Enhanced investor protection vital for HK
A listed company that fails to disclose information likely to affect its share price currently risks no more than a reprimand for breaching the stock exchange's listing rules. But people who make money by trading in stocks and shares on the basis of such inside, price-sensitive information risk being sent to jail.
That is a credibility gap in Hong Kong's regulatory regime that has been there for more than seven years, ever since insider trading was made a criminal offence. A bill to be put before lawmakers later this year will at least narrow it by treating non-disclosure as a breach of the law, while stopping short of criminal sanctions. Instead of being taken to court, companies and directors would face civil action before the market misconduct tribunal, which could impose a fine of up to HK$8 million. Directors could also face a ban on trading or serving as directors. Critics dismiss this as yet another government backdown on market reform. Officials abandoned the first attempt in 2003 to turn some listing rules into law with a maximum 10-year jail term and HK$10 million fine for non-disclosure, after strong opposition from the market. There was less resistance this time to the watered-down version among the 100-odd companies who responded to the latest consultation, though one in five remained opposed.
Secretary for Financial Services and the Treasury Professor Chan Ka-keung, on the other hand, has hailed it as a 'good first step forward for a reform plan to establish a continuous disclosure culture in the local market'. We trust he is right, given the watering down of a proposal to extend the blackout period for the trading of shares by directors ahead of a results announcement, and the exchange's failure to introduce quarterly reporting to keep investors better informed, in the face of opposition from the business sector. That said, there is a difference between trading with access to information not available to ordinary investors and failure to disclose, whether by omission or commission. The first is relatively easily defined by hard evidence and market rules. The other raises tricky questions, such as whether the information would have been likely to cause a big enough change in a share price to amount to a material change - a test that has to be applied hypothetically after the information does become available, when investors may be influenced by other factors; and assessing how a general investor would behave if in possession of the information. The prevailing consideration must be the interests of ordinary investors. Firms and directors should be able to mount a public-interest defence.
It has yet to be shown that criminal charges are necessary to advance the public interest. The threat posed to the reputations of directors by civil action should be a strong deterrent to non-disclosure of price-sensitive information. The possibility of jail terms for non-disclosure could discourage professionals from serving as independent, non-executive directors, whose role is to protect the interests of ordinary investors. And civil sanctions do bring Hong Kong into line with Britain, the European Union and Australia.
The proposed law places a heavy responsibility on the market misconduct tribunal, and regulators who will bring charges before it, to ensure it offers more than merely a lucrative new line of work for lawyers. Given the city's divided and flawed regulatory regime, one that has repeatedly failed to protect investors' interests, it is important for Hong Kong's credibility as an international finance centre that it is seen to enhance investor protection.