The China Securities Regulatory Commission (CSRC) and the Cayman Islands Monetary Authority (CIMA) (together the Competent Authorities) signed a memorandum of understanding (MoU), on 28 September and 5 November 2018 respectively, relating to the increased international activities in the securities, futures and other related investment products markets. The MoU is premised on the corresponding need for mutual cooperation between the Competent Authorities and cross-border enforcement with regard to Cayman Islands companies that conduct public securities offerings in China and / or whose securities are trading on China’s stock exchange. A copy of the MoU can be found here. This update sets out an overview of the MoU.
The following is a summary of the principles under the MoU:
- The MoU serves as the basis of cooperation for the Competent Authorities and does not create any binding international legal obligations. It does not modify or override any laws or regulations in force in or applying to China or the Cayman Islands. The MoU does not create any rights enforceable by third parties, nor does it affect any arrangements under other MoUs.
- The fulfilment of the provisions of the MoU will need to be consistent with the local laws of China and the Cayman Islands.
- To the extent permitted under local laws in China and the Cayman Islands, each Competent Authority will make reasonable efforts to provide the other with any information relevant to a breach or potential breach of the regulatory requirements in the securities, futures and other investment products markets as supervised by the respective Competent Authority.
The scope of the MoU includes:
- Ensuring issuers and offers of securities make full and fair disclosures.
- Enforcement of laws and rules relating to issuing of, dealing in, arranging deals in, managing and advising on securities, futures and other investments.
- Promoting and securing fitness and properness of brokers, dealers and advisers.
- Supervising and monitoring the relevant regulated business activity to ensure compliance with laws and regulations.
- Technical cooperation and assistance.
- Other matters agreed upon by the Competent Authorities.
Requests and executions
The MoU prescribes the various procedural information that should be set out in a request for information (RFI). The RFI will need to be made in writing in English and addressed to the Director-General of the CSRC and the Deputy General Counsel of CIMA. In situations where there are urgent cases, RFIs can be made in summary form to be followed within 10 business days by a full request. The MoU does provide that the RFI will state a timeframe within which the requested party will need to comply. However, this is mitigated by an indication in the MoU that, regardless of the timeframe prescribed, the requested party should make best efforts to treat the RFI in a reasonable timeframe.
The requested party will need to examine and vet the RFI to ensure that it is complying with the terms of the MoU. Importantly, where the RFI cannot be accepted completely, the requested party can consider whether there may be any information that can be provided. This is very much discretionary. In determining whether to accept or decline a request, the requested party must consider whether:
- the request relates to a breach of the laws or regulations which falls within the scope of the requested party;
- broadly equivalent assistance would be available from the requesting party;
- the request involves an assertion of a jurisdiction not recognised by the requested party;
- it would be contrary to the public interests of the requested authority; and
- a criminal proceeding has already been initiated in the country of the requested authority based on the same grounds and against the same person(s) or the same person(s) have been finally sanctioned on the same charges by the Competent Authority in the country of the requested party.
The Competent Authorities will need to keep confidential to the extent permitted by law any RFI under the MoU, ie anti-tipping off will apply and such RFI should not be disclosed by the recipient to any third parties without the prior consent of the Competent Authority in the requesting party. To the extent any information obtained under the MoU is being disclosed to third parties, the requesting party will need to obtain an undertaking of keeping the information confidential from third parties, unless it is a legally enforceable demand to disclose.
If the Competent Authorities become aware that information passed under the MoU may be subject to a legally enforceable demand to disclose, it will, to the extent permitted by law, inform the other Competent Authority of the situation. The Competent Authorities will then discuss and determine the appropriate courses of action.
There is provision in the MoU for the Competent Authorities to work together to identify and address, subject to the availability of personnel and resources, the training and technical assistance required to facilitate the development of the regulatory framework for securities, futures and other related investment products in China and the Cayman Islands.
The MoU has provisions built into it in relation to consultation between the Competent Authorities where there is a dispute in relation to the meaning of any terms used in the MoU. The Competent Authorities can also consult in relation to an RFI or a proposed RFI. The terms of the MoU can also be revised after consultation between the Competent Authorities in relation to any change in the law and regulation which can affect the operation of the MoU.
Following recent case law, the following points should be borne in mind when dealing with RFIs:
- there is at common law a duty of procedural fairness to which public bodies like CIMA are subject, particularly when exercising functions with a power of compulsion;
- procedural fairness requires that CIMA furnish any person to which an RFI relates with sufficient information to enable them to determine whether the RFI was lawfully issued (and therefore comply) or was unlawfully issued and therefore liable to challenge and susceptible to being quashed;
- the duty of confidentiality to which persons (corporate or natural) are subject prevails over common law rights of procedural fairness; and
- procedural fairness demands that an entity such as CIMA provide a sufficient level and degree of information to enable representations to be made as to lawfulness of the RFIs.
If you have any questions, please contact Mirza Manraj or your usual Harneys contact.