SFC looking at third way to settle cases
James Comber, senior associate at Allen & Overy, discusses where the SFC will deploy its enforcement powers next
With the media reporting settlements worth billions of dollars for manipulating the London interbank lending rate and numerous convictions for rogue trading, market misconduct and insider dealing, the past year was undoubtedly a successful one for securities regulators around the globe.
Hong Kong was no exception, with the Securities and Futures Commission racking up a number of significant victories.
With the enforcement division of the commission undoubtedly feeling confident off the back of its successes, where can those working in the industry expect it to focus its attention on in the coming months?
Will the SFC continue to focus on insider dealing and market misconduct?
As the regulator tasked with ensuring the markets operate fairly and that investors are protected, insider dealing and market misconduct will remain a core focus. There have been a number of prominent convictions in recent times, including the imprisonment of Li Jialin of VST Holdings for six months. This case was the first time that the SFC secured the conviction of a chairman of a listed company for market manipulation since the Securities and Futures Ordinance was enacted in 2003.
There is a clear trend of the SFC vigorously pursuing criminal charges in cases where it thinks the evidence is strong enough to achieve a conviction, regardless of whether the defendant is a day trader or a director of a listed company.
With its high success rate and the courts often handing down jail terms for market abuses, this trend can be expected to continue.
The SFC has also used civil proceedings to achieve results in this area. In April last year, it secured a finding in the Market Misconduct Tribunal that a Fidelity portfolio manager had breached a civil insider dealing provision of the SFO. It also secured a highly publicised settlement with Hontex, which saw the company acknowledging false or misleading information had been included in its listing prospectus and offering to buy back more than HK$1 billion of shares from investors.
What can the SFC do about bad corporate governance?
Bad corporate governance can have a devastating impact on a company's share price. With the new disclosure requirements for price-sensitive information now in force, the SFC can be expected to take action against those who breach them.
Is there a new "third way" of enforcement against market misconduct?
It is widely believed that Hong Kong has a "dual enforcement regime" - the SFC can choose to pursue criminal prosecutions in court or civil claims before the Market Misconduct Tribunal. The SFC has sought to add a new hybrid approach through the Hontex and Tiger Asia cases, arguing that it also has the option of getting permanent enforcement orders from the courts under section 213 of the SFO.
This "third way" has proved to be both useful and controversial. The SFC secured an investor compensation outcome in the Hontex case, returning the entire proceeds of the company's share offering without the need for a tribunal hearing or criminal trial. In the Tiger Asia case, the SFC is seeking similar orders through the third way. Critics say the SFC is overreaching its powers.
The Tiger Asia case is being taken to the Court of Final Appeal. The Court of First Instance had rejected the SFC's application for permanent orders against Tiger Asia, saying it did not have jurisdiction to do this. The court noted that the SFC was effectively seeking to obtain a declaration under section 213 that a criminal offence had occurred, without first establishing this at a criminal trial, where proof beyond reasonable doubt is required. The SFC successfully appealed this decision to the Court of Appeal, where the judges stated that the SFC was acting within its powers and that section 213 was another valuable tool to help protect the investing public.
The Court of Final Appeal is scheduled to hear the case next month, and its judgment is likely to be the final word on whether there really is a "third way" of enforcement under the SFO. If successful, the SFC can be expected to use this previously unknown power much more frequently.
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