Grounded Ingenuity | Refined Results

November 16, 2020
By Timothy Loh and Mary Lam
Investigations ("SFC investigations") by the Securities and Futures Commission ("SFC") Enforcement Division are formal enquiries into possible wrongdoing. Key objectives when handling an SFC investigation are to persuade the SFC that there has been no wrongdoing, to lay out a vision of events that militates against the exercise of discretion to prosecute in the public interest and to create a record of events which, if prosecution does ensue, does not contain any unnecessary admissions of liability or guilt. Achieving these objectives requires good legal representation, a thorough understanding of the facts and, in the case of a company, the cooperation of affected employees. In this article, we provide context to SFC investigations and discuss how a person who is subject to an SFC investigation may achieve these objectives. If you would like to gain more insight into these issues, please contact our SFC Investigations & Prosecution lawyers.

The receipt of an SFC investigation notice calls for a careful and considered response, whether or not the notice specifies that the person is a person under investigation. First, a response to an SFC investigation notice may influence how the SFC proceeds and accordingly, the response is a means of diverting the SFC’s attention away from the recipient of the investigation notice. Secondly, a response to an SFC investigation notice forms a permanent record. In the event that the SFC decides to prosecute or otherwise take action against the recipient of the investigation notice, any attempt to deviate from that response in future proceedings may lack credibility.

Understanding the Nature of an SFC Investigation

Though it is common to refer all manner of notices from the SFC requesting information in the context of a complaint or possible wrongdoing as SFC investigations, in fact, there are a number of different types of SFC enquiries:

  • Formal SFC Investigations
  • SFC Corporate Finance Enquiries
  • SFC Surveillance Enquiries
  • SFC Inspections and Field Audits
  • SFC Intermediary Enquiries

Formal SFC Investigations

One type of SFC enquiry is a formal investigation under the Securities and Futures Ordinance (“SFO”), s. 182. These formal investigations are undertaken by the SFC Enforcement Division and are properly regarded as SFC investigations because they invoke the full range of investigative powers under the SFO and are intended to assist the SFC in determining whether wrongdoing has taken place and if so, by whom.

Formal SFC investigations under the SFO, s. 182 enable the SFC to compel a person to attend an interview for the purpose of answering questions and to compel a person to produce records and documents and to answer questions.

The SFC Enforcement Division may supplement an SFC investigation through the search and seizure of documents under a search warrant.

SFC Corporate Finance Enquiries

Another type of SFC enquiry is a corporate finance enquiry focused on companies listed on Hong Kong Exchanges and Clearing (“HKEx”) under the SFO, s. 179. Though they appear similar to SFC investigations under the SFO, s. 182, they are undertaken by the SFC Corporate Finance Division rather than by the SFC Enforcement Division. They are intended to assist the SFC Corporate Finance Division in the regulation of the markets.

SFC Corporate Finance enquiries under the SFO, s. 179 invoke only a subset of the investigative powers available to the SFC under the SFO, focusing on the power to require the production of records and documents concerning HKEx listed companies for the purpose of determining whether there has been corporate fraud and misfeasance, fraudulent or unlawful practices, or other misconduct concerning the management of HKEx listed companies or the treatment of their shareholders.

SFC Surveillance Enquiries

A third type of SFC enquiry is a formal enquiry under the SFO, s. 181. Like SFC investigations under the SFO, s. 182, these are formal enquiries initiated by the SFC Enforcement Division. However, unlike SFC investigations under the SFO, s. 182, these enquiries are limited to identifying persons who dealt in or held positions in securities, futures contracts, leveraged foreign exchange contracts, OTC derivative contracts or collective investment schemes at particular times.

SFC Inspections and Field Audits

A fourth type of SFC enquiry is a formal enquiry under the SFO, s. 180. These types of enquiries are focused exclusively on SFC licensed corporations and are intended to enable the SFC Intermediaries Division in their function of regulating SFC licensed corporations to ensure that such corporations meet regulatory standards.

SFC inspections and field audits can lead to referrals from the SFC Intermediaries Division to the SFC Enforcement Division, with the latter then having the option to follow up with an SFC investigation notice under the SFO, s. 182 to begin the enforcement process.

SFC Intermediary Enquiries

A fifth type of SFC enquiry is a voluntary enquiry, meaning an enquiry which has no statutory authority under the SFO. These types of enquiries are often conducted by the SFC Intermediaries Division in response to public complaints.

A response to this type of enquiry is voluntary in that because there is no statutory basis for the enquiry, no offence is committed by reason of failure to respond to the enquiry. This is unlike an SFC investigation notice under the SFO, s. 182, where there may be serious criminal consequences for failing to respond. However, it is sometimes in the interest of the recipient of such an SFC enquiry to respond on a voluntary basis as it is an opportunity to pre-empt a referral to the SFC Enforcement Division who may elect to commence an SFC investigation under the SFO, s. 182.

Managing an SFC Investigation

An SFC enquiry can result in serious consequences whether or not the enquiry is an SFC investigation under the SFO, s. 182 conducted by the SFC Enforcement Division. This is because any enquiry, if improperly addressed, can lead to a referral to the SFC Enforcement Division who may initiate such an investigation. As a result, whilst the considerations in this article are aimed specifically at persons receiving an SFC investigation notice under the SFO, s. 182, the same considerations apply to a great extent in the context of other SFC enquiries.

Steps After Receiving an SFC Investigation Notice

Every SFC investigation is unique and there is no single response template. However, there are predictable patterns to the way such investigations unfold.

Response Team to SFC Investigation

Where a company receives an SFC investigation notice, senior management should establish a response team. Typically, the response team will include employees with first hand knowledge of the events, a senior executive who can make decisions in relation to the response, an in-house lawyer or compliance officer as well as an external law firm.

The choice of law firm to handle a regulatory investigation or enforcement action is a vitally important decision. The firm should have sufficient experience handling SFC investigations so as to confidently assert legal rights and to ensure that the company’s position can be best articulated. Equally, the firm should have in-depth experience in SFC regulatory requirements so as to be able to identify the concerns underlying the SFC investigation, to be able to identify relevant evidence which may exculpate or mitigate and to be able to ensure that there are no unnecessary admissions of guilt or liability.

Understanding the Facts and Applicable Law Underlying SFC Investigation

It is critical to understand the facts underlying the SFC investigation in the context of the laws or regulations governing the conduct which is the subject to the SFC investigation. Such an understanding is a pre-requisite to dealing intelligently with the SFC, ensuring truthful disclosure of information responsive to the SFC's concerns while controlling the flow of information so as to highlight to the SFC information material to the pursuit of particular defences or pleas of mitigation.

With surprising frequency, the facts which are material to defending an SFC investigation are often not as initially thought. Only a proper investigation of the facts and a careful assessment of applicable laws and regulations will reveal these key facts. In this regard, as noted above, it is critical to work with lawyers who are experienced in SFC investigations and well versed with applicable Hong Kong securities laws and SFC regulations so as to determine which facts need to be elicited and highlighted to address any concerns which the SFC may have.

Preparing a Story Responsive to the SFC Investigation

First impressions count. The time to control the disclosure of facts should begin as soon as possible after the receipt of the SFC investigation notice, not with the subsequent receipt of a notice of proposed disciplinary action, the laying of criminal charges or the commencement of prosecution proceedings.

Every interaction with the SFC is an opportunity to present the company's version of the facts and themes of defence or mitigation.

Suspend Practices Targeted by the SFC Investigation

Where the SFC investigation targets ongoing activity, the company should consider suspending that activity pending an independent assessment of the appropriateness of that activity. The company should be careful not to stop the activity on the basis of any admission of liability.

It is important however, to stay focused on the SFC investigation and address the immediate requirements of the investigation. After addressing the immediate demands of the SFC investigation, consideration can be given to a broader scale compliance review.

Manage Relationships with Employees Affected by SFC Investigation

Companies should resist the urge to discipline employees who may have been involved in activities which are the subject of the SFC investigation even if, at first glance, it appears that such employees may have engaged in wrongdoing.

Discipline should follow only after the key facts have been assembled, so as to avoid premature judgment of employees concerned. Strong and premature discipline may alienate employees who possess important information and who might otherwise be helpful in the SFC investigation.

Employee cooperation will be much more difficult to obtain after an employee has been judged harshly and perhaps unfairly. This may be so even if the employee whose cooperation is solicited is not the one who was disciplined.

Employees who are disciplined and feel that they have been unfairly treated may point the finger at senior management in respect of the matters which are the subject of the SFC investigation.

Consider Arranging Legal Representation for Employees Affected by SFC Investigation

Generally, companies have an interest in what employees say in an SFC interview but, as a result of statutory secrecy provisions are unable to arrange for the law firm representing the organization to attend interviews of employees in their capacity as employees. Therefore, companies may wish to fund separate and independent legal representation for employees who are asked to attend an SFC interview, so as to maximize the opportunity for cooperation with the employees in question.

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