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Enforcement of Securities Laws Violations in the United Kingdom

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Enforcement of Securities Laws Violations in the United Kingdom Enforcement of Securities Laws Violations in the United Kingdom by James J. Fishmant INTRODUCTION .................................................. 132 I. AN OVERVIEW OF THE REGULATORY FRAMEWORK .......... 134 A. LOCI OF REGULATORY AUTHORITY ..................... 134 B. SCOPE OF REGULATION ................................. 135 C. AUTHORIZATION AND ENFORCEMENT ................... 135 II. ENFORCEMENT POWERS .................................... 138 A. HIERARCHY OF ENFORCEMENT POWERS ................. 138 B. MONITORING AND INFORMATION GATHERING ........... 140 1. NOTIFICATION REQUIREMENTS ...................... 140 2. POWER TO CALL FOR INFORMATION ................. 141 3. MONITORING THE SROS AND OTHER RECOGNIZED BODIES ............................................. 141 C. INVESTIGATIVE POWERS ................................ 142 D. ENFORCEMENT IN PRACTICE ............................ 145 E. COMPLIANCE AND CONTROL POWERS ................... 150 1. DISQUALIFICATION OF FIRMS AND INDIVIDUALS ...... 150 A. AUTHORIZATION OF INVESTMENT BUSINESS ...... 150 B. SIB DISQUALIFICATION ACTIONS AGAINST INDIVIDUALS .................................... 151 2. PUBLIC STATEMENTS AS TO MISCONDUCT ............ 152 3. REMEDIES FOR IMPERMISSIBLE TRANSACTIONS ....... 152 A. INJUNCTIONS .................................... 152 B. REsTrrTTION ORDERS ........................... 153 C. VOIDING OF CONTRACTS ......................... 154 D. PRIVATE ACTIONS FOR DAMAGES ................ 156 4. POWERS OF INTERVENTION ......................... 157 5. W INDING UP ....................................... 158 6. COMPLIANCE AND CONTROL POWERS OVER RECOG- NIZED BODIES ...................................... 159 III. THE LIMITS OF ADMINISTRATIVE POWER .................... 161 A. DUE PROCESS REQUIREMENTS .......................... 161 B. THE FINANCIAL SERVICES TRIBUNAL ................... 163 t Visiting Professor of Law, Brooklyn Law School; Professor of Law, Pace University School of Law. J.D., Ph.D New York University. A.B., A.M. University of Pennsylvania. 132 INTERNATIONAL TAX & BUSINESS LAWYER [Vol. 9:131 C. ACCESS TO JUDICIAL REVIEW .......................... i65 IV. PROSECUTION OF SECURITIES FRAUD AND INSIDER DEALING . 168 A. SECURITIES FRAUD .................................... 169 B. INSIDER DEALING ...................................... 173 1. RESTRAINTS ON INSIDER TRADING BEFORE 1980 ..... 174 2. THE COMPANY SECURITIES (INSIDER DEALING) ACT, 1985 ............................................... 175 3. THE FINANCIAL SERVICES ACT AND INSIDER D EALING ........................................... 177 4. VIOLATIONS OF THE INSIDER DEALING ACT IN THE LATE 1980s ......................................... 179 5. THE FAILURE OF ENFORCEMENT .................... 184 A. THE ENFORCEMENT RECORD .................... 185 B. ORGANIZATIONAL AND STATUTORY WEAKNESSES. 186 C. JUDICIAL BARRIERS TO ENFORCEMENT - PROCESS, INEXPERIENCE AND CONSERVATISM .............. 188 D. DEREGULATION ................................. 190 6. CONCLUSION ....................................... 192 C. MULTILATERAL COOPERATION .......................... 192 V. THE VIABILITY OF SELF-REGULATION ....................... 193 A. THE PANEL ON TAKEOVERS AND MERGERS: A CASE STUDY . ................................................ 195 B. THE LIMITS OF SELF-REGULATORY ENFORCEMENT: THE BLUE ARROW AFFAIR .................................. 198 CONCLUSIONS .................................................... 204 INTRODUCTION In 1986, the United Kingdom's securities markets underwent a two-part revolution. The first part involved the deregulation of the London Stock Ex- change (the "Stock Exchange") and the introduction of international inte- grated financial services firms into this formerly-closed and functionally- segmented marketplace. This development has been called colloquially the Big Bang. The second part of the revolution was the passage of the Financial Services Act (F.S.A.). 1 The F.S.A. created a comprehensive scheme of regula- tion covering the entire financial services industry. Under this scheme, regu- latory powers are officially granted to one government department. In practice, however, these powers have been delegated to a nongovernmental regulatory body, the Securities and Investments Board, and to private self- regulating organizations. Consequently, the British approach to financial I. Financial Services Act (F.S.A.), 1986, Ch. 60. 1991] UK. SECURITIES ENFORCEMENT services regulation can be described as self-regulation within a statutory framework.2 The above-mentioned developments have been chronicled elsewhere.' This article examines the record of the United Kingdom in enforcing its se- curities laws since the passage of the F.S.A. It discusses the information gathering and investigative powers of the responsible governmental agencies and self-regulating organizations, and analyzes the enforcement problems. In addition, the article examines the due process protections in the statute for individuals and firms denied authorization to conduct business or accused of wrongdoing. The United Kingdom's new regulatory framework reflects political com- promises in its attempt to serve conflicting purposes: the encouragement of domestic competition through deregulation of the financial services industry, the promotion of a vigorous financial services sector able to compete in a global trading environment, and the attainment of public policy objectives of safety, soundness, stability, and integrity.4 Attendant to market deregulation was the introduction of a more stringent regulatory framework, one of whose goals was to increase investor confidence in the financial services industry as 5 "a clean place to do business." To create such an environment and to en- courage investor confidence, an enforcement scheme had to be implemented that broadened disclosure, improved business practices, and efficiently discov- ered and sanctioned securities law violators. An effective securities regulatory framework should hold out the vision to the investor of fairness in the market place. This can be accomplished through increased disclosure so that informed decisions can be made on the basis of accurate information, through prevention of violations, by increased monitoring and reporting requirements, and through prompt, effective, and vigorous prosecution of securities law violations. Despite the new regulatory framework, securities law enforcement in the United Kingdom could be improved significantly. The enforcement regime has not been able to thwart insider dealing or other fiduciary violations. It has been unable to create an aura of effectiveness. The barriers to effective 2. SECRETARY OF STATE FOR TRADE AND INDUSTRY, FINANCIAL SERVICES IN THE UNITED KINGDOM: A NEW FRAMEWORK FOR INVESTOR PROTECTION, 1985, CMND. SER. No. 9432, at § 5.1 [hereinafter WHITE PAPER]. 3. See Barnard, The United Kingdom FinancialServices Act, 1986: A New Regulatory Framework, 21 INT'L LAW. 343 (1987); Miller, Regulating FinancialServices in the United King- dom - An American Perspective, 44 Bus. LAW. 323 (1989); Peeters, Re-regulation of the Finan- cial Services Industry in the United Kingdom, 10 J. INT'L Bus. L. 371 (1988); Pimlott, The Reform of Investor Protection in the UK: An Examination of the Proposalsof the Gower Report and the UK Government's White Paper of January, 1985, 7 J. COMP. BUS. & CAP. MARKET L. 141 (1985). N. POSER, INTERNATIONAL SECURITIES REGULATION: LONDON'S BIG BANG AND THE WORLD SECURITIES MARKET (1990). 4. Cf. Kubarych, InternationalRegulatory Harmonization: The Economic and Financial Environment, 14 BROOKLYN J. INT'L L. 262-63 (1988); N. POSER, INTERNATIONAL SECURITIES REGULATION: LONDON'S BIG BANG AND THE WORLD SECURITIES MARKET (1990). 5. WHITE PAPER, supra note 2, § 3. 1(iii). 134 INTERNATIONAL TAX & BUSINESS LAWYER [Vol. 9:131 enforcement include: organizational problems; deficiencies. in the enabling statute, particularly the insider dealing act; weaknesses in the self-regulatory system; difficulties in changing attitudes toward certain kinds of behavior; deregulation itself, which has brought together contrasting cultures with dif- fering standards of business behavior; and the globalization of securities mar- kets, which has made enforcement of securities violations more difficult. This article examines the weaknesses of the present system of enforce- ment and suggests changes to make it more effective. The article is divided into three parts: an analysis of the enforcement provisions of the F.S.A., the prosecution of securities offenses since its implementation, and the viability of self-regulatory enforcement. I. AN OVERVIEW OF THE REGULATORY FRAMEWORK A. Loci of Regulatory Authority The F.S.A. created three tiers of authority over the financial services industry. At the top are the Department of Trade and Industry (DTI) and the Bank of England. At a second level is the Securities and Investments Board (SIB), a private agency to which primary regulatory responsibility has been transferred from the DTI. The third tier is comprised of four self-regu- lating organizations (SROs), seven investment exchanges, eight professional bodies, and two clearinghouses. 6 These organizations, which are private 6. The SROs and their principal areas of responsibility are: Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA), which regulates independent invest- ment intermediaries; Investment Management Regulatory Organization (IMRO), which regu- lates investment managers including those of investment
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