On 21 September 2017, the Eastern Magistrates’ Court convicted a Hong Kong licensed securities dealer (the HK Co) for actively marketing to the Hong Kong public US brokerage services provided by its US affiliate, (the US Co). Whilst the US Co is registered as a broker-dealer with the U.S. Securities and Exchange Commission, it is not and was not at the relevant time licensed by the Hong Kong Securities and Futures Commission (SFC). The HK Co was fined HK$20,000 and ordered to pay the SFC’s investigation costs. The SFC’s press release is available here.
The conviction is a reminder of the extraterritorial reach of Hong Kong’s securities licensing regime, embodied in section 115 of the Securities and Futures Ordinance. The SFC routinely raises questions on compliance with section 115 during licence applications and inspections of licensed corporations.
Section 115 extends the licensing obligations under the SFO to persons outside Hong Kong if:
(i) the person actively markets its services (either directly or through someone else and either from within or outside Hong Kong) to the public in Hong Kong; and
(ii) those services, if provided in Hong Kong, would be regulated activities under the SFO.
In essence, section 115 is designed to maintain the integrity of the Hong Kong market by ensuring persons outside Hong Kong who actively market their services to the Hong Kong public need to be licensed and comply with Hong Kong regulatory requirements.
Key elements of section 115 are that there is “active marketing” of services and that such active marketing is directed to “the public” in Hong Kong. The SFC has published FAQs (available here) on its view of what constitutes “actively markets”. The “public” is defined in the SFO to mean “the public of Hong Kong, and includes any class of that public” so, for example, existing clients of a licensed corporation may be considered as “the public” for the purposes of section 115.
In the recent case, the SFC alleged that the HK Co had continually marketed the brokerage services of the US Co for more than four years from around 11 May 2009 to 31 January 2014 through newspapers, magazines, and on the MTR, television, radio and online. On these facts there was clearly active marketing to the public in Hong Kong. The HK Co pleaded guilty to aiding and abetting the US Co in holding itself out as a SFC licensee when it was not. As such, the SFC action against the HK Co appears to be a textbook application of section 115.
For Hong Kong licensed corporations that are part of an international group, this recent case is a reminder that:
You should expect the SFC to ask questions about your compliance with section 115 during your next routine inspection.