In December 2017, the Securities and Futures Commission (SFC) published an updated Guidance Note on Cooperation with the SFC replacing the previous version which was 11 years old. The Guidance Note seeks to clarify the SFC’s approach to cooperation in its disciplinary, civil court and Market Misconduct Tribunal (MMT) proceedings.

The issue of the new Guidance Note is to be welcomed: the old version is severely out of date and does not entirely reflect the practice of the SFC in recent years. Although people who regularly deal with the SFC will have a better sense of how these factors apply in practice, the Guidance Note does give greater clarity to the public on the SFC’s approach. The information in the Guidance Note does not impose any legal obligation on how the SFC would deal with a particular case, but it may drive parties to behave in certain ways to gain the maximum benefit in the event that they are found to be in breach.

The main features of the updated Guidance Note are:

  • A summary of the factors the SFC will consider in assessing cooperation and examples of uncooperative conduct which may affect the outcome. These specific and updated examples are useful for parties under investigation to decide if appropriate steps to cooperate should be taken.
  • A description of the forms of and benefits of cooperating with the SFC in respect of disciplinary, civil court and MMT proceedings. This is useful for civil cases, the number of which have sky-rocketed in the past 10 years. It should be pointed out that the Guidance Note does not apply to criminal cases nor to disciplinary hearings before the Takeovers and Mergers Panel regarding the Codes on Takeovers and Mergers and Share Buy-backs.
  • An explanation that the disciplinary process has been divided into three stages, with the maximum reduction of sanctions depending on the stage at which agreement is reached.

Here is a table comparing the changes:

A number of observations on the new Guidance Note:

1.The maximum reduction of sanctions at the three stages of disciplinary proceedings are:

(1) up to the issue of a Notice of Proposed Disciplinary Action (NPDA) – 30%

(2) up to the deadline to respond to the NPDA – 20%

(3) up to the issuance of a Decision Notice – 10%

The first stage appears fair, as by the NPDA stage the party under investigation would have a fairly good idea of the case against them and its merits. Where the party under investigation is not prepared to contest the NPDA, it might seek to reach a section 201 agreement with the SFC and obtain up to a 20% reduction in the severity of the sanction imposed.

2.For licensed corporations and registered institutions, not only is self-reporting not counted as cooperation (as they are obliged to do so in any event), failure to report promptly and to provide information on a breach might be considered against them in deciding the outcome of the case (see paras 3.1, 4.3 and 4.4). However, we would suggest that where the party under investigation is not a licensed corporation or registered institution, self-reporting should be relied on as a form of cooperation or mitigating factor (see e.g. para 2.1).

3.Para 5.1 says that a “bona fide” refusal to waive legal professional privilege (LPP) attached to a document will not be regarded as uncooperative conduct. LPP is a fundamental right under the Basic Law and the SFO. Parties should not be put under any pressure to waive LPP even though in some cases the SFC might think that the waiver of LPP would not expose the party to any liability other than in relation to the investigation. Even if there is a waiver of LPP, parties would often choose to do it on a basis limited to the investigation.

4.Where cooperation has been taken into account in determining the sanction and the SFC intends to give a reduced sanction, the parties would be informed (1) in the case of disciplinary proceedings, what the level of sanction if there were no cooperation, and (2) in the case of civil proceedings and MMT, what the original proposed order would be. It would be instructive if the SFC would in the future publish some redacted data regarding the sanction reductions granted to parties and the type of cooperation involved.

5.The Carecraft Procedure has been used in section 214 cases to allow speedy resolution of the matter where the defendant agrees to a statement of fact against him and, sometimes, the proposed sanction, such as the period of disqualification. The level of admission would normally be limited to that sufficient for the court to make the disqualification order.

6.One thing that regulated parties often seek to negotiate with the SFC is whether the investigation on a disciplinary matter can be resolved in private or on a “no admission of liability” basis. Unfortunately, the Guidance Note tells us that the answer is “No”.

7.The SFC has also published a short FAQ on the updated Guidance Note. The main point explained is in relation to the grouping of multiple investigation cases against a firm by the SFC. It has the advantage of avoiding multiple press releases about sanctions against the same firm. In appropriate cases, we believe that a better outcome on sanctions could be achieved by the grouping of cases.

8.The grouping of cases often happens where the SFC is looking at whether there are systemic issues in a particular company or group of companies. The SFC says such an approach is more likely where there are no losses to clients or the investing public. What the company under investigation should anticipate in these cases is the use of a third-party reviewer (which is not uncommon in recent years) to assure the SFC that all the systemic problems or internal control failures identified have been rectified.