In Hong Kong, the Securities and Futures Ordinance ("SFO") was introduced in March 2003 and powers of investigation were given to the Securities and Futures Commission ("SFC").
While initially the SFC seemed reluctant to use its powers, it has become more active in the last 18 months as a result of the financial crisis and the Lehman mini-bond scandal.
One of the biggest changes introduced by the SFO is that there is now a criminal as well as civil regime to regulate market misconduct (which includes insider dealing, false trading, and price rigging). On the civil side, the Market Misconduct Tribunal was created and is empowered to investigate potential misconduct and impose sanctions such as disqualification orders, cold shoulder orders (where direct or indirect access to the securities markets is denied), disgorgement and costs orders. Under the criminal regime, the SFC may institute summary proceedings in conjunction with the Department of Justice. The criminal sanctions are severe and can include custodial sentences of up to 10 years. To date, the SFC has focused on criminal prosecutions for acts of market misconduct. In the last 18 months, for example, the SFC has secured 10 criminal convictions for insider dealing and has a 100 per cent success rate.
The SFO also provides that anyone who has suffered pecuniary loss as a result of another person's contravention of the market misconduct provisions may seek compensation if the court considers it "fair, just and reasonable" in the circumstances.
Directors and officers may also face sanctions if they fail to take precautions to ensure that proper safeguards exist to prevent market misconduct, or if the misconduct was carried out with their consent or connivance. While to date the SFC has focused on prosecuting the individuals perpetrating the market misconduct, in the current environment an action against a director or officer for being indirectly involved would not be a surprising move by the SFC.
The SFC has extensive powers to compel the production of documents, ask questions and interview individuals. The answers to questions or information provided to the SFC is not admissible in criminal proceedings, so a person is unable to refuse to cooperate with the SFC on the basis that to do so would be self incriminating. The Hong Kong courts take a dim view of anyone who refuses to assist the SFC. In March 2010, for example, two individuals guilty of market misconduct were sentenced to an additional month in prison for failing to cooperate with the SFC.
In our view, whether the SFC continues to take such an aggressive stance will depend upon whether the Chief Executive, Martin Wheatley, and Executive Director, Mark Stewart, remain at the SFC. While they have been successful in cracking down on market misconduct in the last few years, both are due for reappointment in 2011/2012.
In China, market regulation is carried out by the China
Securities Regulatory Commission ("CSRC"). However, the
CSRC has more of a "watching brief" role, and it will
refer matters requiring investigation and prosecution to criminal
prosecutors. When such criminal proceedings are taken, the
sanctions can be severe, as recent news items demonstrate. It is
not uncommon for directors and officers to receive suspended death
sentences or life
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