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Best practice for IOSCO cooperation standards

Hong Kong’s financial regulator has become one of the first signatories of IOSCO’s enhanced cooperation standards

Hong Kong’s financial regulator has become one of the first signatories of IOSCO’s enhanced cooperation standards

1 Minute read
The Hong Kong SFC is one of the first signatories of IOSCO’s Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU), which provides additional enhanced information sharing and cooperation enforcement powers.

The EMMoU contains several key new powers, such as obtaining and providing financial papers, compelling a person’s physical attendance to provide a statement or testimony under oath, and requiring or requesting freezing of assets. The SFC's participation in the EMMoU is an important step for the SFC to continue its efforts in combating cross-border financial misconduct.

The Hong Kong Securities and Futures Commission (SFC) has become one of the first signatories of IOSCO's Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU).

The EMMoU is built upon the 2002 Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU), of which the SFC has been a signatory since 2003. Both the MMOU and the EMMoU provide a mechanism for regulators to share essential investigative material, such as beneficial ownership information, and securities and derivatives transaction records, including banking and brokerage records.

However, due to changes in the technological and regulatory landscape, globalisation and the increasing interconnectedness of financial markets, there has been a need for enhanced information sharing and cooperation. As highlighted by Thomas Atkinson, the SFC's executive director of enforcement in an October 2017 speech, 'regulators can no longer expect to do their jobs alone'. The EMMoU was thus established, providing for additional enforcement powers that include the sharing of audit work papers, subscriber records from internet and telephone service providers, the ability to compel attendance for witness testimony and the freezing of assets.

What are the key new EMMoU powers?

The EMMoU's expanded scope of assistance includes:

  • obtaining and providing audit work papers, communications and other information relating to the audit or review of financial statements;
  • compelling a person's physical attendance to provide a statement or testimony under oath in accordance with the rights and privileges granted by the applicable laws in the relevant jurisdiction; and
  • requiring or requesting the freezing of assets in the requested authority's jurisdiction. Where such assistance is not available, informing the requesting authority about relevant assets in the requested authority's jurisdiction and assisting the requesting authority with legal procedures and other means to freeze those assets.

Enhanced powers and assistance in relation to the following categories of information are also available to the SFC:

  • subscriber records held or maintained by telephone service providers in the jurisdiction of the requested authority, that identify subscribers, payment details and incoming and outgoing communications with date, time, duration and identification of phone numbers from which communications are made or received;
  • subscriber records held or maintained by internet service providers, and other electronic communication providers, within the jurisdiction of the requested authority, that identify subscribers, payment details, length of service, type of service utilised, network address and session times, dates and durations; and
  • recordings of telephone conversations or other electronic communications held or maintained by persons regulated by the requested authority.

Implications for SFC enforcement

While the SFC is empowered by law to exchange information and intelligence with other securities regulators in appropriate circumstances, it has acknowledged that cross-border evidence gathering poses some of the greatest enforcement challenges for this market. This is due to a high percentage of non-Hong Kong businesses listed in Hong Kong as well as challenges arising from globalisation and advances in technology. Currently, there are four recognised jurisdictions and more than 20 acceptable jurisdictions admitted by the Stock Exchange of Hong Kong (HKEx) for listing in Hong Kong.

The SFC and HKEx issued in April 2018 the amended Joint Policy Statement Regarding the Listing of Overseas Companies to ensure that Hong Kong remains an attractive listing venue for overseas companies.

The SFC's participation in the EMMoU is thus a positive development and demonstrates its continuing efforts to combat financial misconduct.


Cross-border evidence gathering poses some of the greatest enforcement challenges for this market


The ability to obtain and share audit papers is an important enhancement. In recent years, corporate fraud has become the SFC's enforcement priority. We have observed increasingly active enforcement. There are frequent requests for interviews and production of documents and information. The SFC has ordered suspension of trading in shares of a number of listed companies. Audit papers undoubtedly are a valuable source of evidence and allow the SFC to reconstruct and understand transactions in a much more effective manner.

As one of the major financial centres, investors in the Hong Kong market are located all over the world. In fact, some of the recent high-profile cases involved investors residing and placing trade orders outside Hong Kong. The powers to compel physical attendance for testimony and to obtain subscriber records and traffic data are useful for the SFC to collect evidence.

It should be noted that the provisions of the EMMoU (like the MMoU) are not intended to create legally binding obligations or supersede domestic laws. In particular, the MMoU also specifies that the power to compel physical attendance is subject to the rights and privileges afforded by the laws and regulations in the relevant jurisdiction.

Comment

It is still early days for the EMMoU. To date, there are only six signatories but the number is bound to grow. The SFC will be able to make use of the enhanced powers in more jurisdictions when more regulators sign up to the EMMoU. IOSCO's objective is for all MMoU signatories to migrate to the EMMoU eventually. Meanwhile, the SFC can still rely on the MMoU (currently 118 signatories) or any bilateral MoUs and arrangements.

It is no secret that the SFC cooperates with regulators all over the world. The SFC has openly appreciated the assistance provided by other regulators in its press releases. It is stated on the latest annual report 2017/2018 that it received 136 and made 104 enforcement related requests for assistance. We have seen and handled cases where regulators share information and coordinate their investigations. This is important and necessary because of the ever increasing cross-border activities and the jurisdictional limits of regulators' powers.

The SFC also faces additional challenges from cross-border capital flows with Mainland China. The SFC has actively taken steps for closer cooperation with the China Securities Regulatory Commission (CSRC). On December 29 2017, the CSRC and the SFC entered into an MoU on Supervisory and Enforcement Cooperation on Matters concerning Futures, amending their earlier 1995 MoU. On June 11 2018, the SFC and the CSRC held the sixth regular high-level meeting to discuss a range of enforcement cooperation matters including the sharing of intelligence and market information, as well as coordinated investigations.

All of the above initiatives bolster Hong Kong's position as an international financial centre and confirms that the SFC remains a major enforcement force to be reckoned with.

Cynthia Tang
Partner
Baker McKenzie (Hong Kong)
Bryan Ng
Partner
Baker McKenzie (Hong Kong)

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