Understanding the Memorandum of Understanding between SFC and AFRC

Introduction

On 19 October 2023, the Securities and Futures Commission (SFC) issued a press release, according to which the Independent Commission Against Corruption (ICAC), the Accounting and Financial Reporting Council (AFRC) and the SFC have conducted the first tripartite operation involving two Hong Kong-listed companies on suspicion that they falsified corporate transactions totaling HK$193 million (approximately RMB177.56 million).¹

Many might be aware of such joint operation, but not many have actually read the Memoranda of Understanding (MoU) respectively signed by the SFC with the ICAC and the AFRC pursuant to which the joint operation was conducted.

To date, there are fourteen MoUs signed between authorities and regulatory agencies within Hong Kong, namely the Hong Kong Monetary Authority, the Mandatory Provident Fund Schemes Authority, the Insurance Authority, the SFC, and the AFRC.²

The fourteen MoUs that have been signed are relatively similar in terms of the boundaries in collaboration between regulators. They serve as a framework of the working arrangements between the regulators. With the increasing amount of joint investigations anticipated to be conducted by the SFC and AFRC³ , this article will focus on the MoU between these two regulatory bodies, which was entered into on 24 February 2021.⁴

 

Guidance to Co-operation between regulators

Cases of overlapping authority and matters of mutual interests

In the MoU between SFC and AFRC, Section III ‘Guidance on Co-operation and Collaboration between the SFC and the FRC’ discusses the circumstances and how the regulators coordinate. In the cases of overlapping authority and matters of mutual interests, it is agreed upon that the regulator with the more appropriate functions and powers will take enforcement action. These cases of mutual interest will be reviewed regularly by the related regulating parties to determine which regulator should take the lead responsibility for enforcement action, if and when necessary. Additionally, it is stated within the MoU that regulators will try to avoid imposing concurrent enforcement actions to subjects of the investigation unless it is appropriate in the circumstances. If one regulator has already commenced enforcement whilst another is considering taking enforcement actions with regards to the same issue, they will liaise and discuss how to best proceed with regards to their respective enforcement actions.

Conduct of concurrent enforcement actions

The regulators recognize that concurrent enforcement actions to the same issue may affect the investigation, therefore, the regulators will notify each other of significant developments, such as interviewing a key witness; requesting the provision of significant volumes of documents; executing a search warrant; or instituting proceedings or otherwise disposing of the matter. If the regulators identify that taking a particular step might prejudice another regulator’s enforcement action, then they will come together to discuss their next steps. In their discussion of conduct in concurrent enforcement actions, the regulators will consider how the overall objectives are best served.

Joint investigation

In cases that fall under the jurisdiction of both regulators, they may choose to commence a joint investigation to efficiently utilize resources. A joint task force between the regulators will be set up for a joint investigation. An initial coordination meeting will determine the investigatory plans and their respective responsibilities. They will then convene regular meetings to review and discuss the progress of the joint investigation. Additionally, prior to publication of any information in relation to the joint investigation, the involved regulators will consult each other.

Co-operation

If the regulator comes across a matter which may fall within the regulatory remit of another, they will make a complaint or refer the matter to the other regulator for consideration i.e., if SFC becomes aware of a matter which falls under the regulatory remit of the AFRC, they will make a complaint or refer the matter to AFRC and vice versa. Upon consideration, the regulator receiving the complaint or referral will inform the other party of its decision over the complaint or referral. If the regulators decide to pursue enforcement actions, they will notify the other regulator if the matter may be of interest or concern to them. Regulators can also consider rendering other assistance to other regulators upon request such as adducing expert evidence.

Notification and Consultation

When AFRC wishes to initiate an investigation or enquiry related to the Securities and Futures Ordinance (i.e., in particular, pursuant to sections 24, 29, 42 and 43 of Cap 588, Accounting and Financial Reporting Council Ordinance), they will give a written notice to the SFC as soon as practicably possible. In this written notice, details of the concerned listed entity, reasons for the initiation of investigation or enquiry and the powers exercisable by the investigator or enquirer will be given. If AFRC intends to exercise its powers in these matters, the Department of Investigation and Compliance of the AFRC will consult with the Enforcement Division of the SFC.

Meetings

Regulators will meet at least once a year to review the functioning of the MoU, but ad hoc meetings will also be held when necessary. The regulators will coordinate training initiatives, organize joint training opportunities.

 

Sharing of Information

Section IV ‘Sharing of Information’ of the MoU sets out guidance on the obligations of confidentiality when regulators exchange information during the course of their investigation. Any information shared by the parties under the MoU shall be subject to the obligations of professional secrecy and statutory duties. Only when prior written consent from the party providing the information is given, will the regulators be able to disclose confidential information to third parties. If the regulators, pursuant to legal requirements under applicable laws, must disclose confidential information received under the MoU to third parties, they will notify the party providing the information as soon as reasonably practicable.

 

Looking forward

The growing number of MoUs between the regulators signify the increasing collaboration between regulators. That will certainly lead to more complicated issues regarding the legitimacy of sharing of information under such arrangements and potential challenges that one may raise against the regulators regarding the propriety of the investigation and enforcement procedures.

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¹ Announcement of SFC, ICAC and AFRC conduct first tripartite operation against suspected corporate fraud and misconduct, dated 19 October 2023
² Annex list containing MoUs signed by regulators with date and relevant bodies
³ The AFRC signed the MoU in its former name of "Financial Reporting Council (FRC)"
⁴ MoU between SFC and AFRC dated 24 February 2021