In these FAQs on SFC License Type 9, we provide guidance on SFC asset management regulation
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In an investigation ("SFC investigation") by the Securities and Futures Commission ("SFC") Enforcement Division, the SFC has the power to obtain a search warrant. Search warrants empower an SFC investigation team to forcibly enter premises, to search those premises and to seize documents and devices containing information. This article describes how search warrants are used in an SFC investigation and provides practical guidance on how to manage this hostile SFC enforcement action. Anyone interested in more information in this area can contact one of our SFC Investigations & Prosecution or White Collar Crime & Regulatory Defence lawyers.
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The appearance of an SFC investigation team at your door in the early morning is an intimidating experience. Are you obliged by law to let the SFC investigators enter your premises or do you have the right to refuse them entry? What records and documents can the SFC investigators inspect, copy and seize? Do you have to cooperate with the SFC investigators and if not, should you cooperate with them? What steps should you take to protect your legal rights?
The Securities and Futures Ordinance (“SFO”) empowers the SFC to investigate a wide range of offences and other misconduct, including in broad terms any offence committed under the SFO, any fraud, misfeasance or other misconduct in dealing in or managing investment in securities, any market misconduct and any breach of disclosure requirements under the SFO.
Each investigation begins with the issuance of an SFC investigation notice under the SFO, s. 182. The notice appoints members of the SFC Enforcement Division to investigate the matters described in the notice.
The issuance of an SFC investigation notice gives the members of the SFC investigation team appointed under the notice powers under the SFO, s. 183. These powers include the following:
Document Production - The SFC investigation team can require a person to produce any record or document which is, or may be, relevant to the investigation and which is in the person’s possession.
Explanation of Documents – The SFC investigation team can require a person producing a record or document to give an explanation or further particulars in respect of any record or document so produced.
SFC Interview – The SFC investigation team can require a person to attend an interview at a specific time and place to answer any questions relating to the matters under investigation.
Reasonable Assistance – The SFC investigation team can require a person to give all assistance in connection with the investigation which the person is reasonably able to give.
A person who, without reasonable excuse, fails to comply with a requirement of an investigator, as set out above, commits a criminal offence under section 184 of the SFO.
The SFO, s. 191 supplements these investigation powers. It empowers the SFC investigation team, under the authority of a search warrant issued by a magistrate, to do the following:
Forcible Entry - enter premises, by force if necessary, at any time within the period of 7 days beginning on the date of the warrant;
Search and Seizure of Documents - search for, seize and remove records or documents which the SFC investigation team has reasonable cause to believe may be relevant to the SFC investigation;
Compelled Document Production - require any person on the premises to produce for examination records or documents which the SFC investigation team has reasonable cause to believe may be relevant to the SFC investigation;
Prohibition on Document Removal or Destruction – prohibit any person on the premises from removing from the premises any record or document that the SFC investigation team has requested to be produced, or erasing, adding to or otherwise altering any particular in any such record or document.
For these purposes, a “record” includes any device in which sounds, visual images or other data are embodied so as to be capable, with or without the aid of other equipment, of being reproduced.
When the SFC investigation team arrives at the premises specified in the search warrant, the occupier of the premises should consider checking the validity of the warrant.
The occupier should call its legal advisers and ask them attend at the premises as soon as possible. The occupier of the premises may request the SFC investigation team to wait (preferably in a closed conference room) until the legal adviser arrives but the SFC investigation team is not bound to do so.
The occupier should verify that the SFC investigation team has the authority to enter the premises. In this regard, the occupier should ask to see the search warrant issued by the magistrate and take a photocopy of it.
An SFC investigation team has no right to enter any premises, whether residential or business, without the occupier’s consent or other proper authority, such as a search warrant. A mere SFC investigation notice issued under the SFO, s. 182 does not authorize members of the SFC investigation team to forcibly enter premises.
If the occupier is unable to verify the existence of a valid search warrant, he or she should contact the police and seek legal advice.
The occupier should confirm that he or she is in fact dealing with an SFC investigation rather a police investigation. The powers of the police and the SFC are different.
The search warrant obtained for the purposes of an SFC investigation must meet basic threshold requirements under the SFO:
Preconditions to Issuing Search Warrant - The search warrant should indicate on its face that the magistrate is satisfied that there are reasonable grounds to suspect that there are, or are likely to be, on premises specified in the search warrant, records or documents which are or may be relevant to the SFC investigation.
Date of Executing Warrant - The search warrant must be executed on or before the date specified in it (such date being within 7 days of the date of issue of the search warrant), meaning that the SFC investigation team must undertake the search on or before this specified date. Thereafter, the search warrant will automatically lapse and become invalid.
Description of Nature of Alleged Misconduct - The search warrant should describe the alleged misconduct in respect of which the search is authorized so as not to mislead the occupier as to the nature of the alleged misconduct (e.g. any alleged offence committed under the SFO, or any alleged misconduct in connection with any dealing in securities). A search warrant may be defective where the occupier has no way of determining which of a wide range of misconduct is the subject of the SFC investigation.
The occupier should verify that the SFC’s search is being conducted at the correct location. If the address stated on the search warrant does not match the premises being searched, the search warrant may be invalid for execution at those premises.
The occupier should verify that the members of the SFC investigation team 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 referred to in the search warrant (e.g. “each and all employees of the SFC”). Any person not authorized by the warrant to enter the premises, not being a police officer, may have no authority to enter and the occupier may be entitled to refuse that person entry, unless it can be show that such person’s presence is necessary to assist in the execution of the warrant.
The SFC investigation notice will identify the members of the SFC Enforcement Division who are authorized to conduct the investigation. The occupier should confirm that each of the individuals conducting the SFC investigation are duly authorized to act in respect of the investigation.
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 SFC investigation team may have in their possession. At the same time, it is important to ensure that the SFC investigation team executes the warrant within the scope of the authority granted to it.
The occupier should assemble a response team to manage the execution of the SFC search warrant. Ideally, the response team will include at least the following:
Executive Leader - one member of the senior management team who will take responsibility on behalf of the organization for the search, Secretarial Support - 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,
Secretarial Support - 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,
Information Technology Support - a member of the information technology team who can assist with the production of electronic records, if required, and
Legal Adviser - the occupier’s lawyer
Members of the response team should accompany the SFC investigation team throughout the execution of the search warrant. Naturally, in so doing, the response team should not impede the SFC investigation and, in particular, the execution of the warrant. However, the SFC has 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 members of the SFC investigation team have visited, whom they have spoken to, what, if anything, they have said or have been told and what records or documents they have asked for, inspected, copied or seized.
A member of the response team should make a copy of all documents taken under the search warrant in the SFC investigation. 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 SFC investigation and to identify what information may be known to the SFC investigation team. At the same time, the notes will serve as a record of what happened in the event that there is a need to judicially challenge the conduct of the SFC investigation.
At the end of the search, the SFC investigation team may produce an inventory list of the records and documents seized under the search warrant 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 are available to the SFC investigation under the warrant, 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 deal-ing contrary to section 270 of the SFO”.
If there is any doubt or question as to whether particular records or documents fall within the scope of the search warrant, the response team may object to the search for, or the seizure or removal of such records or documents. In this case, the response team should make a note of the objection and, if the SFC investigation team persists, seek to seal them pending a court hearing.
However, the SFC investigation team has the discretion to continue 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.
At the same time, even without any specific authority in a search warrant, under the SFO, the SFC investigation team has 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 it has rea-sonable cause to believe may be relevant to the investigation.
The Hong Kong courts have confirmed that:
a search warrant issued under the SFO, s. 191 empowers the SFC (i) to seize digital devices (e.g. mobile phones, tablets, computers and discs) which contain, or are likely to contain, information relevant to the SFC investigation, and
the SFC’s investigation powers under the SFO, s. 183 entitle the SFC investigation team to require the production of passwords to digital devices and email accounts.
However, it is unclear whether those investigation powers would go so far as to require a person to log in to an organization’s online systems and databases which may provide access to information stored in physical locations outside of the premises specified in the search warrant. If there is any doubt as to whether a particular request of the SFC investigation team falls within the scope of the search warrant, the response team should raise an objection and, if the investigators insist, seek to have the matter be reserved for resolution in court.
A search warrant does not authorize the search, seizure or removal of records or 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 may object to, if the response team wishes to claim legal professional privilege in respect of specific records or documents, they should object to the production of those records or documents on the basis of such privilege and seek to seal them pending a court hearing or agreement as to their disposition if the SFC investigation team insists on inspecting them.
The SFC investigation team 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 relevant to an SFC investigation, staff should answer those questions. As noted above, SFC investigation powers include the power to require staff to produce such records or documents and to give all reasonable assistance.
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 as part of an SFC investigation. For example, the response team may wish to bring to the attention of the SFC investigation team information which is likely to be exculpatory in nature given the misconduct or offence alleged in the search warrant or the SFC investigation notice. 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 search operation and (ii) legal advice taken with the benefit of a more complete factual background.
The SFC investigation team has the powers to compel staff to answer questions in certain circumstances:
Explanation of Documents – Where, in the course of executing a search warrant, the SFC investigation team produces the investigation direction and a written request for specific records or documents (or specific classes of records or documents) which are relevant to the SFC investigation, it may require staff to give an explanation or further particulars of such records or documents produced.
Impromptu Interview – Where, in the course of executing a search warrant, the SFC investigation team produces the investigation direction and a written re-quest for staff to attend an interview on the spot, the staff member is required to attend the interview and answer questions relating to matters which the SFC investigation team may raise with him or her.
However, this does not mean that staff must answer questions on the spot. Staff are entitled to take legal advice before answering questions. Thus, in the case of a re-quest 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.
Staff members who have no knowledge of the subject matter of questions asked by SFC investigation team should indicate that they lack the knowledge to answer those questions.
The SFC investigation team has no right to detain any person for questioning.
Where a staff member provides information, the SFC investigation team may produce a written statement for the staff member to sign. The staff member should review the statement carefully, ideally with the benefit of legal advice, 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 a fully accurate record.
SFC investigations are subject to statutory secrecy provisions under the SFO, s. 378. These provisions prohibit persons who are the subject of enquiries in an SFC investigation from disclosing the existence of the SFC investigation or what information the SFC investigation team has requested.
Certain disclosures are exempted under the statutory secrecy provisions. Most significantly, staff may disclose any matter for the purpose of seeking legal advice. Thus, while staff are generally prohibited from discussing the fact that the SFC executed a search warrant or the fact that the SFC is undertaking an investigation into a specific matter, they may speak to a legal adviser to understand their obligations in the execution of the search warrant or in responding to the SFC investigation.
In these FAQs on SFC License Type 9, we provide guidance on SFC asset management regulation
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