Hong Kong’s long awaited Securities and Future Ordinance (Amendment) Bill 2011 (the Bill) was introduced to the Legislative Council on 29 June 2011.
In essence, the amendments will turn the disclosure obligations in Rule 13.09(1) and Rule 17.10(3) in the Main Board and GEM Board Listing Rules - which impose an obligation on listed corporations to make timely public disclosure of price sensitive information (PSI) - into law.
So what will be new?
The proposed new Securities and Futures Commission (SFC) Guidelines will provide clear guidance on what the regulators will consider is PSI, and how and when it should be disclosed. It will also provide safe harbours and set out penalties for breach of the disclosure obligation.
SFC in the driving seat
The SFC will be empowered to investigate any breach of the disclosure obligation. They will do so using their current investigation powers under the Securities and Futures Ordinance.
More serious penalties
The SFC proposes civil sanctions (including the introduction of a maximum fine of HK$8 million) and has not ruled out the possibility of additional sanctions, such as a criminal sanctions, at a later stage.
What is “inside information”?
The proposal adopts a concept of “inside information”, which is similar to the definition of “relevant information” currently used under the SFC’s insider trading regime. That is, it includes information about a corporation, a shareholder or officer of the corporation or the listed securities of the corporation of their derivatives, that is not generally known to persons who are accustomed or likely to deal in the listed securities of the corporation but would, if generally known to them, be likely to materially affect the price of the listed securities.
The draft SFC Guidelines provide further insight into the key elements of inside information. That is, information which is:
- not generally known to investors who deal or are likely to deal in the corporation's securities; and
- likely to have a material effect on the price of the corporation’s securities.
Of note is the SFC’s interpretation of what information is sufficiently “specific” to be inside information. In the past few years in particular, decisions about this issue have shown a willingness to treat imprecise or uncertain information as being “specific”, for example, where a share placement is being contemplated but the details are not known. In borderline cases, a listed corporation is better off making disclosure rather than exposing themselves and their officers to regulatory sanctions.
Another area of difficulty is the assessment of “material effect” on price. In some cases, we expect listed corporations to err on the side of caution and disclose more information than previously, because of the codification and more serious penalties imposed.
What are the safe harbours?
The Bill contains the following safe harbours:
- Where disclosure of PSI would contravene an order of a court or any statute in Hong Kong;
- Where the information relates to an incomplete proposal or negotiation;
- Where the information is a trade secret; or
- Where the information concerns the provision of liquidity support, for example, by the Hong Kong Monetary Authority or another central bank.
The safe harbours in paragraphs 2 to 4 above are available if a listed corporation has taken reasonable precautions to preserve the confidentiality of the inside information and where there is no leakage of the information.
These are fairly limited safe harbours, and despite calls during the consultation period to introduce more safe harbours, the regulators have decided not to do so. However, the SFC may grant waivers from compliance and is empowered to prescribe further safe harbours in future.
Who will investigate?
The SFC will be the enforcement authority under the new regime, unlike the current position where breaches of the Listing Rules are handled by the Hong Kong Stock Exchange (HKEx). The SFC can carry out investigations using its current powers of investigation under the Securities and Futures Ordinance, and institute proceedings before the Market Misconduct Tribunal.
If the Bill is enacted, the HKEx will only handle non-disclosure of information that constitutes a breach of a specific Listing Rule, such as financial reporting and notifiable or connected transactions.
What are the penalties?
The Market Misconduct Tribunal (MMT) may impose civil penalties on listed corporations and persons who are responsible for the breach as follows:
- Fine of up to $8 million on the listed corporation and/or its directors;
- Disqualification from office: prohibiting a director or officer from being a director or otherwise involved in the management of a listed corporation for up to five years;
- “Cold shoulder” order: prohibiting a director or officer from dealing in any securities or having access to other market facilities for up to five years;
- “Cease and desist order: ordering the listed corporation or its officer not to breach the disclosure requirements again;
- Payment of costs and expenses: as incurred in the investigation; and
- Referral to professional body: referral to a disciplinary body of which the officer is a member to take disciplinary proceedings against the officer.
In addition, the MMT may make such order as it considers necessary to ensure that a breach of a disclosure requirement does not recur, including the appointment of an independent professional advisor to review the corporation’s compliance procedure, to provide advice on compliance matters, or to order an officer to undergo additional training.
Easier rights of private action
A person who has suffered a pecuniary loss as a result of a breach of the PSI disclosure requirement can rely on the results of the MMT proceedings to take civil action and seek damages.