Demonstrating cooperation in disciplinary proceedings
The Guidance provides a non-exhaustive list of examples of how a party may cooperate with the SFC. It includes:
- Voluntarily and promptly reporting any breaches or failings.
- Providing useful and complete information regarding breaches or failings. Examples include taking early and proactive steps to preserve and provide important evidence, sharing the results of internal investigations, and providing testimonies in proceedings where required.
- Where a material problem occurred outside Hong Kong, promptly informing the SFC and providing relevant information, and facilitating the production of documents and/or witnesses located outside of Hong Kong to the extent legally permissible.
- Acceptance of liability. Examples include accepting the SFC’s investigation findings or proposed sanctions, and involving senior management and devoting resources to assist the SFC’s investigation to bring the case to an early conclusion.
- Taking rectification measures. Examples include taking early and active steps to contain breaches or failings, making full and prompt compensation to the affected investors for their losses, and enhancing internal controls and procedures in the case of a corporation.
- A voluntary waiver of legal professional privilege, even on a limited basis (although the SFC continues to expressly recognise legal professional privilege as a fundamental right protected by the Basic Law and section 380(4) of the Securities and Futures Ordinance (SFO)).
What has changed?
Other aspects of the Guidance are more interesting, reflecting recent developments in the SFC’s enforcement agenda and toolbox. In particular, the Guidance expressly notes that the SFC will be willing to resolve disciplinary proceedings if the regulated person involved:
- agrees with the SFC to jointly commission a third-party review, as well as agreeing to:
- bear the cost of engaging the third party;
- the SFC’s terms of reference;
- accept the third party’s findings (importantly the Guidance states that the firm will generally not be entitled to review the reviewer’s report before it is provided to the SFC or to request that changes be made to the report); and
- allow (in the case of a fact-finding review) the SFC to use the reviewer’s findings of fact as the basis for appropriate disciplinary proceedings; or
- agrees to provide directors’ undertakings (collectively and individually) to address the SFC’s regulatory concerns, for example undertaking to remedy the deficiencies identified within a specified period of time.
A carrot, not a stick
Cooperation may result in a decision by the SFC to enter into an agreement to resolve disciplinary proceedings at an early stage pursuant to section 201 of the SFO (a Section 201 Agreement). The SFC states that it may enter into a Section 201 Agreement if it considers it appropriate to do so in the interest of the investing public or in the public interest, taking into account the extent and nature of cooperation evidenced.
The Guidance also provides regulated persons with the prospect of reduced sanctions for an early resolution of disciplinary proceedings:
- For Stage 1 (being the stage from the detection of the misconduct or failings up to the issuance of a Notice of Proposed Disciplinary Action (NPDA)), the SFC may reduce the sanction imposed by up to 30%;
- For Stage 2 (from the issuance of an NPDA up to the deadline for written representations in response to the NPDA), the SFC may reduce the sanction by up to 20%; and
- For Stage 3 (from the deadline for making representations up to the issuance of a Disciplinary Notice), the SFC may reduce the sanction by up to 10%.
Finally, the Guidance clarifies that as a general principle the SFC will not resolve enforcement matters in private or on a “no admission of liability” basis.
What constitutes cooperation in civil and MMT proceedings?
The Guidance provides a new section on how a party may cooperate with the SFC in civil and MMT proceedings.
For proceedings initiated under section 214 of the SFO, a party may seek to resolve matters by agreeing to adopt a “Carecraft procedure”. The procedure involves the submission of a “Carecraft Schedule” that contains agreed facts in relation to the SFC’s allegations and, where appropriate, an agreed period of disqualification, to the court for its determination of the appropriate outcome.
For proceedings initiated under section 213 of the SFO or for MMT proceedings, a party may seek to resolve matters with the SFC by agreeing to a “Statement of Agreed Facts” for the court or MMT’s consideration, the proposed orders with the SFC which may involve, among other things, disgorgement of the amount gained or loss avoided by the party from the breaches or failings, restoring the victims to their initial positions, and filing an affidavit in the proceedings confirming agreement to the facts.
Rendering of cooperation may result in a reduced proposed sanction from the SFC for the court or MMT’s approval, and/or the SFC’s issuance of a cooperation letter to other regulators or law enforcement agencies where appropriate.
The Guidance provides welcome clarity on the SFC’s approach to an assessment of, and the benefits of, cooperation.
The reference to section 210 of the SFO as a “carrot” to encourage resolution is noteworthy given the SFC’s increased reliance on the provision in recent years.
The guidance on reductions in sanction will also be welcome.
That said, other aspects of the Guidance may be more controversial, in particular the apparent emphasis on the use of, and the need to accept the findings of, third-party reviewers in order to enhance the opportunity to obtain cooperation credit.
Finally, the Guidance expressly states that it does not confer any right or create any legitimate expectations on any person under investigation to resolve a matter under a Section 201 Agreement, to be informed of the progress of any SFC investigation, prior to the issuance of an NPDA, or to be informed of the SFC’s preliminary assessment of any potential disciplinary matter. The SFC is obviously keen to ensure that the Guidance does not constrain its handling of disciplinary actions in any way. We would expect nothing less.
 The SFC’s earlier Guidance on Cooperation was dated March 2006. The new Guidance can be read here: http://www.sfc.hk/web/EN/assets/components/codes/files-current/web/guidelines/guidance-note-on-cooperation-with-the-sfc/guidance-note-on-cooperation-with-the-sfc.pdf.
 It is unclear how the sanction reductions are meant to work where the sanction concerned is revocation or suspension.
 This is different from the old guidance for cooperation with the SFC, that provided a maximum reduction in sanction of a broad brush cap of 33% or one order of magnitude (for example, from a revocation of licence to a suspension).
 The Guidance does not cover criminal prosecutions which fall under the ambit of the Department of Justice.
 Section 201 of the SFO allows the SFC to resolve disciplinary cases without completing the formal hearing process set out in the SFO if the other party agrees.
 In its associated FAQ, the SFC poses the question as to whether, if a firm had a third-party review conducted before the SFC became involved, this would be taken into account as a form of cooperation. Although the SFC does not expressly state so, it seems that cooperation credit would be limited solely for that reason. In the SFC’s view, where a firm detects a material problem, it should not wait for a third-party review to be conducted before notifying it, and in the context of resolution agreements which include the use of third-party reviews, the SFC generally considers it necessary to be involved, for instance, in devising the terms of reference.