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Hong Kong Bar Association's views on
Consultation Paper on Proposed Amendments to the Securities and Futures
Ordinance (Cap 571) to Give Statutory Backing to Major Listing Requirements
1.
The Hong Kong Bar Association (“the Bar”) has been invited by the
Financial Services and the Treasury Bureau (“the Bureau”) to comment on
proposed amendments to the Securities and Futures Ordinance (Cap 571)
(“the SFO”) to give statutory backing to major listing requirements
contained in a consultation paper issued in January 2005 (“the Consultation
Paper”).
2.
The Bar understands that the Consultation Paper follows from the
conclusions of an earlier consultation exercise (in which the Bar
participated) on proposals to enhance the regulation of listing in early 2004.
3.
The Bar agreed in the earlier consultation exercise that in principle statutory
backing should be given to appropriate provisions of the Listing Rules. The
Bar also agreed that disclosure rules were a suitable subject to be given
statutory backing, especially the on-going disclosure requirements
presently provided under Chapter 14 of the Listing Rules. However, the Bar
considered that the general duties of directors of listed companies should
not be codified, at any rate if directors’ duties were not codified in respect of
all companies generally, bearing in mind that the Standing Committee on
Company Law Reform had recommended against codification of directors’
duties.
4.
The Consultation Paper proposes to “make explicit” the rule-making power
of the Securities and Futures Commission (“the SFC”) over the
requirements to be met by listed companies following the listing of their
companies by amending s 36 of the SFO and indicates that any rule-making
in that regard by the SFC would be subject to prior consultation
requirements under s 36. The Bureau however has not proposed in the
Consultation Paper an expansion of the scope of the required prior
consultation under s 36(2) in relation to rules to be made to impose
requirements on listed companies. The Bar considers that there is a case for
widening the categories of mandatory consultees outside existing two
categories of the Financial Secretary and all recognized exchange
companies to, for example, all listed companies. Alternatively, the rules
made under the proposed amendments ought to be subject to positive
vetting by the Legislative Council.
5.
The Bar did not in the earlier consultation exercise express a particular view
on the sanctions to be introduced when certain listing requirements were to
be made statutory; the actual provisions would have to be examined
individually. The Bar adopted this approach to take account of the
developing jurisprudence on the nature of disciplinary sanctions and its
impact on the applicable human rights guarantees under the International
Covenant on Civil and Political Rights 1966 (“the ICCPR”), applied in the
HKSAR pursuant to Art 39 of the Basic Law of the HKSAR.
6.
The Bar had repeatedly called for the publication or supply of legal advice
the HKSAR Government obtained on the compatibility of disciplinary
sanctions proposed under the Securities and Futures Bill with human rights
guarantees. The Bureau now relies on newly obtained legal advice(s) from
leading counsel in the United Kingdom to support its proposals in the
Consultation Paper to empower the SFC and the Market Misconduct
Tribunal (“the MMT”) to –
(a) Impose civil fines on issuers and directors for breaches of the statutory
listing rules in the proposed legislative amendments;
(b) Introduce a “no double jeopardy” provision in respect of SFC sanctions;
and
(c) Structure the SFC disciplinary regime and the MMT regime with
sanctions of differing severity.
Chapter 3 of the Consultation Paper set out in brief and selective terms (or
as stated in para 3.4 thereof, “in gist”) the conclusions of that legal advice(s)
and did not provide details of the discussion and reasoning involved in
reaching those conclusions. The Bar considers that such an approach does
not enhance public discussion on this important issue. Nor does it
discourage any later legal challenge to the statutory provisions after
enactment. The Bar accordingly invites the Bureau to publish or make
available to the Bar (whether in full or in redacted format) the legal
advice(s) it relied on in Chapter 3.
7.
The Bar has, in the absence of the detailed reasoning of the legal advice
obtained by the Bureau, undertaken independent legal research on the
relevant jurisprudence. The Bar notes that authorities from the United
Kingdom and the European Court of Human Rights are not directly
applicable to the HKSAR since the relevant human rights guarantees in the
HKSAR are those provided by the ICCPR, as opposed to those under the
European Convention on Human Rights. However, in the light of the
scarcity of views and observations of the United Nations Human Rights
Committee on the question of the autonomous meaning of the expression
“criminal charge” under Art 14(1) of the ICCPR and the opinion of Nowak,
CCPR Commentary (NP Engel, 1993) p 243, that “in spite of the
dubiousness of some Strasbourg decisions, the basic assumptions of [the]
case law [of the European Court of Human Rights] may be transferred to
the Covenant”, authorities from the United Kingdom (which implements
under the Human Rights Act 1998, the European Convention of Human
Rights) and the European Court of Human Rights may be considered
critically.
8.
The European Court of Human Rights has applied three criteria to establish
whether a curial process determines a “criminal charge” within the
autonomous meaning of that expression under the European Convention on
Human Rights:
(a) the categorization of the allegation in domestic law;
(b) the nature of the allegation; and
(c) the nature and the degree of severity of the potential and actual penalty.
9.
The Bar is not convinced of the proposition in para 3.4 of the Consultation
Paper that fines imposed by the SFC for breaches of the statutory listing
rules would be civil in nature if the following three measures were adopted:
(a) Restricting those subject such sanctions to issuers and directors (but not
corporate officers);
(b) Imposing fines only for a regulatory purpose through setting fines
proportionately to the breach, and to the gain made or loss avoided and
stating the purpose to be protective rather than penal; and
(c) Providing for a full right of appeal to a judicial body (namely the
Securities and Futures Appeal Tribunal (“the SFAT”)) on the merits.
10.
The Bar considers that measure (c) is simply irrelevant to the consideration
of whether a process involves a determination of a criminal charge against a
person. The existence or not of a full right of appeal to a judicial body is
relevant to the separate issue of fairness of the overall curial process,
whether that process involves the determination of a criminal charge
against a person or the determination of his rights and obligations in a suit
at law.
11.
The Bar considers that it is illusory to assert that adopting measure (b)
would reduce the risk of the process becoming classified as involving a
determination of a criminal charge. To seek to reduce risk of classification
by saying that fines set at a maximum of $5 million are to be imposed for a
“regulatory purpose” is tantamount to achieving “levitation by traction
applied to shoe strings”. (In any event, the enforcing authority’s own
classification is a mere starting point.) If the fines were to be set as being
proportionate to the breach, such fines would have to be seen to be deterrent
and punitive. If the fines were to be set by reference to the gain made or loss
avoided, such fines would be an addition to disgorgement and must
necessarily be regarded as going beyond compensatory and into being
punitive in nature. If the purpose of the fines were stated to be protective
rather than penal, that leaves the question of whether such fines are to exert
pressure on offenders and/or deter re-offending unanswered. The Bar
considers that the assertion in para 3.10 of the Consultation Paper of
keeping fines at a moderate level by the use of guidelines that prohibit pure
punishment is more easily said than done.
12.
Only measure (a) appears to the Bar to be a legitimate factor to be taken into
account among others in evaluating whether the process involved
determination of a criminal charge against a person. While the Bar accepts
that limiting the scope of the power to impose fines to issuers and directors
does reduce the risk of the process being found as involving determination
of a criminal charge against a person, this is mere one factor among many
others that the United Kingdom and the European Court of Human Rights
case law require to be taken into account. Further, the Bar is not convinced
as to whether issuers and directors constitute a specific group set apart from
the public or a sector of the public, bearing in mind the openness, in terms
of access, of Hong Kong’s equity market and the distinction between
corporate governance and market professionalism.
13.
The Bar is equally not convinced that simply by adopting measures (a) and
(b), the power to impose fines up to $8 million proposed to be given to the
MMT would not attract the minimum human rights guarantees under Art 14
of the ICCPR.
14.
Paragraph 3.24 of the Consultation Paper invites the public to express their
views on whether the proposal of introducing a power to impose fines on
issuers and directors for breaches of statutory listing rules should be
pursued. While the Bar recognizes the existence of policy reasons for the
SFC and/or the MMT to have a power to impose fines, the Bar cannot
endorse the proposal if, as the Consultation Paper seems to indicate, the
Bureau is not prepared to enhance the procedural guarantees accorded to
the SFC sanctioning regime and the MMT respectively to meet the
minimum requirements of Arts 14(2) and (3) of the ICCPR.
15.
Paragraph 3.31 of the Consultation Paper invites the public to comment on
whether the maximum fines to be imposed by the SFC ($5 million) and the
MMT ($8 million) are sufficient to achieve the regulatory, as opposed to
punitive, purpose of the fines. In view of the views expressed earlier, the
Bar does not consider fines set at the maximum levels proposed and
envisaged to be used in addition to a disgorgement order can possibly be
regarded as performing a mere regulatory purpose.
16.
In forming its views, the Bar has considered the following cases:
Bendenoun v France (1994) 18 EHRR 54, ECtHR; Malige v France
(68/1997/852/1059, 23 September 1998), ECtHR; Georgiou & Anor (t/a
Marios Chippery) v United Kingdom [2001] STC 80, ECtHR; Han & Anor
v Customs and Excise Commissioners [2001] 1 WLR 2253, CA (Eng); R v
Securities and Futures Authority Ltd & Anor ex p Fleurose [2002] IRLR
297, CA (Eng); King v United Kingdom (No 2) [2004] STC 911, ECtHR;
and King v United Kingdom (App 13881/02, 16 November 2004), ECtHR.
Hong Kong Bar Association
8th March 2005