Guide to SFC Enforcement Action
From SFC Investigation Notice to Disciplinary Action, Prosecution & Appeal

The Securities and Futures Commission (“SFC”) is the primary regulator of the Hong Kong securities and futures markets. It administers Hong Kong securities law, wielding a broad range of powers under the Securities and Futures Ordinance (“SFO”) including powers to ensure compliance with the SFO and the regulations made by the SFC thereunder. These powers, known as SFC enforcement powers, are exercised by the SFC Enforcement Division and include powers to investigate, powers to take disciplinary action against SFC licensed corporations, powers to institute proceedings for market misconduct before the Market Misconduct Tribunal (“MMT”), powers to seek civil remedies (e.g.injunctions, freezing orders, compensation orders, director disqualification orders and winding-up orders) to protect the investing public, and powers to prosecute certain securities related crimes before a magistrate on a summary trial basis.

Commencement of SFC Enforcement Action

SFC enforcement action begins with the SFC appointing investigators (all of whom typically work in the SFC Enforcement Division) under the SFO, s. 182 to investigate. The SFC may investigate where it has reasonable cause to believe that:

• a securities related offence may have been committed;
• a person may have engaged in defalcation, fraud, misfeasance or other misconduct in connection with any dealing in or the management of investment in any securities, futures contract or leveraged foreign exchange contract;
• market misconduct may have taken place;
• a breach of a disclosure requirement under the SFO may have taken place; and
• the manner in which a person has engaged or is engaging in any dealing or investment management activities is not in the public interest.

SFC Investigation Powers

The investigation powers of the SFC Enforcement Division are in many ways draconian. In broad terms, an SFC investigator has the power under section 183 of the SFO to require a person to:

• produce to the investigator any record or document specified by the investigator which is or may be relevant to the investigation and in his possession;
• if required by the investigator, give the investigator an explanation or further particulars in respect of any record or document so produced;
• attend before the investigator and answer any question relevant to the investigation; and
• give to the investigator all reasonable assistance in connection with the investigation.

These powers apply not only to a person under investigation but also to any other person whom an SFC investigator has reasonable cause to believe has any record or document which contains information relevant to an investigation or otherwise has such information in his possession.

SFC investigation powers under the SFO, s. 183 should be distinguished from enquiries conducted by the SFC Corporate Finance Division under the SFO, s. 179 to regulate companies listed on Hong Kong Exchanges and Clearing (“HKEx”). Though these enquiries appear to be similar to those in an SFC investigation, the powers under s. 179 are more limited and do not, for example, include the power to compel a person to attend an SFC interview.

Right to Silence: The Privilege Against Self-Incrimination

An SFC investigation overrides a person’s right to silence. In other words, in an SFC investigation, a person being questioned by the SFC is not excused from answering any question on the basis that the answer might tend to incriminate him. Whilst the person may claim that the answer might tend to incriminate him with the result that the answer itself cannot be admitted in evidence against the person in criminal proceedings (except for perjury and like offences), any evidence derived from the answer may be used against the person.

In contrast, in a police investigation for a crime, as a general principle, a person under investigation has no legal duty to answer any question from the police, no legal duty to produce records or documents and no legal duty to provide all reasonable assistance to the police in connection with their investigation.

Duty to be Truthful in an SFC Investigation

In an SFC investigation, it is an offence for a person without reasonable excuse to produce to the SFC investigator a record or document which is false or misleading in a material particular or to answer any question by saying anything which is false or misleading in a material particular.

Duty to Cooperate with SFC Investigation

It is an offence in an SFC investigation without a reasonable excuse to refuse to answer a question posed by an SFC investigator, to refuse to produce a document which an SFC investigator requires or to refuse to attend an SFC interview.

Duty to Preserve Records Subject to SFC Investigation

It is an offence to destroy, falsify or conceal any record or document required to be produced by an SFC investigator in an SFC investigation with intent to conceal the facts or matters capable of being disclosed by the record or document.

Statutory Secrecy in SFC Investigations

Under the SFO, s. 378, any person to whom an SFC investigator discloses information is subject to a statutory duty of secrecy. The statutory duty of secrecy not only protects the integrity of an SFC investigation but also protects the reputation of persons subject to an SFC investigation. The statutory duty of secrecy means, for example, that a person who receives an SFC investigation notice is prohibited from disclosing the notice and its contents to any other person except in circumstances permitted under the SFO. These circumstances include the disclosure of information for the purpose of giving or seeking legal advice and the disclosure of information and the disclosure of information with the consent of the SFC.

The SFC Enforcement Division has given standing consent for a person who receives an investigation notice to disclose the fact that he has received an investigation notice and is bound to the statutory duty of secrecy, for an employee to disclose to his employer the date, time and place of an SFC interview and for a company to disclose to its board of directors, its holding company or its indemnity insurers the date and time at which it is required to provide information to the SFC.

Disclosures to indemnity insurers require special care. Where directors and officers liability insurance ("D&O insurance") may be called upon to advance legal costs to defend against SFC enforcement action, the insurers may wish to obtain further information to determine coverage and in this case, it may be necessary to obtain SFC consent.

SFC Warrants: The Power to Search and Seize Documents

The SFC Enforcement Division can obtain and execute search warrants to search, by force if necessary, premises and seize documents if it can establish to a magistrate that there are reasonable grounds to suspect that there is, or is likely to be, on premises specified any record or document which is or may be relevant to an SFC investigation.

Any record or document removed pursuant to a search warrant may be retained by the SFC Enforcement Division for any period not exceeding 6 months beginning on the day of its removal or, where the record or document is or may be required for criminal proceedings or for any proceedings under the SFO, for such longer period as may be necessary for the purposes of those proceedings.

Handling of SFC Investigations

SFC enforcement action can, as discussed below, culminate in a range of penalties, including, in some cases imprisonment. As a result, any person who receives an SFC investigation notice should consider taking legal advice to determine whether he or she is at risk of prosecution action, to minimize any prosecution risk and to ensure that the record emerging from the SFC investigation is not one which would prejudice any defence that may ultimately need to be argued in court. This is so even where the recipient of the SFC investigation notice is not identified as a person under investigation as SFC enforcement action can target a person who provides information to the SFC even where the person has not been informed that he is a target of the investigation.

SFC Sanctions: Possible Penalties

If, following an investigation into possible wrongdoing, the SFC Enforcement Division determines that there has been wrongdoing, it can pursue civil remedies and, in some cases, criminal penalties.

Civil remedies include:

• Market Misconduct Tribunal Proceedings - If the misconduct may amount to market misconduct, including insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions and stock market manipulation, the SFC Enforcement Division may institute MMT proceedings.
• SFC Disciplinary Proceedings - If the misconduct was undertaken by a person licensed by or registered with the SFC, including SFC licensed corporations as well as SFC licensed representatives, responsible officers and managers-in-charge, the SFC Enforcement Division may commence disciplinary proceedings.

Even where conduct may amount to a criminal offence, the SFC Enforcement Division will tend to prefer disciplinary action when dealing with SFC licensed persons. Equally, in the case of market misconduct, such as market manipulation, insider dealing or the failure to disclose price sensitive information, the SFC Enforcement Division will tend to prefer to institute Market Misconduct Tribunal proceedings.

Criminal Prosecution Powers of the SFC Enforcement Division

Although the general power of criminal prosecution lies with the Secretary for Justice, the SFC enforcement action can take the form of a criminal prosecution for securities related offences (as well as conspiracies to commit those offences) before a magistrate summarily, meaning that the SFC Enforcement Division is limited in the penalty, whether imprisonment or a fine, it can pursue.

SFC Criminal Jurisdiction

The offences (“securities related offences”) within the SFC criminal prosecution jurisdiction include offences under the SFO itself, the prospectus provisions of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (”CWUMPO”), the share buy-back and financial assistance provisions of the Companies Ordinance (“CO”) and the customer due diligence provisions of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”). The SFC has no authority to prosecute an offence on indictment.

Where the SFC Enforcement Division has no criminal prosecution authority, by default, such authority lies with the Secretary for Justice. In this regard, the Secretary for Justice may prosecute not only securities related offences on indictment but also offences other than securities related offences on both a summary and indictable basis. Most significantly, these latter offences may include corruption, theft as well as various fraud related offences which may come to light as part of an SFC investigation.

If a decision is taken to prosecute in the criminal courts, the SFC Enforcement Division will normally make a complaint or lay information before a magistrate (or an officer of a magistrate’s court).

The Summons: Commencement of SFC Criminal Prosecutions

The magistrate (or the officer) may issue a summons to the person the SFC is charging with a crime. The summons requires the person against whom the complaint or information has been laid to appear at a designated time and place before a magistrate to answer the complaint or information.

The summons will set out the particulars of the complaint or information, including the time and place where the offence is alleged to have been committed and will identify the offence alleged to have been committed.

First Hearing of SFC Charges

At the first hearing before a magistrate, the charge will be read to the defendant. At this time, the defendant may enter a plea or the case may be remanded for further consideration before a plea is taken.

There may be a number of appearances before a magistrate before a plea is taken and (in the case of a plea of not guilty) the charge is set down for trial. Careful consideration must be given to verify whether the charge is in order (e.g.whether it refers to an actual offence).

Preparing for Trial Against the SFC Enforcement Division

In preparing for trial, the defendant may request a copy of the materials upon which the SFC Enforcement Division will rely for their case as well as any materials which the SFC collected during its investigation but upon which it does not intend to rely. This will normally include the interview statements and documents taken by the SFC Enforcement Division during the investigation stage.

At the same time, ahead of trial, the SFC Enforcement Division may serve written witness statements on the defendant for the purpose of introducing evidence, such as transcripts of audio tapes of interviews, into the trial, and may seek to agree facts. The defendant may object to any written statement tendered by the SFC Enforcement Division and if he does not object, the witness may not need to attend court to be cross-examined and the statement will be admissible as evidence.

As a result, the defendant should consider carefully whether he wishes to object to the written statements. Equally, the defendant should consider carefully whether to agree any facts as such facts may be prejudicial to him.

Trial Procedures in SFC Criminal Prosecutions

At trial, the magistrate will first hear from the SFC, then the defendant and then the SFC in rebuttal.

Each side may adduce their own witnesses and evidence. Each witness will provide his or her evidence through questioning by the side which called him or her as a witness and then may be cross-examined by the other side. If necessary, following cross-examination, a witness may be re-examined by the side which called him so as to address issues arising in cross-examination. In any area where the evidence of a witness of the SFC contradicts the evidence of the defendant, the witness should be cross-examined.

Statements given during the SFC investigation, including at an SFC interview, play an important role at trial. Any testimony at trial contradicted by such statements may be viewed as unreliable or not credible, underlining the importance of handling the SFC investigation process as aggressively as possible at the outset rather than waiting to the trial or prosecution stage to deploy resources in full.

After hearing both sides, the magistrate will then decide whether to acquit or convict the defendant.

Appeals from SFC Convictions

After a magistrate issues a decision, whether to convict or to acquit a defendant prosecuted by the SFC Enforcement Division, either the SFC Enforcement Division or the defendant may appeal the decision by way of case stated. However, the defendant may also appeal by way of a notice of appeal if he pleaded not guilty at the trial or did not admit the truth of the information or complaint against him.

An appeal by way of case stated is limited to a point of law or to a question as to the magistrate’s jurisdiction. Accordingly, the SFC Enforcement Division cannot appeal on the basis that the magistrate’s findings of fact were unsupported by the evidence. In contrast, an appeal by notice of appeal may include not only points of law and questions of the magistrate’s jurisdiction but also questions of fact.

Time Limit to Appeal SFC Enforcement Action

Both types of appeal must be made within 14 clear days of the magistrate’s decision but it is possible for a defendant to apply for an extension of time in which to lodge the appeal in the case of a notice of appeal. However, extensions of time are granted at the court’s discretion and the right to appeal may be lost if the appeal is not made in time.

As a result, it is important that immediately following a conviction, the defendant seeks legal advice as to the possibility of an appeal so that a decision as to whether or not to lodge an appeal can be made within the 14 day period. An appeal should only be made where there are reasonable arguments with a real chance of success.

Appealing SFC Enforcement Action to the Court of First Instance

Appeals from a magistrate’s decision are made to the Court of First Instance (“CFI”). However, in rare cases, the CFI may direct any point in the appeal be heard before the Court of Appeal.

Appealing SFC Enforcement Action to the Court of Final Appeal

A decision of the CFI on appeal from a magistrate may be further appealed to the Court of Final Appeal (“CFA”) (rather than the Court of Appeal) with leave (i.e. permission) of the CFA.

An application for leave to appeal must be lodged with the CFA within 28 days of the CFI’s decision. However, the application for leave to appeal cannot be lodged with the CFA unless:

• there is substantial and grave injustice, meaning normally that there is disadvantage to the defendant as a result of a serious departure from accepted norms; or
• there is a question of law of great and general importance.

In the past, appeals based on the “great and general importance” limb have been made to the CFA to test, for instance, the proper interpretation of market manipulation offences, as well as the proper interpretation of the scope and application of the professional investors exemption which exempts certain investment offers from having to obtain authorisations from the SFC.

For appeals based on the “great and general importance” limb, an application must be made to the CFI to certify that there is a question of law of great and general importance. This application for certification must be made well before the 28 day deadline for lodging the application for leave to appeal. Otherwise, the certification cannot be granted in time to meet this deadline. If the CFI refuses certification, the CFA may (if it is minded) so certify and grant leave to appeal.

Therefore, it is critical for a defendant to seek legal advice immediately following a decision of the CFI so as to ascertain whether there is a basis for an appeal to the CFA and if so, to seek certification to allow the application for leave to appeal to be made in time.

Whilst the CFA has the discretion to extend the time in which the application for leave to appeal is made, failure to apply for certification in time may be fatal to the appeal as the CFA may refuse to entertain an application for leave to appeal out of time.

As appeals to the CFA are rare and there is no further recourse from a decision of the CFA which is final, a defendant must exercise particular care to ensure that his legal advisers are well versed not only in the substantive legal issues arising from the securities offence for which he has been convicted but also in appeal procedures for the CFA.

MMT Proceedings

The Market Misconduct Tribunal is a statutory tribunal responsible for hearing cases relating to market misconduct. It comprises a judge and 2 experts drawn from industry or academia.

Meaning of Market Misconduct

Under the SFO, market misconduct includes the following:

Penalties for Market Misconduct

Market misconduct may result in a range of penalties but cannot result in imprisonment. These penalties include disgorgement orders (i.e.orders to pay a sum equal to the profit gained or loss avoided as a result of the misconduct) and, in the case of a failure by an HKEx listed company listed on Hong Kong Exchanges and Clearing (“HKEx”) or its directors to disclose price sensitive information, orders to pay fines. In addition, a finding of liability by the MMT will carry adverse reputational consequences and may form the basis for civil liability through the civil courts.

SFC Disciplinary Proceedings

The SFO, s. 194 provides that the SFC may take disciplinary proceedings where an SFC licensed person, including an SFC licensed corporation, a responsible officer or a licensed representative is guilty of misconduct or it is of the opinion that an SFC licensed person is not a fit and proper person to remain licensed. The SFC will often make the case that an SFC licensed person is no longer fit and proper or has engaged in misconduct where it breaches the Code of Conduct for Persons Licensed by or Registered with the SFC (“SFC Code of Conduct”) or the guidelines issued by the SFC to elaborate on the requirements of the SFC Code of Conduct.

SFC disciplinary proceedings serve as the main tool for the SFC Enforcement Division to sanction SFC licensed corporations.

Penalties in SFC Disciplinary Action

Disciplinary proceedings may result in substantial fines which may be as much as HK$10 million or 3 times the amount of profit gained or loss avoided, whichever is the greater. Disciplinary proceedings may also result in a suspension or even a revocation of an SFC license or registration with corresponding loss of livelihood

Appealing SFC Disciplinary Decisions to the SFAT

SFC licensed persons who are subject to disciplinary sanction but who disagree with the disciplinary decision may appeal to the Securities and Futures Appeal Tribunal. The Securities and Futures Appeals Tribunal, also known as the “SFAT”, is a tribunal independent of the SFC responsible for hearing appeals from SFC decisions, including SFC disciplinary decisions. It comprises a judge and 2 members of industry or academia.

Civil Remedies

In addition to imposing penalties, the SFC Enforcement Division may apply to the civil courts for a variety of orders to protect the investing public or compensate them for loss, including remedial orders and even interim orders (e.g.injunctions) before it begins prosecution. For example:

• the SFC Enforcement Division can seek restoration orders requiring wrongdoers to restore the counterparties to a transaction to the position they would have been in had they not entered into the transaction, such as by requiring a company listed on HKEx to make an offer to buy back its shares from investors who had subscribed for such shares in reliance of false or misleading disclosure in the company’s prospectus;
• the SFC Enforcement Division can seek compensation orders requiring wrongdoers to pay compensation to persons who have suffered loss as a result of the wrongdoer’s misconduct;
• where an HKEx listed company has engaged in misconduct, the SFC Enforcement Division may seek disqualification orders to disqualify the individuals involved from being a director of that company or any company for up to 15 years; or
• in the case of insider dealing, the SFC Enforcement Division may seek an injunction order to freeze the gains from the relevant dealing activities pending full trial.