Select Page

The Licensing Regime under The Securities and Futures Ordinance

, , ,
The Licensing Regime under The Securities and Futures Ordinance

17. DISCIPLINARY REGIME

Part IX SFO sets out the disciplinary powers of the SFC and the categories of persons subject to such powers.

17.1 Liability of Officers

Under sections 194 and 196 of the SFO, the SFC has disciplinary powers to sanction a ‘regulated person’ who is:

  1. guilty of misconduct; or
  2. considered by the SFC not to be a fit and proper person to be or to remain the same type of regulated person.

The definition of a ‘regulated person’ is broad. In the case of licensed corporations, it includes the licensed corporation, its responsible officers (which include all executive directors) and any person involved in the management of the licensed corporation, irrespective of whether they are licensed (Section 194(7)). In the case of a registered institution, ‘regulated persons’ include the registered institution, its executive officers, any person involved in the management of the business which constitutes a regulated activity for which the institution is registered and any person registered with the HKMA under Section 20 of the Banking Ordinance as a person who conducts a regulated activity on behalf of the registered institution.

‘Misconduct’ is defined as:

  1. a contravention of the provisions of the SFO or of any subsidiary legislation made under it;
  2. a contravention of any of the terms and conditions of any licence or registration under the SFO;
  3. a contravention of any condition imposed under the SFO or under certain provisions of the Banking Ordinance; or
  4. an act or omission relating to the carrying on of a regulated activity which in the opinion of the SFC is, or is likely to be, prejudicial to the interest of the investing public or to the public interest.

With respect to misconduct within paragraph (d) above, depending on how broadly the term “relating to” is interpreted, ROs, licensed representatives and senior management members may face SFC disciplinary action with respect to business activities which are not “regulated activities” for which they are licensed, if they are considered to be “related to” the conduct of a corporation’s regulated business activities.

The Securities and Futures Appeal Tribunal’s (SFAT) decision 3 with respect to Moody’s Investors Service Hong Kong Limited (Moody’s) and its publication of its “Red Flags for Emerging-Market Companies: A Focus on China” (the Red Flags Report). Moody’s is licensed for regulated activity Type 10 – providing credit rating services. Moody’s argued that the preparation of the report was not a regulated activity for which Moody’s was licensed and the Code of Conduct (which the SFC alleged it had breached) did not therefore apply.

However, the SFAT found that, whether or not this was Moody’s intention, the Red Flags Report constituted a credit rating and that its publication was a regulated activity. It went on to say that even if it was wrong on this point, the Red Flags Report was intended to be read “as amplifying and supplementing Moody’s ratings … and became part and parcel of Moody’s ratings themselves” and thus fell within the definition of “regulated activity” as it was connected to Moody’s licensed activities.

17.2 Sanctions Available

The sanctions available to the SFC include a new power to impose on any regulated person a maximum fine of the greater of $10,000,000 or 3 times the amount of profit made or loss avoided by the regulated person as a result of the misconduct. Other sanctions include:

  1. the revocation or suspension of a licensed corporation’s licence or the registration of a registered institution in respect of all or part of the regulated activities for which it is licensed or registered;
  2. the revocation or suspension of a person’s approval as a responsible officer;
  3. a public or private reprimand; and
  4. a prohibition order preventing a licensed corporation or registered institution from applying to be licensed or registered or preventing an individual from applying for approval as a responsible officer of a licensed corporation or as an executive officer or relevant individual of a registered institution, in each case for a period specified by the SFC.

The Banking Ordinance also contains provisions entitling the HKMA, after consulting the SFC, to withdraw or suspend the consent granted to an executive officer (Section 71C(4)) and to remove a relevant individual from the register (Section 58A(1)), in both cases either indefinitely or for a specified period. These powers arise where the relevant individual has been guilty of misconduct or if the HKMA is no longer satisfied as to their fitness and properness. The Banking Ordinance definition of ‘misconduct’ for these purposes includes the breach of any provisions of the SFO which apply to the executive officer or relevant individual, conduct which in the opinion of the SFC is, or is likely to be, prejudicial to the interest of the investing public or to the public interest and, in the case of executive officers, breach of any condition attached to the HKMA’s consent. In the case of an executive officer, a misconduct (as defined in the SFO) committed by a registered institution as a result of conduct which occurred with his consent or connivance or which was attributable to neglect on his part, is also regarded as the misconduct of the executive officer (Section 71C(13)).

17.3 Officers’ Criminal and Civil Liability

The disciplinary sanctions the SFC can impose under section 193 SFO are civil in nature.

Officers of licensed corporations or registered institutions may be criminally liable where the licensed corporation/registered corporation is found guilty of an offence under the SFO, and the offence is proved to have been aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness of, any officer of the corporation/registered institution (section 390(1) of the SFO). “Officers” include a director, manager or secretary, or any other person involved in management.

Similarly, where a licensed corporation or registered institution is found to have committed civil misconduct and that misconduct occurred with the consent or connivance of, or which was attributable to any neglect on the part of, a responsible officer or a person involved in the management of the business of a licensed corporation, or an executive officer or a person involved in the management of any regulated activity of a registered institution, then that individual will also be regarded as guilty of the misconduct (Section 193(2)).

FEBRUARY 2016

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.

Skills

Posted on

2014-10-16