Executive Summary

Background to the Bill

The Government announced on 7 September 1998 its "Measures to Strengthen the Order and Transparency of the Securities and Futures Markets". The Measures included a proposal to criminalise false reporting to the SFC and the Exchanges. This was followed by a SFC Consultation Paper in February 1999 and, following on from this, the Bill was gazetted on 3 March 2000.

Overview of the Bill

In summary, the Bill would make it a criminal offence for a person to provide to the SFC, Hong Kong Exchanges and Clearing Limited, the Exchanges or their clearing houses any information that:

  • he knows to be false, misleading or incomplete in a material particular; or ·
  • he does not believe to be true, accurate and complete in every material particular.

If the information was provided in purported compliance with a legal requirement, the offence would be punishable with a fine of HK$1,000,000 and imprisonment for 2 years. If the information was provided in other circumstances, but was relevant to or was connected with the performance of the regulators' functions, the offence would be punishable with a fine of HK$500,000 and imprisonment for up to 6 months.

The Bill seeks to introduce provisions to the above effect in the Securities and Futures Commission Ordinance, Commodities Trading Ordinance, Stock Exchanges Unification Ordinance, Securities and Futures (Clearing Houses) Ordinance and Exchanges and Clearing Houses (Merger) Ordinance.

The Securities Law Committee's concerns

We recognise the importance of the regulatory authorities receiving accurate and timely information, to assist them in the performance of their functions. We also endorse the view that appropriate sanctions should be taken against anyone who deliberately misleads regulatory authorities in the exercise of their functions, and that this should apply to misleading HKEx, the Exchanges and the clearing houses, as well as the SFC. Nevertheless, we have a number of serious concerns on the scope of the proposed offence.

  1. We do not believe that it is appropriate to extend the criminal law to the provision of information to regulators except in clearly specified circumstances. The Bill would create an all-encompassing offence which would extend to information provided orally and in an informal context.

  2. As presently drafted, the Bill would also lead to potential criminal liabilities extending far wider than the situation of a person who deliberately provides false or misleading information to a regulator. The offence would apply not only to information which was false or misleading, but also where the information provided was not complete in every material particular. This imposes an impracticably broad requirement, for the reasons discussed in the Appendix.

  3. The offence would apply if the person did not believe the information to be true, accurate and complete in every material particular. Very often, a person will supply information to regulators which is not within his personal knowledge, but has been provided by someone else, where he has no reason to believe it is inaccurate. However, it is difficult to say that he positively believed it to be true, accurate and complete unless he takes steps to verify that information. Again, for the reasons mentioned in the Appendix, we do not believe that this is practical and unfairly exposes a person who deals with the regulators to the risk of criminal liability.

The combined effect of 1-3 above would, in our view, create an extremely unsatisfactory position. Persons in the financial services industry who communicate with the SFC, exchanges and clearing houses would be at risk of criminal liability for errors and oversights (whether their own or other peoples) in the course of their day to day activities.

We are concerned that the introduction of such a wide-ranging offence would, rather than assisting the regulators in the performance of their functions, instead be counter-productive and constrain open dialogue between the regulators and participants in the financial markets. The Bill is likely to make the financial markets industry very reluctant to co-operate with the regulators by providing information to the regulators on an informal basis. It will create great difficulties for financial intermediaries and lawyers who liaise with the regulators on behalf of their clients and potentially hinder the efficiency of Hong Kong as a centre for capital raising and corporate finance activity. It may well discourage people from accepting roles where they will be responsible for providing information to regulators.

We set out in the Appendix our comments as regards the drafting of the new offence. It is to be hoped that significant drafting changes will be made to the Bill before it is enacted.

Securities Law Committee
The Law Society of Hong Kong

15 March 2000