The Securities and Futures Ordinance of 1991 was a significant leap in Wall Street regulation. The Ordinance consolidated several laws that were created in the past and helped pave the way towards securing Hong Kong’s financial future. The Ordinance created a universally accepted licensing system in dealing with financial commodities, such as securities and other derivatives (Charltons). The Ordinance also only allows for corporations and individuals representing them to receive that licensing. In addition, the Ordinance provides those currently licensed two years to adjust their platforms to the new regulations provided by the Ordinance. Though it is the most expansive piece of legislation regarding market fraud yet, it still does not go far enough to prevent fraud that may occur.
The Ordinance was primarily a big step in the direction of criminalizing certain market behaviors, notably disclosing false financial information. This Ordinance was created a few years after the SOX Act in America, which is similar in scope and intent as they both are trying to reduce corporate fraud. The Ordinance calls for a maximum of ten years in prison or a fine of HK$10,000,000 for those who knowingly provide false documentation. It also provides for courts to restrict activities that licensed individuals can participate in as punishment. This is in section 299, and this case deals almost explicitly with securities fraud. However, fines and punishment are deterrents but they do not always prevent fraud, as illegal actions do occur in society though there are still penalties. The Ordinance does not provide adequate resources for the SFC to police or investigate, making it much more difficult to catch wrongdoers. This is part of the reason the Ordinance does not fully level the playing field.
Section 384 makes it a criminal action for anyone to provide the Security and Futures Commission or the Hong Kong Stock Exchange with false or misleading information, and the maximum penalties are 2 years in prison or a HK$1,000 fine (Chiu). Section 40 outlines the liability issues and forces company executives to pay an amount of damages when misinformation causes shareholders to lose money. This is significant because it is a huge deterrent, though it may be difficult to prove an actual monetary amount that was lost. Section 378 of the Ordinance protects individuals assisting investigators and ensures they do not disclose information about the case. Another interesting aspect of the Ordinance is that is limits crowdfunding activities in comparison to the US, where most crowdfunding is legal (KWM). In fact, the Ordinance severely limits it and only normally licenses, personnel are allowed to crowdfund in any way, making it seem as if crowdfunding is to be frowned upon (Robertson). As previously mentioned, without providing a way for the SFC to investigate more efficiently, the Ordinance does not help as much.
The Ordinance also increased the powers of the SFC to investigate and report on companies and businessmen who do not follow the Ordinance’s laws, though it just defined what those abilities were already. These include the right to enter onto the premises of businesses suspected of wrongdoing, forcing businesses to provide records of their financial statements when suspicion of fraud has occurred, and investigating other offenses that relate to misconduct characterized by the Ordinance (Slaughter and May). The Ordinance does not fully protect the information of people cooperating with investigations fully, and it does not provide for the secrecy of company whistleblowers who report on the criminal wrongdoing.
Though the Ordinance is very broad, it does not necessarily fully help level the playing field. The SFC only inspects companies it has reasonable suspicion of; thus, there is still room for fraud. The Ordinance is not nearly as in depth as its American counterpart, the SOX Act, due to local laws and ordinances already on the books and because the Ordinance was not created in response to a massive industry scandal. Regardless though, the penalties are stiff under the ordinance, fear of getting caught may not be enough to dissuade companies from committing fraud.
However, I believe the Ordinance is effective for the most part. The stiff penalties might not stop everyone, but they are a considerable enough deterrent that not many would risk getting caught. Thus, the Ordinance creates a freer atmosphere, because companies can no longer misreport profits to gain an edge, while honest companies fall behind because of good business ethics.
Works Cited:
Charltons. “Guidance to the securities and futures ordinance, cap. 571.” Charlton Law. Charltons, 2 Aug. 2002. Web. 8 Aug. 2016.
Chiu, Barbara. “The securities and futures commission in Hong Kong imposes serious consequences on market misconduct.” KWM. 26 Jan. 2015. Web. 8 Aug. 2016.
KWM. “The Hong Kong Sevens: Tackling seven issues in the licensing of ‘regulated activities’ under the Securities and Futures Ordinance.” KWM. n.d. Web. 8 Aug. 2016.
Robertson. “Crowdfunding in Hong Kong.” Robertson Solicitors. 28 Feb. 2014. Web. 8 Aug. 2016.
Slaughter and May. “A Guide to the Securities and Futures Ordinance.” Slaughter and May. n.d. Web. 8 Aug. 2016.
