CIRCULAR ON PROVISION OF FINANCIAL INFORMATION ON THE INTERNET LICENSING REQUIREMENTS

Transcription

1 CIRCULAR ON PROVISION OF FINANCIAL INFORMATION ON THE INTERNET LICENSING REQUIREMENTS Introduction 1. The Securities and Futures Commission notes that an increasing number of Hong Kong-based internet web-sites are engaged in the provision of financial information or investment advice. The Commission expects that, with the increasing popularity of the internet as a means of communication, the number of web-sites offering similar services will grow quickly. 2. The Commission s policy on web-based activities, as stated in its Guidance Note on Internet Regulation issued in March 1999, is to strike an appropriate balance between measures that maintain market integrity, provide protection for investors, and encourage market development and regulation. (This Guidance Note is available from the Commission s web-site site: The Commission encourages competition and the benefits it can bring to investors but it is concerned that some of the web-sites may presently be operating unlawfully. 3. This paper outlines a number of specific issues in relation to the licensing requirements for internet content providers who provide financial information or advice through internet web-sites. It is published to assist persons to comply with the applicable law and is not intended as a definitive interpretation of the relevant statutory provisions. Legal and Regulatory Obligations Securities Ordinance ( SO ) 4. Section 49(1) of the SO provides that a person (whether an individual or a body corporate, or a member of a partnership or director of a body corporate) shall not in Hong Kong act as an investment adviser or hold himself out to be an investment adviser unless he is registered as an investment adviser. An investment adviser is defined in section 2(1) of the SO as a person who

2 (a) (b) (c) for remuneration carries on a business of advising other persons concerning securities; for remuneration as part of a regular business issues analyses or reports concerning securities; or for remuneration pursuant to a contract or arrangement with a client, undertakes on behalf of the client the management of a portfolio of securities, including the arranging of purchases, sales, or exchanges of securities through a dealer or exempt dealer, and, in the case of a corporation which is an investment adviser, includes any director of the corporation who actively participates in, or is in any way directly responsible for the supervision of, the corporation s business as an investment adviser; but does not include - (i) (ii) (iii) (iv) (v) (vi) (vii) a licensed bank; a solicitor or professional accountant whose carrying on business as an investment adviser is wholly incidental to the practice of his profession; the proprietor or publisher of, or any contributor to, a bona fide newspaper, magazine, journal, or other periodical publication that is generally available to the public, otherwise than on subscription, who, only in that bona fide newspaper, magazine, journal, or periodical publication, advises other persons concerning securities, or issues analyses or reports concerning securities, not being the proprietor or publisher of, or a contributor to, a newspaper, journal, magazine, or other periodical publication whose principal or only object is to advise others concerning securities or to issue analyses or reports concerning securities; a dealer or exempt dealer to the extent that his giving of investment advice is incidental to his carrying on business as a dealer or exempt dealer; a trustee company registered under Part VIII of the Trustee Ordinance; an exempt investment adviser; or a recognized clearing house. 2

3 Commodities Trading Ordinance ( CTO ) 5. Section 27(1) of the CTO provides that (subject to subsections (1A), (2) and (3)), no person shall (a) (b) (c) (d) for remuneration carry on a business of advising any other person concerning the purchase or sale of futures contracts; for remuneration as part of a regular business issue or circulate analyses or reports concerning the purchase or sale of futures contracts; for remuneration pursuant to a contract or arrangement with a client, undertake on behalf of the client the management of a portfolio of commodities or futures contracts, including the arranging of purchase, sale, exchange or storage of commodities; or hold himself out as carrying on the business referred to in paragraph (a), unless such person is registered as a commodity trading adviser under this Ordinance. 6. Subsection (1A) of section 27 of the CTO states that subsection (1) shall not apply to a recognized clearing house within the meaning of section 2(1) of the Securities and Futures (Clearing Houses) Ordinance. 7. Subsection (2) states that subsection (1)(a) shall not apply to the giving of advice concerning the purchase or sale of futures contracts by a dealer to his client, if such activity is incidental to his carrying on business as a dealer. 8. Subsection (3) states that subsection (1)(a) or (b) shall not apply to the proprietor or publisher of, or contributor to, a publication that is generally available to the public otherwise than on subscription who only in that publication advises other persons concerning the purchase or sale of futures contracts, or issues or circulates analyses or reports concerning the purchase and sale of futures contracts, not being a proprietor or publisher of, or contributor to, a publication whose principal or only object is to advise others concerning the purchase or sale of futures contracts, or to issue or circulate analyses or reports concerning the purchase and sale of futures contracts. In this subsection publication means a bona fide newspaper, magazine, journal or other periodical publication. 3

4 The Commission s Views on Certain Specific Issues 9. As a recent development, the web-based financial information industry may give rise to novel regulatory and investor protection issues. The Commission s aim is to facilitate new business and services, without compromising investor protection. With this in mind, the Commission considers that it should set out its views on certain specific issues upon which queries have arisen. 10. The guidance offered below reflects the Commission s general view on specific issues. It is not, and is not intended to be, definitive. Each individual case must be assessed on its own facts. Web-site operators are advised to consult their own legal advisers about how the law applies to their business. General Regulatory Approach 11. As set out in the Guidance Note on Internet Regulation, the Commission is of the view that the fundamental principles of regulation are not premised on the use of a particular medium of communication or delivery. Regulated activities should be uniformly regulated irrespective of whether such activities are conducted via paperbased or electronic media. Remuneration 12. Both sections 49 of the SO and 27 of the CTO link the receipt of remuneration and the giving of investment or commodity trading advice. However, the term remuneration has not been defined in any of the relevant Ordinances. The Commission takes the view that remuneration should include both direct and indirect forms. This is the approach that best serves the objective of investor protection, without the burden of over-regulation. In this context, notwithstanding that the websites concerned may not levy any direct charge on visitors for services or advice given, a benefit or advantage indirectly derived, such as from advertisements or hyperlinks with other web-sites, may amount to remuneration. 4

5 Periodical Publication Exemption 13. Both the SO (sub-section (c)(iii) under the definition of investment adviser in section 2(1)) and CTO (section 27(3)) provide specific exemptions from the licensing requirement for periodical publications in respect of certain investment or commodity trading advisory activities. These exemptions are available to the proprietors, publishers, or contributors of bona fide newspapers, magazines, journals, or other periodical publications. (See paragraph 4 above for other qualifying criteria.) Internet publications may rely on such exemptions only if they are able to satisfy these provisions. Investment or Commodity Trading Advising 14. The ambit of investment advising or commodity trading advising as provided in sections 2 of the SO and 27 of the CTO is broad. In the present context, the Commission takes the view that the licensing requirement should not be extended to cover activities concerned solely with the provision of generic factual market information where no recommendation on specific securities or investment advice has been made, nor to cover the reproduction of research reports from persons registered with the Commission. Hyperlinks to other financial web-sites 15. Hyperlinks to other related sites are a common feature of internet web-sites. The mere presence of such hyperlinks, notwithstanding the links may be with a securities dealer or commodity dealer, does not of itself trigger a licensing requirement. However, the presence of any inducement, or invitation, to visit the related sites through the links concerned may mean a licence is required. In this regard, it should be noted that effecting an introduction of a client to a securities dealer in return for a commission or other remuneration may constitute dealing in securities, which may trigger a licensing requirement under section 48 of the SO. There is a corresponding provision under the CTO - see section 26 of the CTO. Provision of Analytical Tools 16. Analytical tools facilitating the making of investment decisions are widely, and very often, freely, available from financial information web-sites. In general, where the tools are able to identify a variety of investment possibilities or recommendations 5

6 presenting different choices to users, the provider of such tools would be regarded as giving investment advice. However, this is an area in which investors must accept responsibility for their own actions and the Commission is prepared to accept that the mere provision of analytical tools which solely filter publicly available data in a transparent process does not constitute an investment (or commodity trading) advisory activity. For example, the provision of a computer programme that identifies stocks of a particular industry sector having price earning ratios below a predetermined level, or that identifies investment funds having past annual returns above a predetermined level, will not constitute giving investment (or commodity trading) advice. 17. On the other hand, the provision of tools whose analytical processes are not transparent, or require certain subjective input, or which utilise data not widely available, and which generate recommendations on specific stocks or investment funds will, generally, constitute an investment advisory activity. An example would be an analytical tool able to make specific recommendations on the basis of the investment profile (risk aversion, age, projected cash flow) as determined by the user. 18. We advise the providers of such tools to seek legal advice as to whether their activities may be construed as giving investment advice. Provision of Electronic Trading or Advisory Platforms 19. The Commission appreciates that a significant number of electronic trading or advisory platforms utilised by licensed intermediaries are provided, either by way of a rental, leasing or similar contractual arrangement, by other firms primarily engaged in the technology service sector. These firms are primarily technology vendors or technology providers. Typically, such firms provide technical know-how and support for the electronic platform in return for a service fee payable by the intermediaries. Such a fee may, for example, be charged on the basis of the number of transactions effected through the platform. Queries have been raised by a number of these firms as to whether a licensing requirement would be triggered by such an arrangement on their part. The Commission s general view is that so long as these firms do not carry on dealing or advisory activities, or hold themselves out as doing so, no registration will be required. In determining whether a person carries on or holds himself out as carrying on such business activities in Hong Kong, the 6

7 Commission will consider all the facts of each case. These include the nature of the activities and the manner in which they are being carried out in Hong Kong, the presentation of the web-site, and the circumstances surrounding the conduct of such activities. For example, whether or not investment advice or orders on securities or futures are being conveyed or transmitted in the name of that person. Advisory Services Provided by Overseas Web-sites 20. The Commission does not generally seek to regulate any securities or commodity trading or advisory activities conducted over the internet via off-shore sites, provided such activities are not targeted at persons residing in Hong Kong, and are not detrimental to the interests of the investing public in Hong Kong or to the market integrity of Hong Kong. 21. In section 7.4 of the Guidance Note on Internet Regulation, the Commission has set out the Consideration Factors for Whether Activities are Targeted at People Residing in Hong Kong. For ease of reference, these factors are reiterated: In determining whether or not an activity conducted over the Internet is targeted at people residing in Hong Kong and hence attracts regulatory concern, the Commission 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 the information is targeted, via "push" technology, to people whom the financial services provider knows, or should reasonably know, reside in Hong Kong. For this purpose, "push" technology refers to any technology which spams, broadcasts, or directs information to a particular person or group of persons, via, for example, Whether the information available over the Internet is presented or provided in a manner which gives the appearance that people residing in Hong Kong are targeted. The Commission may consider the following factors, amongst others, as giving the appearance that people residing in Hong Kong are targeted: the use of local 7

8 distribution agents; the use of references to Hong Kong Dollars; the use of Chinese language in conjunction with other factors; the provision of hyperlinks (including banners) to the Internet web site of a distributor who possesses the above characteristics; and the publication in a Hong Kong newspaper or other Hong Kong publication of the Internet address at which such information may be accessed. Notwithstanding the above factors, the Commission may, taking into account the activities of the business as a whole, regard activities conducted over the Internet as not targeted at people residing in Hong Kong, if: The information presented includes a prominent disclaimer clearly indicating that the subject services or products are not available to people residing in Hong Kong and such disclaimer is viewed with or before the advertisement or description of the services or products. This may be achieved by either (i) an affirmative statement stating the countries where the services or products are made available; or (ii) stating that the services or products are not available to people residing in Hong Kong. A statement to the effect that the service or product is not being made available in any jurisdiction in which the same would or could be illegal would not be regarded by the Commission as satisfying this requirement Reasonable precautions are taken to guard against the acceptance of purchases from or provision of services to people residing in Hong Kong. Precautions may include the checking of telephone numbers and mailing addresses (including addresses) of potential clients; the use of firewall, password, blocking or other limiting device to restrict access to the information and services provided; or not providing the means for applying for the services. Precautions that simply require a person to identify whether he is a Hong Kong resident would not alone be regarded as sufficient to guard against such activities taking place in Hong Kong. 8

9 However, the use of precautions or disclaimers will not necessarily preclude the Commission from exercising its powers of enforcement if the conduct of the persons who are responsible for the particular activity over the Internet or some other circumstances, so warrant. Final Note 22. In light of the proliferation of Hong Kong-based internet web-sites offering financial information or investment advice, the Commission would like to remind the operators of these internet content providers to ensure that their operations do not contravene licensing requirements and/or applicable laws. Web-sites offering investment advisory services in breach of licensing requirements should apply to the Commission immediately for a registration. In case of doubt, web-site providers should consult their own legal advisers. 23. The Commission would also like to remind internet service providers and internet content providers who engage in the provision of financial information that they should adopt, as a matter of best practice, the principles enumerated in the Commission s Code of Conduct and, in particular, the principles in relation to avoiding conflicts of interests. 24. Any queries in relation to the issues raised in this Circular may be addressed, by way of , to lic-online@hksfc.org.hk. (Amended, May 2001) 9