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The Securities and Futures Appeals Tribunal: Challenging SFC Disciplinary DecisionsNovember 11 , 2020
November 16, 2020
By Timothy Loh and Mary Lam
The Securities and Futures Appeals Tribunal is the tribunal responsible for hearing appeals from SFC disciplinary decisions. Experience dealing with the Securities and Futures Appeals Tribunal has demonstrated that where, in the exercise of its disciplinary powers, the SFC acts unreasonably, in bad faith or otherwise improperly, a remedy may be available through this tribunal. In this article, we review strategies for challenging SFC disciplinary decisions through the tribunal.
The Securities and Futures Appeal Tribunal, also known as the “SFAT”, is the statutory tribunal to whom persons licensed by the Securities and Futures Commission (“SFC”) must appeal SFC disciplinary decisions. It is constituted under the Securities and Futures Ordinance (“SFO”) and is intended to be "independent of the SFC", to provide a "full merits" review of SFC decisions and to act as “a powerful safeguard in ensuring that SFC decisions are correct, proper and fair.”
Independence of the SFAT
The Securities and Futures Appeals Tribunal comprises a judge and 2 lay members. Although the tribunal is sometimes regarded as an SFC tribunal, no member of the SFC sits on the tribunal.
Powers of the SFAT
Under the SFO, the Securities and Futures Appeals Tribunal has the power on review of an SFC disciplinary decision to confirm, vary or set aside the SFC’s decision and, where the decision is set aside, to substitute for that decision any other decision which the tribunal considers appropriate. In this regard, the Securities and Futures Appeals Tribunal may make any decision, whether more or less onerous, than the SFC had the power itself to make in respect of the person making the application for review.
The Securities and Futures Appeals Tribunal also has the power to remit any matter in question to the SFC with directions it considers appropriate, which may include a direction to the SFC to make a decision afresh in respect of any matter specified by the tribunal.
Approach of the SFAT
The Securities and Futures Appeals Tribunal is required to hear each appeal case anew and decide the case for itself based on such a re-hearing. It is not bound by the decision of the SFC and may, therefore, vary or set aside a decision of the SFC even if the decision of the SFC is not defective by reason of procedural or jurisdictional error.
Thus, unlike judicial review, the Securities and Futures Appeals Tribunal may vary or set aside the decision of the SFC on the simple basis that it does not agree with the views expressed by the SFC. However, it is obliged to give due weight to the fact that the SFC is the regulator and should, accordingly, be slow to vary or set aside the decision of the SFC unless it decides that the SFC decision is wrong (rather than simply not right). Regrettably, the line between the SFC decision being wrong and simply not right is not clear though, in the event of a procedural or jurisdictional error, it is likely that the SFC decision will be wrong.
In hearing the case anew, the Securities and Futures Appeals Tribunal is not limited to reviewing the reasons given by the SFC for their decision. It may examine the original evidence presented before the SFC when the SFC reached its original decision as well as new evidence, new submissions, the decision making process of the SFC, any policies applied by the SFC or any other relevant matter.
In the four and half years since its inception in April, 2003, the Securities and Futures Appeals Tribunal has determined and provided written reasons for 24 cases. From these cases, a number of lessons emerge. Chief among these is that successful appeals against SFC decisions have usually relied upon one or more of the following grounds:" to “A review of decisions of the Securities and Futures Appeals Tribunal shows that successful appeals against SFC disciplinary decisions usually rely upon one or more of the following grounds:
- failure to consider the individual merits of a case;
- bad faith on the part of the SFC;
- erroneous or outdated findings of fact; or
- absence of a specific rule or policy to justify the SFC’s position.
Conversely, arguments premised on mere incorrect exercise of discretion by the SFC have been almost uniformly unsuccessful. Such arguments, if successful, are more likely to result in changes in sanctions against the applicant than in reversal of the underlying SFC decision.
Failure to Consider Individual Merits of Case
It is a general principle of administrative law that a regulator must consider the unique facts of each case before it or its decision is subject to reversal. Consistent with this principle, the Securities and Futures Appeals Tribunal has interfered with SFC decisions where it considered that the SFC had pursued its general policy or practice without regard to specific circumstances.
Another general principle of administrative law is that a regulator must act within the bounds of natural justice. While the Securities and Futures Appeals Tribunal is understandably reluctant to use the “bad faith” label in its published decisions, it has occasionally questioned the motivation behind certain SFC decisions and ruled accordingly.
Of particular significance, in Application 2 of 2004, on an appeal from SFC enforcement action, the Securities and Futures Appeals Tribunal hinted that the SFC had let a history of bad blood between the parties cloud its judgment in handing down penalties that were overly harsh. The tribunal accordingly reduced the penalties from revocations of the two Applicants' licenses to one-month suspensions plus fines of HK$50,000.
Erroneous Findings of Fact
Findings of fact made by the SFC, particularly those which underpin its decisions, may be challenged through the Securities and Futures Appeals Tribunal. Indeed, the tribunal has broad powers to collect evidence including through viva voce witness testimony before the tribunal.
In this regard, the Securities and Futures Appeals Tribunal is on equal footing with the SFC whereas in respect of regulatory policy and the application of such policy, the tribunal is obliged by law to be deferential to the views of the SFC.
Absence of Specific SFC Rule or Policy
Decisions of the SFC premised on general principles may be more susceptible to successful challenge before the Securities and Futures Appeals Tribunal than decisions premised on specific requirements. This is particularly so where the SFC applies general principles to prohibit conduct where no specific prohibition has been published, the prohibition has not been the subject of public consultation and the desirability of such a prohibition is an issue upon which reasonable men may differ.
In Application 8 of 2006, for instance, SFC enforcement action resulted in a disciplinary sanction against the Applicant for recommending to a client a “locking” strategy. “Locking” involves taking equal long and short positions on a futures contract to avoid margin calls should losses occur.
The Securities and Futures Appeals Tribunal wondered why, if the practice was as deceptive as claimed by the SFC, the SFC had taken no steps “to make it explicit to market participants that this practice will not be tolerated save in exceptional circumstances”. The SFC had no answer to this question and so the tribunal reduced the Applicant's sanction. The sanction might have been lifted in its entirety but for the existence of a separate cold-calling finding by the SFC against the Applicant which was not challenged on appeal to the tribunal.
Incorrect Exercise of SFC Discretion
In a handful of cases, applicants for review have successfully challenged SFC decisions on the basis that the SFC has not exercised its discretion correctly. However, challenges of SFC decisions which do not bring out new evidence or new submissions, which do not cast the evidence in a new light and which do not impugn the decision making process of the SFC are difficult (though, as the record shows, not impossible) to mount successfully before the Securities and Futures Appeals Tribunal.
SFC licensed persons who are subject to SFC discipline and who believe the disciplinary decision is wrong may successfully challenge the SFC’s decision through the Securities and Futures Appeals Tribunal if it can be shown that the SFC acted unreasonably, in bad faith or otherwise improperly. However, the tribunal is unlikely to overturn an SFC disciplinary decision merely because the SFC licensed person making the appeal disagrees with how the SFC has exercised its discretion.