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However, its biggest defect is, perhaps, what I would describe as its "effect-based philosophy". The offence catches individuals who unwittingly or mistakenly mislead the market. Those individuals are subject to precisely the same penalties as individuals who intend to mislead the market. The approach that the Opposition are taking, which is reflected in these amendments, is to inject into the Bill the requirement of intent and to insist that, in order to proceed for market abuse, the authority has to go to the courts.
In taking that approach, we have been greatly influenced by what happens in the United States of America. In this regard I am happy to acknowledge the help that we have received from one of the partners--a former general counsel to the Securities and Exchange Commission--at the well-known Washington law firm of Debevoise and Plimpton.
As I understand it, the position in the United States is as follows. Section 10(b) of the Securities Exchange Act 1934, and under it the Exchange Rule (10)(b)(5), are broad anti-fraud provisions that prohibit manipulative, deceptive or fraudulent conduct in connection with the purchase or sale of any security through inter-state commerce.
Over the years, Section 10(b) and Rule 10(b)(5) have been used to combat various forms of securities fraud, including insider trading, accounting irregularities and market manipulation. In each case, liability under
Congress and the SEC (through its delegated rule-making authority) have addressed problems caused by the misuse of market information through detailed and sophisticated regulation. But when the use of market information may harm the operation of securities markets, they provide that a person in possession of material non-public information must do one of two things: either disclose it completely or not trade.
The SEC may initiate an enforcement action in a Federal court alleging violations of Section 10(b) and Rule 10(b)(5) thereunder. The SEC is also authorised to institute administrative proceedings alleging violations of Section 10(b) and Rule 10(b)(5). These administrative proceedings are conducted before an SEC hearing officer, an administrative law judge designated by the agency. Initial administrative decisions may be appealed to the commission itself and then, if necessary, to a Federal appellate court.
When proceeding administratively, the SEC is limited to seeking an administrative order sanctioning the alleged violator. Monetary penalties and other sanctions are available in both forms, but in administrative proceedings monetary proceedings may only be assessed against a regulated entity and its associated persons--unlike the provisions for market abuse in the Bill.
Congress has established in certain circumstances, including insider trading and SEC administrative proceedings against regulated entities, tiers of monetary penalties that vary as to the degree of harm. In order to obtain certain civil monetary remedies for insider trading, the SEC must proceed in court. Therefore, it is quite clear from American practice that the mental state required under Rule 10(b)(5) is the intention to commit a fraudulent act, albeit that "recklessness" is treated in some court decisions as intentional. Accordingly, the US equivalent of market abuse is not strict liability or negligence.
Moreover, the SEC has to go to court whether for criminal or civil fraud, although it can impose monetary penalties itself. That is the pattern which has infected the amendments that we have tabled this evening.
Lord Fraser of Carmyllie: Before my noble friend develops his argument--I very much wish to avoid interrupting his line of thought--it would help me to understand all of his argument, much of which I support, if I could understand the following point a little more clearly. My noble friend's Amendment No. 208A to Clause 109(1)(c) states,
Lord Kingsland: It is clear that regular users of the market will sometimes need to give evidence in disputes about how the market would behave, or ought to have behaved, in a particular set of circumstances. We have no objection to that. The reason that expression was sought to be removed by
I wish to comment on one government amendment in this group before I sit down, and that is Amendment No. 214. My understanding, from what had happened in another place, was that the status of the code, which had originally been intended to be evidential, has become, in effect, a safe harbour. Therefore, if an operator in the market performed in a way which conformed precisely with the code, he or she would be safe from pursuit by the authority. It now appears, as a result of the noble Lord's amendment, that things are not so simple. As I understand his amendment, it is not enough for a particular form of behaviour to be included in the code. It appears that that form of behaviour will only provide a safe harbour to a market operator if in addition it has an expression which says that it should do so.
It is my impression--I hope that the Minister will correct me if I am wrong--that the Government are resiling from the position they took at the end of the Bill's stages in another place. It is also my view that, if the situation has changed, it appears that an operator--the Minister will correct me if I am wrong--will, on the one hand, be obliged to follow the code which, on the other hand, gives him no guarantee of a secure haven.
Throughout the financial sector great concern has already been expressed about the uncertain conditions in which operators will function as a consequence of the Bill. I hope that the interpretation that I have put on Amendment No. 214 is incorrect; because if it is not, we shall have to reconsider the code to see what additional amendments we would have to make to that part of the Bill.
I had hoped that we had reached the stage where the code was now accepted as a safe harbour and we could move on to consider improving the provisions in relation to guidance which at the moment does not provide a safe harbour. The biggest uncertainty in the City at the moment is not the price of any particular commodity or the price of any particular share but what the regulator is going to do this time next year. Certainty now is at a huge premium. My concern is that the Minister's amendment is a step back rather than a step forward in this respect. I beg to move.
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