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FINANCIAL LAW AND FINANCIAL LAW AND REGULATIONSREGULATIONS

WEEK 6

Securities and Futures Ordinance (SFO)

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Securities and Futures Ordinance (SFO)

Consolidate and streamline 10 former ordinances [operational in April 2003]

1) Securities and Futures Commission

2) Commodities Trading Ordinance

3) Securities Ordinance

4) Protection of Investors Ordinance

5) Stock Exchange Unification Ordinance

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Securities and Futures Ordinance (SFO)

Securities and Futures Ordinance (SFO) (cont’d)

6) Securities (Insider Dealing) Ordinance

7) Securities (Disclosure of Interest)

8) Securities and Futures (Clearing Houses)

9) Leveraged Foreign Exchange Trading

10) Exchanges and Clearing Houses (Merger) Ordinance

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Objectives of SFO

- promote fair, orderly & transparent market- cope with new products innovations and new advances in technological infrastructures;- be a regulator with sufficient powers and discretions (operations are transparent; accountable to the stakeholders through a system of adequate checks and balances); - maintain a par with international practices

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SFO Part I – Preliminary

- contain most of the general definitions

- are applicable to licensed corporations supervised by SFC, and intermediaries supervised by HKMA and registered with the SFC

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SFO Part II – The SFC

Its constitution, Its objectives, Its functions, Its powers and Its duties

- states the powers of SFC and

its relationships with the Chief Executive,

HKSAR and the Financial Secretary

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SFO Part III

- provide for the recognition by the SFC

exchange companies, clearing houses,

exchange controller, investment compensation companies, providers of automated trading services

- they are recognised market operators (at present, HKEx is the only recognised exchange controller in Hong Kong )

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SFO Part III

- the SFC supervises all the above

operators in the market to ensure

that they perform their functions

and operations properly

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SFO Part IV – Offers of Investments

- deal with the regulation of investment

products

- control of its marketing activities

- The objective of establishing a properly regulated environment for the products available to investors is to encourage the development of reputable and well-structured products in the Hong Kong market and to eliminate dubious products and schemes.

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SFO Part V – Licensing and Registration

- cover the licensing of intermediaries,

include registered institutions supervised

by the HKMA who undertake activities

regulated by the SFC

- issue licence on regulated activities to

companies & their accredited individuals

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SFO Part V- The regime installed under the SFO provides for a single licence that is given only to companies, bodies corporate and individuals accredited to them. They are referred to as licensed persons.

- 9 categories of regulated activities by SFCType 1: Dealing in securitiesType 2: Dealing in futures contractsType 3:Leveraged foreign exchange trading

Type 4: Advising on securities

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SFO Part V (cont’d)

Type 5: Advising on futures contracts

Type 6: Advising on corporate finance

Type 7: Providing automated trading service

Type 8: Securities margin financing

Type 9: Asset management

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SFO Part VI

Empower the SFC to make rules on

- capital requirements (Financial Resources Rules) on licensed corporations

- safeguarding and control of client assets and money

- keeping of records (If a person makes false or misleading entries; destroys any records; or does not maintain records; he is guilty of an offence)

- issue of receipts and statements of accounts to clients

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SFO Part VI

Have provisions on licensed corporations (not to registered AFIs) and also to associated entities of intermediaries on matters relating to:

- audited accounts submitted to the SFC not later than 4 months after the end of the financial year

- information about appointment and removal of auditors

- reportable matter by auditors to SFC

- appointment of auditors by SFC

- powers of appointing auditor by SFC

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SFO Part VII

- Empower the SFC to make rules

of business conduct for intermediaries

and their representatives which may

specify prohibitions, requirements and

other matters in codes of conduct

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SFO Part VII- [codes of conduct gives guidance on the practices and standards which intermediaries (which would include registered AFIs) and their representatives are ordinarily expected to comply with while conducting regulated activities]

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SFO Part VII

- Failure to observe codes of conduct

may be taken into account to consider

an intermediaries and its representatives

to remain fit and proper for the licence

- The code is admissible as evidence in proceedings under the SFO before court

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SFO Part VII* SFO prohibits an intermediary or its

representatives from representations expressly or by implication that its or his abilities or qualifications have been endorsed or warranted by the Government

or the SFC

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SFO Part VIII- Supervision and InvestigationsIt provides the SFC with powers to

supervise, inspect and investigate listed companies and intermediaries and their staff

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SFO Part VIIIPowers to require information- SFC can require information which

include records and documents, explanations and statements on oaths from listed corporations, any related

corporation, an auditor, present and past members of staff and any other person.

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SFO Part VIII - Supervision of intermediaries Provide SFC with the power to conduct inspection to ascertain whether an intermediary has complied with the SFO. The SFC may inspect the premises and ask for documents and explanations.

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SFO Part VIII - Powers of Investigation SFC may authorise an employee or with

the consent of the Financial Secretary, another person to carry out an investigation.

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SFO Part VIII- A person fails to comply with the requests

of an investigator is guilty of an offence.SFC may apply to court for the issue of

a warrant to enter specified premises. A person destroys or disposes of any

required documents is guilty of an offence.

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- SFO Part IX – Discipline If a regulated person is guilty of misconduct or is not a fit and proper person, the SFC may revoke or suspend his licence, issue public or private reprimand, prohibit him from applying for licence, order him to pay a penalty

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SFO Part XI- Establish a full-time Securities and Futures Appeals Tribunal chaired by a judge to hear appeals against decisions made by the SFC and the HKMA

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SFO Part XII - Establish and maintain the Investor

Compensation Fund (to cover losses incurred by clients of intermediaries in general including non-exchange participants)

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SFO Part XIII - Establish the Market Misconduct Tribunal to hear cases of insider trading and other cases of market misconduct

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SFO Part XIV- The criminal regime for market misconduct (maximum of 10 years’ imprisonment and/or fines of up to $10million)

- All forms of market misconduct, including insider dealing are subject to prosecution as a criminal offence. - A person will not face the “double jeopardy” of being subject to civil proceedings before

the MMT under Part XIII and prosecution under Part XIV in relation to the same

conduct

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SFO Part XV

- It reflects the modern trend towards greater disclosure and transparency in securities markets which include the disclosure of ownership in companies, the interests of directors and chief executives

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SFO Part XV Broad provisions on the duty of disclosure - Directors and chief executives of a listed companies have stronger burden to disclose interests without any threshold limits. The burden is reduced where the information does not significantly contribute to the supervision of the activities

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SFO Part XVPower to investigate ownership

- A listed company may investigate any interests in its shares, short positions in shares, interests in derivatives which have the relevant share capital as the underlying. It has to issue its findings to the relevant exchange, the SFC and the HKMA

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SFO Part XV - The Financial Secretary may appoint inspectors to investigate the control of a listed company to determine the true persons financially interested or able to control the listed corporation

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SFO Part XVI- Enable the SFC to intervene in

civil proceedings between third parties in cases which concern matters under the SFO or statutory functions of the SFC

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Part XVII – Repeals and Related Provisions

- These are extensive and are designed for continuity and to ensure a smooth transition from the old regime of the 10 Ordinances to the new single SFO.

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Review Question

* One of the key objectives of the SFO is to enable the regulator with sufficient power. Discuss the parts of SFO that provide the regulator (SFC) with the necessary power in its administration. What are these specific powers?