed at a subsequent court hearing.
A search warrant does not authorize the investigators to search for, seize or remove documents which are the subject of legal professional privilege. As a result, as with other records or documents in respect of which the response team objects, if the response team wishes to claim privilege in respect of specific records or documents, they should object to the production of those records or documents on the basis of privilege and seek to seal them pending a court hearing or agreement as to their disposition if the investigators insist on inspecting them.
Even without any specific authority in a search warrant, under the SFO, investigators have the power to require any person whom they have reasonable cause to believe is employed in connection with the business conducted on the premises specified in the warrant to produce for examination any record or document which is in the possession of the person and which they have reasonable cause to believe may be relevant to the investigation. Accordingly, unless there is a valid objection to the production of any record or document (as set out above), the response team should cooperate with the investigators. A failure to cooperate with, or indeed, an attempt to obstruct the execution of the search warrant is a criminal offence.
The investigators may seek to question staff at the premises being searched. To the extent that the questions relate to the production of records or documents which are the subject of the search warrant, staff should answer those questions. As noted above, the investigators have a statutory power to require staff to produce such records or documents. However, to the extent that the questions do not relate to the production of such records or documents, it is desirable for staff to take legal advice as to whether they are required to answer such questions and whether it would be desirable to answer such questions. Questions in this category would include, for example, questions asking for an explanation of documents or questions asking for the background to documents.
It may sometimes be desirable to volunteer information to the investigators. For example, the response team may wish to bring to the investigators’ attention information which would be exculpatory in nature given the offence alleged in the search warrant. However, if there is any doubt as to the value of volunteering information or the accuracy of the information to be volunteered, it is generally desirable to limit the flow of information during the execution of a search warrant to that which is strictly required by law. This will give the organization greater flexibility to consider its position in light of (i) the records and documents rendered during the execution of the warrant and (ii) legal advice taken with the benefit of a more complete factual background.
Where a staff member volunteers information, the investigators may produce a written statement for the staff member to sign. The staff member should review the statement carefully and satisfy himself or herself that it is an accurate record. If there is any matter in doubt, the staff member should seek to remove it. Staff should not sign any statement if they are not satisfied that the statement is an accurate record.
Investigators have powers to compel staff to answer questions in 3 circumstances:
However, this does not mean that staff must answer questions on the spot. Staff are entitled to take legal advice before answering questions. In the case of a request for an explanation or further particulars or a request for an answer to a written question, staff are not required to respond verbally and may wish to answer in writing after taking legal advice and giving due consideration to the question asked. Similarly, in the case of a request for an interview on the spot, staff may wish to defer the time of the interview until such time as they are afforded the opportunity to take legal advice and to collect their thoughts more fully.
Investigators have no right to detain any person for questioning. Staff members who have no knowledge of the subject matter of questions asked by investigators should indicate to the investigators that they lack the knowledge to answer those questions.
SFC investigations are generally subject to statutory secrecy provisions (section 378 of the SFO). Persons subject to the statutory secrecy provisions are obliged to keep secret any matter coming to their attention in the course of assisting investigators in the performance of their investigation. Staff who receive an investigation direction (section 182 of the SFO) and a request from investigators pursuant to such a direction to attend an interview or to answer a written question (section 183 of the SFO) may be considered to be “assisting” investigators (albeit involuntarily) and thus, should not generally disclose the existence of the investigation or what the investigators have requested.
Certain disclosures are exempted under the statutory secrecy provisions. Thus, staff may disclose any matter to their legal adviser (section 378 of the SFO). Unless the SFC has requested otherwise, staff may also disclose the fact that they have received an investigation notice and the general nature of the matter giving rise to a secrecy obligation and, in the case of a request for an interview, staff may also disclose to their employer the date, time and place of the interview.
Significantly, the statutory secrecy provisions only apply to information coming to staff's attention in the course of assisting investigators in the performance of their investigation. Thus, staff who witness the execution of a search warrant but do not assist in the execution of the search warrant (e.g. by producing documents at the request of the investigators) should not be subject to statutory secrecy provisions.
Originally published by Thomson Reuters GRC
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