United States and Hong Kong Deepen Cooperation on Supervision of Entities Regulated by the SEC and SFC

January 25, 2017

The Securities and Exchange Commission (SEC) and the Hong Kong Securities and Futures Commission (SFC) have announced the establishment of a memorandum of understanding (MOU) to establish a mutual assistance regime in respect of the supervision and oversight of companies that operate on a cross-border basis in the US and Hong Kong.[1] This primarily encompasses exchanges, brokers, dealers, investment advisors and investment fund managers, investment funds and companies, clearing houses, and credit rating agencies. This is not the first time the regulators have signed agreements in relation to these matters, but it does indicate a renewed commitment to cooperation in respect of the supervision and oversight of entities that are regulated[2] by both the SFC and SEC.

The MOU indicates particular areas of focus for the two regulators, including investor protection, promoting a culture of compliance within regulated entities, and fostering integrity and confidence in capital markets. The MOU focuses specifically on the supervisory and oversight obligations on regulators rather than on specific enforcement matters. 

The terms of the MOU envisage ongoing informal consultations, including in relation to general oversight issues and issues particularly relevant to the operation and regulation of entities that operate in the US and HK. For example, the MOU indicates that cooperation is likely to occur where an SFC-regulated entity that is regulated by the SFC applies for SEC registration or vice versa. 

In addition to cooperating on general supervisory and oversight matters, the regulators have agreed to provide advance notice to each other of the following matters:

  • pending regulatory changes that will significantly impact entities that operate within the US and HK;
  • a material event that may be relevant to entities regulated by both;
  • enforcement actions or sanctions in respect of an entity that is regulated by both; and
  • significant changes in the rules or regulations applicable to the regulator.

The MOU describes a procedure for the formal exchange of information between the SFC and the SEC. Each regulator may make a written request to the other to obtain information that would be of assistance in fulfilling supervisory and oversight functions. Information that can be provided pursuant to such a request includes:

  • information relating to the financial and operational condition of an entity, for example, the solvency position of a company;
  • regulatory information in relation to a company, such as annual returns; and
  • regulatory reports, including findings made by the regulator in respect of a regulated entity.

The provision of information does not necessarily need to be the result of a request (or part of the advance notice arrangements set out above). The regulators can provide information to each other on a voluntary basis where it considers such information may be of interest, and such provision will be covered by the terms of the MOU where it expressly refers to it. Conversely, an authority may decline requests for assistance for acts that would violate domestic law, are not in accordance with the MOU, or are made on the grounds of “the public interest.”

There are also provisions setting out a procedure to facilitate onsite inspections of an entity where the premises are located in the other regulator’s territory. Those procedures include the provision of advance notice and the sharing of information obtained during the inspection.

There are some notable limits applicable to the use of information obtained pursuant to the MOU, including the requirement that all non-public information obtained can only be used for the purpose of performing supervisory functions in respect of the entity. This limitation is important for regulated entities as it means that the regulators cannot use the MOU to obtain information for the purposes of enforcement activity. Having said that, there are already procedures in place for the provision of information in respect of enforcement matters, including memorandum of understanding signed between the SFC and SEC in October 1995 and the arrangements that exist between them as a result of being signatories to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, the Memorandum of Understanding Concerning Consultation and Cooperation in the Administration and Enforcement of Securities Laws, as well as the Mutual Legal Assistance Agreement in Criminal Matters between the Departments of Justice of the US and HK. The MOU allows an authority to use MOU-obtained information for enforcement purposes with the consent of the providing authority.

The MOU is not legally binding and does not limit one regulator from taking measures alone in order to fulfill its functions. It is also not intended to replace earlier agreements to which the SFC and SEC are parties, but to supplement those arrangements.

The Director of the SEC’s Office of International Affairs has noted that, “By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis.” Whilst it does not directly apply to enforcement matters, it is still something for entities that operate both in the US and Hong Kong to bear in mind. It will be interesting to see whether this increased cooperation on supervisions ultimately leads to more coordinated enforcement efforts in the future.

[1] The announcements were made on 19 January 2017. The MOU is available here.

[2] It also applies where an entity operates in both jurisdictions, but is exempt from regulation in one jurisdiction.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ronald Cheng, an O’Melveny partner licensed to practice law in California, Amanda Beattie, an O'Melveny Counsel licensed to practice law in Hong Kong and New South Wales, Australia, and Alvin Sin, an O’Melveny associate licensed to practice law in Hong Kong, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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