HK Lawyer Says SFC’s 2009 Guidance on ILAS Was “Disturbing”—“Real Possibility” that Unlicensed Sellers Could Be Found Guilty of Criminal Offense

Broken Law

On Friday, I published a blog post describing a number of common situations in which sales of ILAS appear to fall under the legal definition of dealing in securities.

Dealing in securities is an SFC-regulated activity. Carrying on a business in an SFC-regulated activity without an SFC license is a criminal offense.

On 13 Aug 2009, the SFC published a circular in which it argued that, “as a general rule”, selling ILAS did not classify as an SFC-regulated activity and that ILAS sellers did not need to hold an SFC license.

The SFC’s arguments were based on a very narrow set of circumstances which do not apply to much of the ILAS business conducted in Hong Kong. It is highly unbelievable that the SFC was not aware of this.

HK Lawyer Says SFC’s Guidance Was “Disturbing”

On 30 June 2010, Timothy Loh, of Timothy Loh Solicitors, published an article titled, “SFC Guidance on Requirements for Licensing Under the Law: Reliable Or Not“.

The article was highly critical of the SFC’s 2009 circular. Loh wrote:

“recent guidance from the SFC has been disturbing in the vigor with which it has discouraged market participants from holding licenses under the SFO. A recent decision of the Hong Kong Court of Appeal serves as a reminder that the SFC does not have the jurisdiction to conclusively interpret the SFO. Where the SFC takes the position that a market participant does not need a license and refuses to grant a license based on this position, there is a real possibility that should the requirement for a license ever be litigated, a court may ultimately find that the market participant has breached the SFO.”

Loh Saw a Train Wreck Coming—Five Years Ago

In his article, Loh highlighted a then recent case in which the Securities and Futures Appeals Tribunal stated: “I do not consider… the content of the SFC website to represent any more than straws in the interpretative wind.”

The Hong Kong Court of Appeal later concurred: “the SFC’s view can be of no relevance as a matter of law unless it is a tool of statutory interpretation. Since [counsel] accepts that it is not such a tool, the Tribunal’s approach was plainly correct.”

Loh explained the significance of the decision as follows:

“Whilst the decision of the Court of Appeal merely affirms long-standing law, it is a context specific reminder that interpretations by the SFC are mere opinions rather than conclusive and binding interpretations at law. Whilst such interpretations are always relevant because the SFC is the regulator responsible for enforcing the SFO and it is less likely that the SFC will enforce the SFO in a manner inconsistent with its own interpretations, the SFC does not have the exclusive authority to litigate a breach of the SFO.

A private litigant may, for example, allege a breach of SFO licensing requirements in proceedings against an intermediary. In this case, a finding by the court that the intermediary was in breach of the SFO despite compliance with SFC guidance could require other intermediaries to shut down operations pending licensing.

Equally, for example, the SFC itself is free to change its interpretation and in this event, the SFC may take the view that a market participant which relied upon the SFC’s interpretation was not entitled to do so as it did not fall within the circumstances then contemplated by the SFC.

Finally, it is not inconceivable that in an egregious circumstance, the Secretary for Justice, who is not in any way bound by SFC guidance, would seek to commence criminal proceedings against an intermediary for breach of licensing requirements under the SFO despite the intermediary’s purported compliance with SFC guidance.

The Train Wreck Is Here

This blog post has been distributed to dozens of Hong Kong ILAS victims who are actively discussing among themselves how to recover their money.

I hope the SFC will finally pull its head out of the sand, take the lead, and issue a new circular addressing the points raised HERE.

It is not just the industry that needs guidance, but also the industry’s victims.

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