Market Misconduct and SFC Enforcement: Hong Kong Legal Framework

Hong Kong Market Misconduct Enforcement: The Regulatory Framework

Hong Kong market misconduct enforcement operates under a dual civil-criminal regime established by the Securities and Futures Ordinance (Cap. 571). The Securities and Futures Commission (SFC) investigates suspected breaches and, depending on the seriousness of the case, refers the matter either to the Market Misconduct Tribunal for civil proceedings or to the Department of Justice for criminal prosecution.

Market Misconduct Under Cap. 571

Section 245 of the Securities and Futures Ordinance (Cap. 571) defines market misconduct. Six specific types exist: insider dealing (section 270), false trading (section 274), price rigging (section 275), disclosure of information about prohibited transactions (section 276), disclosure of false or misleading information inducing transactions (section 277), and stock market manipulation (section 278). Attempting, assisting, counselling or procuring any of these acts is also caught.

The SFC investigates suspected market misconduct and then selects either the civil route (Part XIII, sections 245 to 284) or the criminal route (Part XIV, sections 285 to 307). Section 283 bars Tribunal proceedings after criminal proceedings. Section 307 bars criminal proceedings after Tribunal proceedings. Section 252A(1) requires the Secretary for Justice's consent to institute Tribunal proceedings.

SFC Market Misconduct Tribunal: Civil Proceedings

The Market Misconduct Tribunal hears civil proceedings under Part XIII of the Securities and Futures Ordinance. Section 252(7) applies the standard of proof applicable to civil proceedings: the balance of probabilities rather than beyond reasonable doubt. The Tribunal sits as a panel comprising a High Court judge and two lay members.

The Tribunal may make any of the orders listed in section 257(1). These are: a disqualification order for up to five years, a cold shoulder order for up to five years, a cease and desist order, disgorgement of an amount not exceeding the profit gained or loss avoided, an order to pay the Government's costs, the SFC's costs and the AFRC's costs, and a recommendation of disciplinary action. The Tribunal has no power to impose a fine for market misconduct under section 257.

Insider Dealing Hong Kong Penalties

Insider dealing is defined in section 270 of the Securities and Futures Ordinance. It occurs when a person connected with a listed corporation deals in its securities while in possession of inside information, or counsels or procures another to do so.

Under the criminal route, section 303(1)(a) sets the maximum penalty on indictment at a fine of HK$10 million and imprisonment for 10 years. On summary conviction the maximum is a fine of HK$1 million and imprisonment for three years. Under the civil route, the Tribunal may impose a disqualification order barring the person from being a director or involved in the management of any listed corporation for up to five years, a cold shoulder order preventing the person from dealing in securities for up to five years, and a disgorgement order for the profit gained or loss avoided.

Hong Kong False Trading Offence

False trading is a market misconduct type under section 274 of the Securities and Futures Ordinance. It covers transactions that create or are likely to create a false or misleading appearance of active trading in securities or futures contracts. It also catches transactions that maintain or are likely to maintain an artificial price.

The criminal offence under section 295 mirrors the civil definition. The maximum penalty on indictment is a fine of HK$10 million and imprisonment for 10 years under section 303(1)(a). The civil route proceeds before the Market Misconduct Tribunal on the balance of probabilities. The Tribunal may make a cease and desist order requiring the person to stop the conduct, and may recommend disciplinary action against a licensed intermediary.

Market Manipulation Hong Kong SFC

Stock market manipulation is defined in section 278 of the Securities and Futures Ordinance. It includes activities that artificially raise, lower or maintain the price of securities, such as wash sales, matched orders and cornering. The criminal offence under section 299 carries the same maximum penalty of a fine of HK$10 million and imprisonment for 10 years on indictment.

The SFC investigates suspected manipulation and may refer the matter to the Market Misconduct Tribunal for civil proceedings. The Tribunal's orders under section 257(1) include disqualification orders, cold shoulder orders, cease and desist orders and disgorgement orders.

Inside Information Under Part XIVA

Part XIVA, sections 307A to 307ZA, was added by Ordinance 9 of 2012. Section 307B(1) requires a listed corporation to disclose inside information to the public as soon as reasonably practicable after it comes to the corporation's knowledge. Inside information is defined in Part XIVA as specific information that is not generally known to the public, that concerns a listed corporation or its securities, and that would be likely to materially affect the price of the securities if generally known.

A breach of section 307B is market misconduct. Section 307N(1)(d) sets the maximum Market Misconduct Tribunal fine for breach at HK$8 million.

Disqualification Order and Cold Shoulder Order

Section 257(1) of the Securities and Futures Ordinance lists the orders available to the Market Misconduct Tribunal. A disqualification order under section 257(1)(a) may prohibit a person from being a director, liquidator, receiver or manager of any listed corporation, or from being concerned in its management, for up to five years. A cold shoulder order under section 257(1)(b) may prohibit a person from dealing in any securities or futures contract, or from offering to acquire or dispose of securities in Hong Kong, for up to five years. A cease and desist order under section 257(1)(c) may require the person to stop the conduct constituting the market misconduct and take steps to remedy it.

Cease and Desist Order and Disgorgement

The Tribunal may make a cease and desist order under section 257(1)(c) requiring the person to refrain from engaging in the conduct constituting the market misconduct and to take specified steps to effect a remedy. Disgorgement under section 257(1)(d) requires the person to pay to the Government an amount not exceeding the profit gained or loss avoided as a result of the market misconduct. The Tribunal may also order the person to pay the costs of the Government, the SFC and the AFRC under sections 257(1)(e) to (g).

Criminal Penalties Under Section 303

Section 303(1)(a) sets the maximum criminal penalty for market misconduct on indictment at a fine of HK$10 million and imprisonment for 10 years. On summary conviction the maximum is a fine of HK$1 million and imprisonment for three years. The court may also order disgorgement of the profit gained or loss avoided on a criminal conviction. The SFC must choose either the civil or criminal route; it cannot pursue both. Section 283 bars Tribunal proceedings after criminal proceedings, and section 307 bars criminal proceedings after Tribunal proceedings.

Price Rigging Under Section 275

Price rigging is defined in section 275 of the Securities and Futures Ordinance. It covers transactions that maintain or are likely to maintain an artificial price for securities or futures contracts, or that cause or are likely to cause a fluctuation in the price of securities or futures contracts. The criminal offence under section 296 mirrors the civil definition. The maximum penalty on indictment is a fine of HK$10 million and imprisonment for 10 years under section 303(1)(a). The Market Misconduct Tribunal may hear the civil route and impose disqualification orders, cold shoulder orders, cease and desist orders and disgorgement orders under section 257.

Disclosure of False or Misleading Information

Section 277 of the Securities and Futures Ordinance covers disclosure of false or misleading information inducing transactions. It applies to statements, promises or forecasts that are false, misleading or deceptive, and that are likely to induce another person to deal in securities or futures contracts. The criminal offence under section 299 carries the same maximum penalty of a fine of HK$10 million and imprisonment for 10 years on indictment. The Market Misconduct Tribunal may hear the civil route and impose the orders under section 257.

Balance of Probabilities Standard

Section 252(7) of the Securities and Futures Ordinance applies the standard of proof applicable to civil proceedings to the Market Misconduct Tribunal. The Tribunal decides on the balance of probabilities, not beyond reasonable doubt. The lower standard makes it easier for the SFC to establish market misconduct before the Tribunal than before a criminal court. The Tribunal's findings may still result in disqualification orders, cold shoulder orders, cease and desist orders and disgorgement orders, all of which carry significant consequences for the person concerned.

Section 307B Disclosure Obligation

Section 307B(1) of the Securities and Futures Ordinance requires a listed corporation to disclose inside information to the public as soon as reasonably practicable after it comes to the corporation's knowledge. The obligation applies to the corporation itself, not to individual directors or officers, though directors may be liable for aiding and abetting. A breach of section 307B is market misconduct. The Market Misconduct Tribunal may impose a fine of up to HK$8 million under section 307N(1)(d) for breach of the disclosure obligation.