Public images about the SFC's enforcement actions are often influenced by press stories, which can sometimes distort the public's perception of the SFC's role and its actions. The reality is more complex and often less dramatic.

This chapter provides an overview of our enforcement philosophy: why the SFC takes enforcement action, what enforcement powers we have, how we exercise those powers, and the principles that guide our enforcement action.

Why is Enforcement Action Necessary?

Hong Kong's securities and futures markets are the second largest in Asia outside Japan, and are widely considered Asia's most international. One of the important factors behind this is that the laws and standards governing our markets have been rigorously and credibly enforced.

In our experience, most market participants comply with the law and relevant business and professional standards. Unfortunately, there is a minority that fail to do so. To deal with the actions of this minority, the SFC takes steps to try and ensure that:

• their actions do not cause potential loss to the investing public, or disrupt the securities and futures markets; and
• the persons responsible for wrongdoing are held accountable for their actions.

What are the SFC's enforcement-related aims?
The SFC's key enforcement-related aims are to:

• protect investors
• maintain market integrity and confidence

These aims are derived from the Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO).

The SFC's Power to Take Enforcement Action

The SFC's responsibilities
Among the SFC's primary roles are to enforce the laws governing the securities and futures markets, and this means taking action to suppress illegal, improper or unethical conduct in those markets. We are required to:

• ensure that there is proper compliance with the laws that we administer;
• report suspected civil market misconduct to the Financial Secretary for possible referral to the Market Misconduct Tribunal;
• supervise financial intermediaries to try and ensure that they comply with relevant laws and standards of behaviour, and to promote and encourage such compliance;
• supervise and monitor the activities of Hong Kong Exchanges and Clearing Limited;
• co-operate with local, national and overseas regulatory and law enforcement agencies; and
• take whatever other lawful action we consider appropriate to suppress illegal, improper or unethical conduct in the securities and futures markets and in trading in other financial products that we regulate.

How the SFC Exercises its Enforcement Powers

The enforcement process
The process of enforcing relevant laws and regulations generally involves two main steps:

• identifying that a breach of the relevant laws or regulations has taken place, and those responsible for the breach; and
• taking necessary steps to protect the public interest and, if appropriate, to punish those responsible for the breach.

This process of enforcement is generally the responsibility of the SFC's Enforcement Division.

Identifying a breach of the relevant laws or regulations
To spot breaches of the relevant laws or regulations, and to identify those responsible for it, the SFC:

• carries out market surveillance to look out for possible market misconduct (e.g. market manipulation or insider dealing);
• considers complaints from the public;
• considers referrals for investigation from the SFC's other divisions (Intermediaries and Investment Products, Corporate Finance and Supervision of Markets); and
• considers referrals for investigation from other organizations (e.g. the Hong Kong Police, the ICAC, or national or overseas regulators).

Investigation
Once we suspect that there has been a breach of relevant laws or standards, we conduct further investigations or inquiries to try and find out what has happened, and whether there is any evidence of wrongdoing.
If we believe that a serious criminal offence may have been committed, we refer the matter to the Department of Justice for prosecution on indictment and/or, the Hong Kong Police or the ICAC for further investigation.

Taking steps to protect the public and punish wrongdoers
If we find sufficient evidence of wrongdoing after our investigations or inquiries, we have 3 methods to protect the investing public:

• we may apply to the Court for an injunction to restrain the wrongdoing.
• we may punish the wrongdoers by taking disciplinary action against them if they are registered or licensed intermediaries. Such disciplinary action may include suspension or revocation of their licences or registrations, or issuing reprimands.
• we can also prosecute those responsible for breaching securities laws before the Magistrates' Court if the offences are of a less serious nature. Such offences include unregistered dealing or advising on investments.

Our enforcement principles are grounded on the SFC's principles of regulation set out in Chapter 1. When considering and taking enforcement action, we look to the following aims:

• Prevention . It is better to stop improper conduct before it happens. To achieve this, we encourage intermediaries to foster a culture of compliance. The investing public can also help by learning how to look after their own rights and interests.
• Remedying what has happened . If wrongdoing has already occurred, we will take appropriate steps to try and remedy it. We will look at each situation in light of its particular circumstances and consider what might be appropriate courses of action, keeping in mind the interests of the investing public.
  It is important to note that, although the SFC is required to act in the public interest, we cannot seek compensation for those who have suffered loss as a result of wrongdoing, or directly assist them in their attempts to seek compensation through the Courts.
• Punishing wrongdoers and deterring others. In general, punishment is usually appropriate for those who engage in wrongdoing. Punishment serves a number of purposes. Firstly, it is an effective tool to deter wrongdoers from engaging in further wrongdoing. Punishment may also deter others from engaging in wrongdoing. Thus, it has a deterrent effect that minimises misconduct.
  To maximise the deterrent effect, we generally publicise our enforcement sanctions wherever appropriate.
  Do note that the SFC cannot represent or bind other bodies that may have an interest in the matter. In particular, the Department of Justice remains responsible for criminal prosecutions within Hong Kong and has the right to intervene in the SFC's conduct of summary prosecutions. We will, where necessary or appropriate, consult such bodies when conducting settlement negotiations.
• Effectiveness of action . The SFC has to make the best use of the limited resources that we have. We cannot do everything and must set priorities. Therefore, we have to consider the costs and benefits of any action that we propose to take. Sometimes, this may mean that we take no action in relation to one matter in favour of taking action on other, more serious cases. For example, we are unlikely to prosecute on a case concerning a minor technical breach, that is unlikely to be repeated and has resulted in very little or no loss to investors.
• Co-operation with other regulators. We co-operate with other domestic and overseas regulators in situations where it may be more appropriate for a regulatory body other than the SFC to take action.

A Balancing Act

Each of the SFC's enforcement actions involves a careful balancing of a number of complex issues. These issues will also vary from case to case. In balancing them and making a decision, we will always endeavour to act firmly, fairly, impartially, keeping in mind at all times the SFC's principles of regulations and aims described above.