On June 10, 2022, the Securities and Futures Commission (SFC) issued the Advisory Document on the proposed amendments to the provisions related to the application of the Securities and Futures Ordinance (Consultation document). While the main amendments proposed in the Consultation Document concern the provisions on the application and trading of inside information under the Securities and Futures Ordinance (Chapter 571)SFO), SFC also proposes to clarify the exemption in section 103 of the SFO related to the advertising of investment products to professional investors (PIs).
Proposed amendments related to advertising of investment products
Section 103 (1) of the SFO prohibits the issuance of advertisements, invitations or documents related to investment products, unless the issuance is permitted by the SFC, with certain exceptions. In particular, Section 103 (3) (k) provides for an exemption from Section 103 (1) for the issue or possession for the purpose of issuing any advertisement, invitation or document made in respect of securities or structured products, or participation in any collective investment scheme which is or is intended to be granted only to PIs (PI Release).
IN Securities and Futures Commission v. Pacific Sun Advisors Ltd and Mantel, Andrew Peterin which the interpretation of the exemption from PI under Article 103 (3) (k) of the SFO was the subject of the appeal, the Final Court of AppealCFA) ruled that the exemption from PI applied to all kinds advertising that has any connection or connection with investment products that are or are intended to be provided only to PI. The effect of the CFA’s interpretation is that advertisements for investment products, although not permitted by the SFC, may still be published while the products are intended for sale on PIs only.
The SFC considers that the CFA’s interpretation of the PI exemption under section 103 (3) (k) of the SFO may lead to the fact that retail investors will be exposed to unauthorized offers or invitations to invest in risky or complex products, which are unsuitable for them. The relatively lower threshold for eligibility for exemption from PI (ie simply the intention to sell investment products only to PI) makes the legal regime extremely difficult, according to the SFC, to implement and seems to run counter to the intended objectives of Part IV and section 103, para. 1 of the PFA, namely to settle advertising of (unlike sale (na) investment products not authorized by the SFC.
The SFC therefore seeks to amend Section 103 (3) (k) of the SFO in the sense that the exemption from PI will only apply to ads that are issued only on PIs. As such, following the proposed amendments, unauthorized advertisements of investment products that are or are intended to be sold only to PIs may only be issued to PIs that have been identified as such in advance by an intermediary through its known client and related procedures. , whether or not such an intention is stated in the advertisements.
In addition, the SFC also proposes to amend the exemption under Section 103 (3) (j) of the SFO (applicable to the issuance of an advertisement, invitation or document to a person outside Hong Kong), which is worded in terms identical to the PI Exception to reflect the same changes made in section 103 (3) (k) of the SFO for consistency.
Although the SFC has not yet set out the exact way in which sections 103 (3) (j) and 103 (3) (k) of the SFO should be amended in the consultation paper, the proposal may require fund managers to reconsider the existing practice in issuing or distributing advertisements related to investment products intended only for the sale of PI. As stated in the consultation paper, SFC will expect advertisements related to products for sale or intended for sale to PI to be issued to a specific group of potential investors who have been identified as qualified as such. in advance by knowing the client and related procedures. Enhanced measures may be needed to control the audience to which such advertisements are provided.
Proposed amendments to the SFC’s power to apply for injunctions
The consultation paper also covers the proposed amendments to section 213 of the SFO, which gives the SFC the right to apply to the Court of First Instance (CFI) for various ordersSection 213 Commandments) to provide remedies to persons affected by infringements by another person of certain provisions under the SFO or requirements or conditions imposed by the SFC. Such orders under Section 213 may include, for example, an order restricting or prohibiting a breach of the relevant provisions, an order requiring a person to take steps to recover the parties to each transaction in the situation they were in before the transaction was concluded, and an order requiring one person to pay compensation to another person.
Under the current regime, the SFC is not authorized to apply for orders under Section 213 of the CFI when a regulated entity has been found guilty of misconduct or is unfit and appropriate to remain a regulated entity under sections 194 or 196 of the SFO, unless the conduct also constitutes a breach of one of the relevant provisions, requirements or conditions described above (which does not cover circumstances in which there is a breach of the SFC codes and guidelines by a regulated entity, however serious that breach may be). SFC also has no legal power at present to require the regulated entity directly to take any steps to recover, compensate or otherwise protect the interests of investors or clients who may have been adversely affected by the regulated entity’s conduct.
It is now proposed to allow the SFC to apply for orders under Section 213 when the SFC has exercised any of its powers under Sections 194 (1), 194 (2), 196 (1) or 196 (2) of the SFO (collectively, on Relevant provisions) against a regulated entity. Therefore, the SFC also proposes to amend Article 213 (3A) of the SFO to allow the SFC to apply for Section 213 orders when it has exercised any of its powers under the relevant provisions against a regulated entity that is an investment director. manager, trustee or sub-trustee of an open-end company (OFC). The key OFC operators must take into account the extended scope of the SFC’s implementing powers if the proposed amendments to section 213 of the SFO materialize.
The SFC is currently inviting the public to comment no later than 12 August 2022 on the proposed amendments set out in the Consultation Document.