Monitor

OUR STOCK EXCHANGE'S struggling Trivial Pursuits Board (GEM) is still trying valiantly to strike an elusive balance between proper regulation of securities and inducements to companies to list their securities.

It has just published another list of amendments to its rules. They are mostly of a housekeeping nature, a twist here to tighten a restriction and a tweak there to loosen one. We will not bother to go into the relative merits of these changes. It comes down to lawyers' talk and I value having readers. Ever tried to read a legal brief?

But there are two points worth noting. The first is that the GEM is based on lax listing rules which have become even laxer through the granting of waivers, one reason that this secondary market has been such a disappointment to investors. Small changes change little. The GEM's most obvious characteristic is still that it makes life easy for sharks in suits.

The second point is one that our regulatory authorities have not really yet considered but should do.

Why should the burden of regulation be carried by government authorities when there are mechanisms we could adopt to make the private interests concerned do it themselves and more effectively too?

One of the arguments the stock exchange and the Securities and Futures Commission advance for allowing the GEM to operate on lax rules is that the comparable Nasdaq market in the United States has even laxer rules.

It is both true and not true. Yes, the stated rules that apply to the Nasdaq alone are laxer than the stated rules that apply to the GEM alone, but overall securities law in the US is tighter, the penalties are more severe and the enforcement of the rules relies much more on private lawsuits by shareholders.

The reason that it is easier in the US for aggrieved private parties to take legal action, aside from the ridiculously high cost of justice in Hong Kong, is two features of US law - class action lawsuit and contingent fees.

Class action lawsuit means that if a fellow shareholder of a company that has bilked you takes legal action against that company, you can add your name to the lawsuit and share equally in the damages if it is successful.

Contingent fees means that you can strike a deal with the lawyer who is handling the lawsuit to pay him a set percentage of the damages if it is successful and nothing at all if it is not. These two together make it easier and inexpensive for a small shareholder to find legal redress when he has been cheated.

If the lawyer thinks the lawsuit has a fighting chance of success, enough for the potential damages to make it worth his while, he will start the proceedings and, even if it were not you who first took it to him, you can become a plaintiff too if you have the same case to make.

Yes, Hong Kong would probably become a more litigious society if we adopted these practices and this is one feature of the American way of life that we do not necessarily welcome.

But think of it differently. Investors who are cheated, particularly small ones, face obstacles so great in seeking redress in Hong Kong that few of them bother to try. If this is the reason we are less litigious than Americans it is a reflection of a serious failing of law here, not of a virtue of our society.

The stock exchange and the SFC are certainly no substitutes. They may investigate much but they prosecute little and the penalties are insultingly slight.

Buried notices of censure are about as far as they are willing to go on most occasions and even those occasions are few.

Investors here need better protection and they could have it too at much less cost to the public purse if we adopted two features of American practice.