THE SECURITIES AND FUTURES COMMISSION
Hong Kong's independent securities and futures regulator.
The Securities and Futures Commission (SFC) is an independent statutory body established in 1989 to regulate Hong Kong's securities and futures markets. Its creation followed the October 1987 stock market crash and the subsequent review of Hong Kong's then fragmented regulatory structure.
The regulatory framework was substantially modernised through the Securities and Futures Bill introduced in 2000. Following extensive public consultation, the Securities and Futures Ordinance (Cap. 571) (SFO) came into operation on 1 April 2003, consolidating and updating the earlier securities and futures legislation.
REGULATORY MANDATE AND LEGAL EVOLUTION
The statutory objectives of the SFO
The SFO provides a comprehensive framework for regulating Hong Kong's securities and futures industry. The SFC's statutory objectives include:
Fair and orderly markets
Maintain and promote the fairness, efficiency, competitiveness, transparency and orderliness of Hong Kong's securities and futures industry.
Public understanding
Help members of the public understand the operation and functioning of the securities and futures industry.
Investor protection
Provide protection for members of the public investing in, or holding, financial products.
Crime and misconduct
Minimise crime and misconduct within the securities and futures industry.
Systemic risk
Reduce systemic risks in the securities and futures industry.
Financial stability
Assist the Financial Secretary in maintaining the financial stability of Hong Kong.
THE DUAL CIVIL AND CRIMINAL REGIME
Six forms of market misconduct
A central feature of the SFO is its parallel civil and criminal framework for addressing market misconduct. The statutory regime covers the following six categories:
Insider dealing
Dealing or related conduct involving relevant inside information in the circumstances defined by the SFO.
False trading
Conduct creating, or likely to create, a false or misleading appearance of active trading, market activity or price.
Price rigging
Transactions or other conduct intended to maintain, increase, reduce or stabilise the price of securities or futures contracts in prohibited circumstances.
Disclosure about prohibited transactions
Disclosing information about conduct known to be prohibited transactions where the statutory elements are established.
False or misleading information
Disseminating materially false or misleading information that is likely to induce transactions or affect market prices.
Stock market manipulation
Transactions carried out to affect a securities price with the intention of inducing another person to trade.
ENFORCEMENT TRACKS
The same market misconduct may engage a civil or criminal route
The legislation contains safeguards against a person being subjected to both civil market-misconduct proceedings and criminal prosecution for the same conduct. The route selected materially affects the procedure, standard of proof and available orders.
Market Misconduct Tribunal
The MMT is chaired by a judge and ordinarily sits with two members. It applies the civil standard of proof, taking account of the seriousness of the allegation. Available orders include disqualification, cold-shoulder, cease-and-desist, profit-disgorgement and costs orders.
Hong Kong courts
A criminal charge must be proved beyond reasonable doubt. Serious market-misconduct offences tried on indictment may carry a maximum sentence of ten years' imprisonment and a fine of HK$10 million, subject to the particular offence and statutory provision.
PROSECUTION AND ENFORCEMENT MECHANISMS
Distinct Prosecutorial Power
Under Article 63 of the Basic Law, the Department of Justice controls criminal prosecutions free from interference. The SFO nevertheless gives the SFC a distinct power to conduct summary prosecutions and a range of investigative and civil-enforcement powers.
Summary prosecutions
Section 388 of the SFO permits the SFC to commence a prosecution in its own name in the Magistrates' Courts. The power covers offences under the SFO and specified offences under legislation including the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Companies Ordinance and the Anti-Money Laundering and Counter-Terrorist Financing Ordinance. Summary prosecution is generally used for less serious offences. Market-misconduct prosecutions are handled under an arrangement with the Department of Justice, while the SFC may directly prosecute other offences within the statutory scheme.
Rights of audience
An appropriately authorised SFC employee may conduct a summary prosecution before a Magistrate. Section 388 gives that employee the same rights of audience as a barrister or solicitor for that prosecution.
Indictable offences
The Department of Justice conducts prosecutions on indictment in the District Court or the Court of First Instance. The SFC does not have a general power of arrest and may conduct joint operations or refer suspected criminal conduct to the Police, ICAC or another enforcement body where their powers are required.
Inter-agency referrals
The SFC and the Hong Kong Monetary Authority coordinate the supervision of registered institutions under a memorandum of understanding. The HKMA is the frontline regulator of banks' regulated activities and may refer matters within the SFC's investigative remit to the SFC; complaints and supervisory information may also be shared in the other direction.
DISCIPLINARY ACTION AND STATUTORY REMEDIES
Licensing consequences, financial penalties and protective orders
Part IX of the SFO empowers the SFC to discipline licensed corporations, registered institutions and regulated individuals, including responsible officers, licensed representatives and specified persons involved in management.
Disciplinary sanctions
Under Part IX of the SFO, principally sections 194 and 196, the SFC may discipline regulated persons for misconduct or for not being fit and proper. Available sanctions include revocation or suspension, prohibition orders, public or private reprimands and pecuniary penalties.
Pecuniary penalties
For each failure or misconduct, the maximum disciplinary fine is HK$10 million or three times the profit gained or loss avoided, whichever is greater. The applicable sanction depends on the statutory power, the evidence and the circumstances of the case.
Tribunal and court orders
Following an adverse Market Misconduct Tribunal finding or a criminal conviction, the MMT or court may make orders including disqualification, cold-shoulder, cease-and-desist, profit-disgorgement and costs orders, subject to the relevant statutory conditions.
Statutory defences and exceptions
A person facing SFC action should identify the precise provision alleged and evaluate every applicable statutory defence, exception and safe harbour. Their availability is offence-specific: absence of manipulative intent, for example, is not a universal defence and must be assessed against the elements of the particular provision.
HOW MCS CAN ASSIST
Advice and representation throughout an SFC matter
MCS can advise individuals, licensed persons, directors, officers and corporations from the earliest stage of an SFC enquiry. We can assist with interview preparation, compulsory information and document requests, privilege issues, written representations, disciplinary proceedings, Market Misconduct Tribunal proceedings and related criminal investigations or prosecutions.
Where an investigation involves the Department of Justice, Police, ICAC, HKMA or an overseas regulator, we can help coordinate the response across the parallel processes and identify the consequences of each step for the client's regulatory and criminal position.