In recent years, we have seen an increasing number of cases which were concluded following settlement discussions with the Securities and Futures Commission (SFC). More than a decade ago, the SFC published a guidance note on “cooperation” in 2006. We have observed that the SFC’s practice has been continuously evolving since then. We are pleased to see that the SFC finally issued a new version (New Guidance Note) on 12 December 2017 to update the general market in relation to its most current approach to cooperation. This New Guidance Note redefines “cooperation” in disciplinary, civil court and Market Misconduct Tribunal proceedings.
This alert highlights some interesting and key changes introduced under the New Guidance Note and their implications in the context of SFC investigations and enforcement proceedings. We also discuss our experiences of what “cooperation” with the SFC means when seeking a resolution of the matter. Please refer to this link for the full version of the New Guidance Note.
Key features of the New Guidance Note
1. Importance of timely cooperation with the SFC
A recurring theme in the New Guidance Note is the benefit of taking early and proactive steps. Timeliness has a major impact on the sanctions to be imposed by the SFC. Under the old guidance note, the maximum reduction of a disciplinary sanction is either a reduction of the type of sanction by one order of magnitude (eg from a revocation of licence to a suspension) or 33% of the penalty. The New Guidance Note sets out a new scale of discounts – the later the cooperation occurs, the less benefit a party will receive.
Under the New Guidance Note, for cooperation in disciplinary proceedings, the SFC may reduce the sanction imposed by up to:
- 30% if a section 201 agreement1 is reached before the issuance of a Notice of Proposed Disciplinary Action (NPDA);
- 20% if the section 201 agreement is reached after the issuance of the NPDA but before the party submitted the written representations;
- 10% if the section 201 agreement is reached from the deadline for making written representations up to the issuance of a decision notice.
Our comment: As illustrated above, taking proactive steps at an early stage to reach an agreement with the SFC would have a direct impact on the scale of sanctions imposed. In our recent experience, early resolution was possible even before a formal investigation was commenced. To benefit the most from the cooperation, it is important to seek legal advice promptly upon discovery of potential breaches and strategise the approach of cooperation with the SFC.
2. Joint appointment of a third-party reviewer
The New Guidance Note has confirmed the SFC’s affirmative attitude towards the joint appointment of an independent reviewer. The SFC will be more willing to enter into a section 201 agreement if a third-party review is commissioned.
An independent reviewer will be responsible for conducting a fact-finding review in respect of the breaches or failings, or a prospective internal control review to identify appropriate remedial actions. The review should be conducted in accordance with the terms of reference devised by the SFC. The regulated person is expected to bear the costs of such appointment.
Our comment: Tripartite reviews by independent reviewers have become increasingly popular among regulators in Hong Kong. We have handled a number of these cases. In our experience, regulators do play active roles in the selection of the reviewer and play an active role in the review. Apart from fact-finding, reviewers such as law firms may also be engaged to conduct assessments of legal and regulatory compliance. For engagements involving law firms as reviewers, there could be conflicts and complex legal issues such as issues concerning legal professional privilege (LPP). A regulated party should carefully manage such engagements and should seek legal advice from experienced legal advisers.
3. Involvement of senior management
The importance of senior management’s role is expressly set out in the New Guidance Note. This can include taking a proactive approach to bring the case to an early conclusion by involving senior management in communications with the SFC and devoting manpower and resources to assist the SFC in their investigation.
The SFC will also give weight to undertakings given by directors to address the SFC’s concerns. These may include undertakings to remedy deficiencies identified in a third-party review within a specified period of time and to ensure that such failings would not reoccur.
Our comment: The strategy of involving senior management to lend gravitas in negotiations with the SFC has been adopted from time to time. It is interesting to note that the SFC expressly recognizes its importance. Going forward, senior management will be expected to devote more time to dealing with regulators.
4. Legal professional privilege
The New Guidance Note acknowledges LPP as a fundamental right and confirms that a bona fide refusal to waive privilege will not be regarded as uncooperative conduct. That said, the SFC may recognise a voluntary waiver (even on a limited basis) to an LPP claim as cooperative conduct.
Our comment: We welcome the SFC’s express recognition of the concept of a limited waiver. Limited waiver of LPP over documents requested by the SFC is an option to consider. Nevertheless, any waiver to a claim of LPP should be considered carefully as it may have other implications, particularly in investigations involving regulators in multiple jurisdictions.
As the SFC has emphasised in the New Guidance Note, each case will be considered on its own facts. There are no hard and fast rules as to when and how parties should enter into settlement discussions with the SFC. It is fair to say that the “cooperation” definition is constantly evolving. Legal advice should be sought immediately when one is aware of any potential breaches or misconduct that could lead to an SFC investigation.
1 Pursuant to section 201 of the Securities and Futures Ordinance (Cap. 571), the SFC may enter into an agreement with the relevant parties to resolve disciplinary proceedings at an early stage if it considers appropriate to do so in the interest of the investing public or in the public interest.
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