Cross-Border Cooperation Seen in Hong Kong Enforcement Action

There has been a great deal of discussion by senior securities regulators about the need for cross-border enforcement cooperation as financial markets go global. In a prime example of cross-border enforcement of the securities laws, the Hong Kong Securities and Future Commission suspended a bond trader for four months for a breach of conduct involving the use of inside information. The case involved the common practice of sounding out, under which bond underwriters sound out prospective buyers with the likely terms before the issue is publicly announced to ensure that the bond issue will sell. This usually involves disclosing inside information, which is not usually traded on. Those who do trade on the information are likely in breach of the insider trading provisions if the shares are listed in Hong Kong.

But here the trader had been contacted by another firm to sound out his views about a potential convertible bond issue by a company listed on the Tokyo Stock Exchange. In an instance of cross-border cooperation, the Japanese Securities and Exchange Surveillance Commission (SESC) referred the matter to the Commission.

The terms of the potential convertible bonds were disclosed to the trader to sound out his views about their attractiveness to investors. While in possession of this information, the trader placed orders to sell shares of the company and eventually sold 204,000 shares. The trading occurred while he was in possession of additional information confirming that the convertible bonds would be announced to the market after the market closed and the issue price would be fixed the next day. Since the trading in this case occurred on the Tokyo Stock Exchange, the trader’s conduct did not contravene Hong Kong’s securities laws. However, the SFC found that his conduct was a breach of General Principle 2 of the Code of Conduct, which requires licensed persons to act with due skill, care and diligence in the best interests of clients and market integrity, a breach of which raises issues of fitness and properness.