HONG KONG BAR ASSOCIATION'S COMMENTS ON
SFC’S DRAFT DISCIPLINARY FINING GUIDELINES
INTRODUCTION
1.
The Draft SFC Disciplinary Fining Guidelines (“the Fining Guidelines”) are made
pursuant to Clause 187(7) of the Securities and Futures Bill (“the Bill”). By way
of the Fining Guidelines, the SFC seeks to set out the considerations which are
relevant to the determination of the level of fine that it should impose on a
regulated person guilty of misconduct in the context of Clause 187(2) of the Bill.
FINE AS INTERMEDIARY SANCTION
2.
The SFC regards a fine as an intermediary sanction between a reprimand and a
suspension/revocation of a licence. However, such categorisation of a fine does
not appear to be reflected in Clause 187 of the Bill because of the following
reasons:(1)
Clause 187(1) only deals with revocation/suspension of a licence,
reprimand and prohibition regarding future application for licence whilst
“pecuniary penalty” is mentioned in Clause 187(2). Different kinds of
penalty are not ranked in accordance with the severity they are supposed
to carry in the Bill.
(2)
Further, in respect of all kinds of penalty for a regulated person guilty of
misconduct, the overriding consideration for the SFC as stated in the Bill
is the same i.e. whether, in the opinion of the SFC, the regulated person is
not a fit and proper person to be or to remain licensed, or to be or to
remain a responsible officer, or a person involved in the management of
the business, of a licensed person.
NO FINE IF ANOTHER PENALTY WARRANTED
3.
As specifically stated in the Preamble of the Fining Guidelines, the SFC will not
impose a fine if only a private or public reprimand is warranted in view of the
circumstances of the case. What should naturally follow is that the SFC will not
revoke or suspend a licence if only a fine is warranted in a particular case. The
corollary is that a fine and another kind of penalty imposed under Clause 187(1)
of the Bill are mutually exclusive. However, such mutual exclusivity appears to
be inconsistent with Clause 187(2) of the Bill which states that the SFC may
“separately or in addition to any power exercisable under subsection (1), order the
regulated person to pay a pecuniary penalty”. In other words, a fine may be the
only penalty or one of the penalties to be imposed.
GENERAL CONSIDERATIONS
4.
The first part of the Fining Guidelines deals with “general considerations” which
are intended to make a distinction between:(1)
conduct which should be regarded as more serious and thus deserving a
higher level of fine (for example, conduct which is intentional or conduct
which damages the market integrity or causes loss to others); and
(2)
5.
conduct which should be regarded as less serious and thus deserving a
lower level of fine (for example, negligent conduct or conduct which
causes little damage to market integrity or little cost on others).
It is submitted that the general considerations will not serve any useful purpose in
determining the level of fine because of the following reasons:(1)
The general considerations only provide an artificial difference between
more serious conduct and less serious conduct. It is difficult to evaluate
the seriousness of conduct by simply resorting to the general
considerations. For example, if some conduct is intentional but causes
little adverse effect on the market integrity, it is unclear whether such
conduct should be regarded as more serious or less serious. On the
contrary, if some inadvertent or negligent conduct causes substantial
impact on the market integrity or loss to other parties, one can hardly
determine how to categorise such conduct in the light of the general
considerations.
(2)
In any event, all the factors stated under general considerations are
contained in part 2 of the Fining Guidelines i.e. specific considerations.
This gives rise to the question whether it is necessary to have a distinction
between “general considerations” and “specific considerations” in the
Fining Guidelines. It is suggested that all factors be placed under the
heading of “relevant considerations”.
SPECIFIC CONSIDERATIONS
6.
Part 2 of the Fining Guidelines, namely, “Specific considerations”, consists of
four sections:(1)
The nature and seriousness of the conduct (“Section A”).
(2)
The amount of profits accrued or loss avoided (“Section B”).
(3)
The size, financial resources and other circumstances of the firm or
individual (“Section C”).
(4)
Other relevant factors (Section D”).
SECTION A
7.
The third factor under Section A is whether the conduct was intentional or
reckless, including whether prior advice was sought. However, before looking at
whether prior advice was sought, it is more important to first examine whether in
the light of the conduct/practice involved, it was reasonable for the regulated
person to obtain advice.
8.
The fifth factor under Section A is whether the conduct is widespread in the
relevant industry. In this regard, it is believed that one relevant question which
could be specifically set out is how long such conduct/practice has been in place
in the relevant industry.
9.
The seventh factor under Section A concerns whether a breach of fiduciary duty
was involved. However, the mere existence of a breach of fiduciary duty may be
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neither here nor there. The crucial factors are always those regarding the nature
and the effect of the conduct, which are already contained in the Fining
Guidelines.
10.
The final factor in this section deals with whether the conduct reveals serious or
systematic weakness in a firm’s system. What can be further considered is
whether the firm, with reasonable efforts, should have been able to identify the
risk in the system and eliminate the same.
SECTION B
11.
It is submitted that it is not necessary to have a separate Section B under the
heading of “The amount of profits accrued or loss avoided” because:(1)
The factor regarding the loss to other people caused by the conduct is dealt
with in Section A i.e. “The nature and seriousness of the conduct”. The
question whether a firm or individual and related parties benefit from the
conduct which is associated with the loss factor, should be considered in
Section A.
(2)
The second point of Section B simply states that a fine should have
deterrent effect. It has nothing to do with the amount of profits accrued or
loss avoided.
12.
In view of the points raised in paragraph 11 above, it is suggested that Section B
be deleted and the first point under Section B should be placed under Section A.
Further, as stated in Clause 187(2) of the Bill, the fine should not exceed
HK$10,000,000 or 3 times the amount of the profit secured or loss avoided,
whichever is greater.
In the circumstances, the Fining Guidelines should
stipulate whether in a case which involves profit gained or loss avoided by the
regulated person, the level of fine should automatically be based on the amount of
such profit or loss. This may give rise to the following questions:(1)
A substantial profit may be obtained by simply a negligent act or a
technical breach. In this case, the level of a fine, if based on the amount of
profit, may not reflect the degree of seriousness of the conduct.
(2)
On the contrary, certain conduct may lead only to little or no profit gained
by the regulated person but a substantial loss to its clients. In that case,
the level of fine, if based on the amount of the profit, again may not be
commensurate with the impact of such conduct.
13.
Given the deterrence value of a fine, it is necessary to consider the prevalence of
the conduct in question or similar conduct in Hong Kong while determining the
level of fine in a particular case.
SECTION C
14.
The first point of Section C apparently concerns the effect of a fine on a firm or
individual. Obviously, a most relevant factor in this regard is the financial
situation of a firm or individual. However, it is interesting to note that an
example of a firm or individual taking deliberate steps to dissipate assets is
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mentioned. It is unclear why this particular example is raised whilst the financial
situation of a firm or individual is not mentioned at all under Section C. It is
suggested that the first sentence of the first point of Section C should be
sufficient.
15.
As to the second point of Section C, it is submitted that the way in which the
conduct is identified and brought to the SFC’s attention is of significance. There
should be a material difference between a matter reported by the firm or
individual in question and that reported by a third party.
SECTION D
16.
The first point in this section is whether the SFC has issued any guidance in
relation to the conduct in question. Apparently, if guidance has been issued, this
may help consider whether the conduct in question was engaged in in disregard of
the SFC guidance. This factor hence is relevant to the assessment of the
seriousness of the conduct and should therefore be placed under Section A.
17.
It is the SFC’s intention to keep a database of all the fining decisions which will
serve as a sentencing guide. However, it will take time to develop certain tariffs
from the decisions. It is believed that the fining decisions on other types of
misconduct in the context of securities may act as a good starting reference. It
can be stated in the Fining Guidelines that the SFC can refer to the fining
decisions on, for example, insider dealing as a starting point bearing in mind the
difference between the two types of conduct.
18.
The last point in Section D states that the result of any civil action taken should be
considered. It is believed that this would give rise to the following questions:(1)
It is doubtful why the outcome in a civil action should affect the level of
the fine imposed. It is important to note that in nature, the former is
compensatory whilst the latter is punitive.
(2)
If no civil action is taken at the time when the SFC is considering the level
of the fine, it is impossible to predict whether and when a civil action will
be commenced. In the circumstances, there is no basis on which the SFC,
at the time when the level of a fine is considered, can ascertain the
likelihood of any third party taking civil action, let alone the likely result
of such action.
(3)
The level of fine may, to a certain extent, depend on whether a third party
brings a civil action promptly or not. This may be fortuitous or unfair to
the regulated person in question.
Dated: 25th May 2001
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