Will the Hong Kong Securities and Futures Commission (SFC) enforce on a large scale like the SEC? Analyze from the composition of the two institutions.

The Hong Kong Securities and Futures Commission (SFC) will not necessarily follow the same approach as the U.S. Securities and Exchange Commission (SEC) in defining securities, regulating, investigating, and imposing fines. The key to this issue is not just how they define their organizational goals, but also how they behave in practice. One simple way to answer this question is to understand the business and personnel composition of the SEC and SFC.

This article is reproduced from 0xLoki, who is a columnist for several Chinese media. For the original article, please see here.

Analysis of the Structure of the U.S. SEC

First, let's take a look at the structure of the SEC. At the top is a committee consisting of a chairman and four commissioners, with 6 divisions, 1 office of the inspector general, and 11 offices underneath. In addition, there are 11 regional offices. It is important to note that these 11 regional offices report to both the Division of Enforcement and the Office of Examinations.

From the organizational structure, it can be observed that the Division of Enforcement and the Office of Examinations seem to be the most crucial in all departments. In the descriptions of various departments that follow, we can see that the Division of Enforcement and the Office of Examinations are also prominently featured.

In addition, there is another compelling data point: financials. The SEC's funding mainly consists of three parts:

1. Appropriations
2. Securities transaction fees and registration fees
3. Disgorgements

Disgorgements are further divided into two parts:

1. If compensation is owed to victims, disgorgements are used to compensate the victims and inject into the U.S. Treasury General Fund.
2. If no compensation is owed to victims, disgorgements are allocated to the Investor Protection Fund, whistleblowers, and funding examinations by the Office of the Inspector General.

Next, let's look at the SEC's balance sheet. According to the 2022 financial report, the SEC's total assets increased from $12.2 billion to $14.1 billion, a $1.9 billion increase. Investments increased by $400 million; accounts receivable increased by $1.5 billion, the majority of which are from disgorgements, with the investment category already net of regulatory expenses.

In addition to disgorgements, the U.S. Office of Management and Budget (OMB) allocated a reserve budget of $50 million to the SEC in 2022, with $390 million for the Investor Protection Fund, about $1.8 billion from SEC transaction fees, and $640 million from registration fees. It is evident that disgorgements have become a "pillar revenue" for the SEC.

Looking at expenditures after income, it can be seen that the net expenditures of the Division of Enforcement and the Office of Examinations are the highest, totaling $1.75 billion, accounting for 65% of total expenditures. These expenditures ultimately translate into actions: according to another SEC public article, the SEC initiated a total of 760 enforcement actions in the 2022 fiscal year, a 9% increase from the previous year. This includes 462 new or "standalone" enforcement actions.

These enforcement actions have brought in substantial income: the total amount ordered to be paid is $6.439 billion, including civil penalties, disgorgements, and prejudgment interest, marking the highest amount in SEC history, surpassing the $3.852 billion in the 2021 fiscal year. Among the total amount, civil penalties amounted to $419.4 million, also a historic high.

Under this system, the SEC has rewarded whistleblowers handsomely, with approximately $229 million distributed in 103 awards in the 2022 fiscal year, ranking second in historical amounts and number of rewards.

Simultaneously, the number of whistleblower reports in the 2022 fiscal year also reached a historical high, with a total of 12,300 reports received by the SEC. Gensler's request at the hearing to increase the SEC's staff from 4,685 to 5,139 seems reasonable.

In conclusion, the SEC's actions are not difficult to understand; it is a form of retrospective enforcement. First, let as many people in as possible and let them act, then investigate, gather evidence, prosecute, and finally penalize as much as possible. Therefore, it is not difficult to understand the SEC's statement that "everything other than Bitcoin is a security." Expanding enforcement targets is the first step, and whether enforcement is ultimately chosen, and whether the prosecution is successful, depends on many factors.

Analysis of the Structure of the Hong Kong SFC

After discussing the SEC, let's look at the SFC. The structure of the SFC differs significantly from the SEC, with the only regulatory units possibly involving the Market Surveillance and the Intermediaries Supervision under the Intermediaries Division. Additionally, there is a "Licensing Department" under the Intermediaries Division, closely related to the familiar licensing system.

According to the SFC's 2021-2022 Annual Report, the SFC initiated 220 case investigations throughout the year, filed 168 civil suits, and fined licensed institutions and individuals a total of HK$410.1 million. Apart from enforcement, another important data point is that in that year, the SFC received 7,163 license applications; processed over 38,000 license data reviews through WING.

In specific enforcement categories, although the SFC mentions that "where appropriate, we will take decisive enforcement action against platform operators who are not licensed," the enforcement cases still mainly involve traditional financial sector illegal activities such as insider trading and market manipulation, corporate fraud and misconduct, intermediary negligence, improper internal controls, among others.

In terms of revenue and expenditures, the composition of the SFC is straightforward. The total revenue of the SFC for 2021-2022 was HK$2.247 billion, with "transaction levies" accounting for 95.3%, and other income at 6.7%, mainly collected from market participants. Disgorgements do not appear in the SFC's revenue sharing. In terms of expenses, 75.7% is personnel expenses. According to the annual report data, as of 2022, the SFC had a total of 913 employees.

Additionally, based on this data, the notion that the SFC earns money through "licensing" is inaccurate; market transactions contribute the vast majority of revenue to the SFC. For example, licensees pay application fees/annual fees ranging from HK$0.47-12.97K for each activity for licensed corporations and HK$1,790-5,370 for each activity for licensed representatives. The 3,231 licensed institutions and over 40,000 licensed individuals do not contribute significantly to revenue.

From historical data, the SFC does not have the same motives as the SEC. Furthermore, the SFC does not possess the enforcement capabilities of the SEC; with only 903 employees, these employees are tasked with handling the complex operations of the Stock Exchange, Futures Exchange, processing a large number of license applications, maintaining inspections, and even "promoting goodwill and making the world a better place," making it challenging to allocate additional resources for proactive enforcement.

Conclusion: SFC Will Not Adopt SEC's Regulatory Approach

Based on the data above, it is evident that the SFC does not have the same policy inclinations as the SEC, and fundamentally, both the SFC and SEC operate under the principle of "same business, same principles, same risks"; the SEC has a strong regulatory inclination towards cryptocurrencies, but it also exhibits similar tendencies towards other financial institutions; similarly, the SFC is unlikely to treat cryptocurrencies differently.

In conclusion, I believe the likelihood of the SFC adopting large-scale enforcement similar to the SEC is very low. For entrepreneurs, as long as they do not clearly violate current Hong Kong regulations, they do not need to worry about regulatory pressures. However, I do not think that "Hong Kong's market" and "active licensing" are suitable for every project party, as the application and maintenance involve considerable costs, and even without a license, there are still many Web3-related activities that can be pursued in Hong Kong.

Although there is no need to worry about regulatory pressures similar to the SEC, I still want to emphasize that every eager participant should calmly ask themselves a question - do we really need a "license"?