First Hong Kong criminal conviction for actively marketing unlicensed regulated activities carried out overseas

Sep222017

Case background

On 21 September 2017, the Securities and Futures Commission (“SFC”) issued a press release about its conviction against ETRADE Securities (Hong Kong) Limited (“ETrade HK”) for actively marketing to the Hong Kong public US brokerage services provided by E*TRADE Securities LLC (“ETrade US”). Whilst ETrade HK, a Hong Kong company, was a Type 1 licensee under the Securities and Futures Ordinance (Cap. 571) (“SFO”), ETrade US, a US broker-dealer that provides online trading services in US securities, was not licensed under the SFO at the relevant time.

It was alleged that ETrade HK had continually marketed ETrade US’s brokerage services on its behalf, for more than four years through mass media, on the MTR and online. As a result, ETrade HK had received revenue from ETrade US for its services provided to its Hong Kong customers.

ETrade HK was convicted of aiding and abetting ETrade US in holding itself out as an SFC licensee when it was not, and was fined HK$20,000 and ordered to pay the SFC’s investigation costs.

Licensing obligations for corporations conducting businesses outside Hong Kong

Section 114 of the SFO imposes restrictions on carrying on business in regulated activities as defined in the SFO. As explained in the SFC’s circular of 1 April 2010 titled ‘Circular clarifying the licensing obligations of corporations and individuals and more particularly those conducting business outside Hong Kong’ (“Circular”):

a licence only permits the holder to carry on business in a regulated activity, or to perform a regulated function in relation to a regulated activity carried on as a business, in Hong Kong. The SFO neither imposes upon corporations and individuals an obligation to be licensed in relation to activities which are conducted by them outside Hong Kong, nor confers upon them, after they have been licensed, the ability to conduct business outside Hong Kong. It follows that when a licensed corporation or individual conducts activities in a jurisdiction outside Hong Kong, it is necessary for such corporation or individual to ensure that the relevant legal and regulatory requirements of that other jurisdiction are fully complied with.

Section 115 of the SFO stipulates that the licence requirements under section 114 applies if (a) a person actively markets, whether by himself or another person on his behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services that he provides; and (b) such services, if provided in Hong Kong, would constitute a regulated activity.

Infringement of either section 114 or section 115 of the SFO is a criminal offence and may also entitle the SFC to impose disciplinary action, including fines and bans from being licensed.

What constitutes active marketing?

There is no statutory guidance as to what constitutes ‘active marketing’. The SFC, in its answers to ‘Frequently Asked Questions’, provided the following guidance:

This may include, for example, those who frequently call on Hong Kong investors and market their services (including offering products); running a mass media programme targeting at the investing public in Hong Kong; and internet activities that target Hong Kong investors.

Generally speaking, no person may actively market, whether in Hong Kong or from a place outside Hong Kong, to the public here any services which would constitute a regulated activity if provided in Hong Kong, unless that person is registered or licensed by the SFC. In determining whether or not a person ‘actively markets’ its services to the public, the SFC will consider the nature of the business activities as a whole and have regard to a number of factors including (without limitation) the following:

  • whether there is a detailed marketing plan to promote the services;
  • whether the services are extensively advertised via marketing means such as direct mailing, advertisements in local newspapers, broadcasting or other ‘push’ technology over the Internet (as opposed to whether the services are passively available eg. on a ‘take it or leave it’ basis);
  • whether the related marketing is conducted in a concerted manner and executed in accordance with a plan or a schedule which indicates a continuing service rather than an one-off exercise;
  • whether the services are packaged to target the public of Hong Kong, eg. written in Chinese and denominated in Hong Kong dollars; and
  • whether the services are sought out by the customers on their own initiative.

In Ng Chiu Mui & Anor v Securities and Futures Commission (unreported CACV 141/2009, 26 May 2010), it was argued that the term ‘actively markets’, when taken in conjunction with SFC explanatory materials (such as the Circular), must be taken to mean no more than marketing in the primary sense of pro-actively advertising the service to the Hong Kong public and did not encompass instances of the actual sale or provision of products to individual customers. The SFC’s interpretation as reflected in those materials, however, had been dismissed by Securities and Futures Appeals Tribunal (“SFAT”) as being non-determinative, and was similarly dismissed by the Court of Appeal, which stated

the SFC’s view can be of no relevance as a matter of law unless it is a tool of statutory interpretation”.

The Court of Appeal found that the SFAT’s interpretation was not that an actual sale would be sufficient for the purposes of demonstrating ‘active marketing’, but that much would depend on the evidence surrounding the circumstances of such a sale, and upheld this interpretation.

Lessons from current case

The above case appears to be a clear breach of section 115, with active marketing being conducted by a non–licensed overseas entity, from overseas, for services being provided overseas. However as that direct marketing was undertaken by its Hong Kong affiliate, in Hong Kong to the Hong Kong public, there is a breach of the SFO. Licensed entities must be careful to ensure that they only market their own services to the Hong Kong public, and not those of associated or group companies,  even if those are being undertaken in overseas jurisdictions.

Russell Bennett

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

For more information on SFO regulated activities and licence requirements, please contact:

Russell Bennett
Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.