Offences, Market Misconduct and Disciplinary Action
This domain tests the three enforcement tracks open to the SFC, the conduct that amounts to market misconduct, and the penalties each track can produce.
The three tracks
- Criminal prosecution in the courts for statutory offences, including the criminal insider dealing offence.
- Civil proceedings before the Market Misconduct Tribunal for market misconduct.
- Disciplinary action against licensed corporations and licensed individuals under ss.194 and 196.
Market misconduct
Categories include insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, stock market manipulation, disclosure of false or misleading information inducing transactions, and the use of fraudulent or deceptive practices.
Insider dealing requires inside information that is specific, material and not generally known; a connection with the listed corporation; and then dealing, tipping or counselling. Defences include the Chinese wall defence and bona fide market making.
Powers and penalties
- Disciplinary fines: up to HK$10 million or three times the profit gained or loss avoided, whichever is higher, plus revocation, suspension and reprimand.
- MMT orders: cease and desist, cold shoulder order for up to 5 years, disqualification for up to 5 years, disgorgement of profits, and costs.
- Section 213 court orders: injunctions, restitution and disqualification orders.
- Criminal insider dealing carries up to 10 years' imprisonment and a HK$10 million fine.
- Part XIVA requires a listed corporation to disclose inside information as soon as reasonably practicable; breach is dealt with by the MMT.
Worked example
A licensed corporation's dealing desk makes a profit of HK$4 million from conduct found to be market misconduct. Three times the profit is HK$12 million, which exceeds HK$10 million, so the maximum disciplinary fine is HK$12 million. The MMT could separately order disgorgement of the HK$4 million. The two amounts are calculated on different bases and are not alternatives.
Traps
- Describing the MMT as a criminal court; it cannot imprison and applies the civil standard of proof.
- Assuming fines are paid to affected investors; they go to the government, with restitution sought separately.
- Mixing up the SFAT (appeals against SFC decisions) and the MMT (findings of misconduct).
- Forgetting that tipping and counselling are themselves insider dealing.