The Contest of Securities Regulatory Powers: The Path Analysis of US SEC and Hong Kong SFC

Space has talked about a topic before: Will the Hong Kong SFC be like the US SEC, go madly define securities and then supervise, investigate, and impose fines? The key to this question is that we can't just look at what they say (organizational goals), but also how they do it (actual behavior). There is a very simple way to answer this question: understand the business and personnel composition of SEC and SFC.

SEC

First of all, let's take a look at the structure of the SEC. At the top is a committee consisting of the chairman + 4 members, which consists of 6 departments + 1 inspector general's office + 11 offices. In addition, there are 11 sub-regional offices. It should be noted that these 11 regional offices need to report to both Enforcement and Examinations.

From the organizational structure, we can find that Enforcement and Examinations seem to be the most important of all departments. In the following descriptions of each department, we can also see that the Law Enforcement Division and the Inspection Division are also divided into one and two.

In addition, there is a more convincing data: financial situation. The SEC's funding sources roughly consist of three parts:

1. financial budget;

2. Securities transaction fees and application fees;

3. Confiscation of income.

The confiscated income is divided into two parts:

A. If the victim needs to be compensated, the confiscated income will compensate the victim + inject into the General Fund of the US Treasury

B. Where victims do not need to be compensated, forfeiture proceeds will be distributed to investor protection funds, whistleblowers (providers of investigative leads), and to fund investigations by the Office of the Inspector General.

Next, let's look at the SEC's balance sheet. According to the annual report for the 2022 fiscal year, the total assets of the SEC increased from 12.2 billion to 14.1 billion US dollars, an increase of 1.9 billion US dollars. Among them, the investment account increased by 400 million US dollars; the accounts receivable increased by 1.5 billion US dollars, the vast majority of these two items were composed of confiscated income, and the investment account has also deducted the expenditure in the supervision process.

In addition to fines and confiscated income, OMB’s 2022 reserve budget for the SEC is US$50 million, and the investor protection fund budget is US$390 million; the SEC transaction fee is about US$1.8 billion; and the application fee is US$640 million. It can be seen that the confiscated income has become a kind of [pillar income].

After reading the income and then looking at the expenditure, we can see that the net expenditure of the Law Enforcement Division and the Inspection Division is the highest, reaching a total of 1.75 billion US dollars, accounting for 65% of the total expenditure. That spending ultimately translates into enforcement actions: According to another SEC public article, the SEC brought a total of 760 enforcement actions in fiscal year 2022, a 9% increase from the previous year. These included 462 new or "standalone" enforcement actions.

These enforcement actions have brought handsome revenue: Ordered payments totaling $6.439 billion, including civil penalties, forfeited proceeds and prejudgment interest, are the highest in SEC history and up from $3.852 billion in fiscal year 2021. Of the total amount handed down, civil penalties were $419.4 million, also a record high.

Under this system, the SEC issued generous rewards to whistleblowers. In the 2022 fiscal year, the SEC issued about 229 million U.S. dollars in 103 rewards. The amount and the number of rewards ranked second in history. Also ranked first in history, the SEC received a total of 12,300 reports. Gensler's request at the hearing to ask the SEC for resources to increase its headcount from 4,685 to 5,139 also made sense.

To sum up, the SEC's behavior path is not difficult to understand, it is a kind of law enforcement after the fact. Let as many people as possible come in and act their own way, then investigate, collect evidence, prosecute and punish as much as possible. Therefore, it is not difficult to understand that the SEC [except BTC] is all securities. Expanding the target of law enforcement is the first step. Of course, whether to choose law enforcement in the end and whether the prosecution is established depends on many factors.

Hong Kong Securities Regulatory Commission SFC

After talking about SEC, let's look at SFC. The structure of SFC is significantly different from that of SEC. Only the Market Inspection Section and the Intermediary Agency Supervision Section under the Ministry of Intermediaries may be involved in supervision. In addition, the intermediary agency has also set up a [Licensing Section], which is inseparable from the familiar licensing system.

According to the SFC 2021-2022 annual work summary, SFC launched a total of 220 case investigations throughout the year, initiated 168 civil lawsuits, and fined licensed institutions and individuals a total of 410.1 million Hong Kong dollars. In addition to law enforcement, another important data is that SFC received 7,163 license applications this year; more than 38,000 license applications were processed through WING.

In terms of specific law enforcement categories, although the SFC mentioned [In appropriate circumstances, we will decisively take law enforcement actions against unlicensed platform operators. ], but judging from the law enforcement cases, the illegal activities in the traditional financial field such as insider trading and market manipulation, corporate fraud and misconduct, negligence of intermediaries, and improper internal control are still the main ones.

In terms of income and expenditure, the composition of SFC is very simple. The total income of SFC in 2021-2022 is 2.247 billion Hong Kong dollars, of which [transaction levy] accounts for 95.3%, other income is 6.7% (mainly collected from market participants), fines and confiscations Does not appear in SFC's revenue share. Among the expenses, 75.7% are personnel expenses. According to the annual report data, as of 2022, SFC has a total of 913 employees.

In addition, based on this data, it is not accurate to say that SFC makes money by [licensing], and market transactions contribute most of SFC's income. According to the application fee/annual fee of 4,700-129,700 Hong Kong dollars for each activity of a licensed legal person; the application fee of 1,790-5,370 Hong Kong dollars for each activity of a licensed representative, 3,231 licensed institutions and more than 40,000 licensed personnel will not contribute too much income.

According to past data, SFC does not have the same motivation as SFC. On the other hand, SFC does not have the same law enforcement capabilities as SFC. SFC has only 903 employees. To [promote kindness and make the world a better place], it is difficult to allocate so much manpower and material resources for active law enforcement.

From the above data, it can be seen that SFC does not have the same policy tendency as SEC, and SFC/SEC are essentially acting in accordance with the idea of [same business, same principle, same risk]; SEC has a very strong regulatory tendency for cryptocurrencies. But it also has the same inclination towards other financial institutions; and SFC has a high probability of not treating cryptocurrencies specially.

To sum up, I think it is very unlikely that the SFC will enforce large-scale law enforcement like the SEC. For entrepreneurs, as long as they do not clearly violate the current Hong Kong laws and regulations, they do not need to worry about regulatory pressure. But I don’t think [Hong Kong market] and [active licensing] are suitable for every project party. After all, application and maintenance also require considerable costs. Even without a license, many other Web3-related things can still be done in Hong Kong.

Although there is no need to worry about regulatory pressure like the SEC, I still want to say here that every participant who is eager to try should calmly ask himself a question-do we really need a [license]?