Press Release
Securities and Futures Bill
10 November 2000 (Friday)
The Government announced today (Friday) that the Securities and
Futures Bill would be introduced into the Legislative Council on 29 November.
“After more than a year of consultation with the market, we are pleased
to announce that the Securities and Futures Bill will be ready for introduction into
the Legislative Council by the end of this month,” said Mr. Stephen Ip, Secretary
for Financial Services.
“There is a general consensus in the community to modernise the
regulatory regime for the securities and futures industry. This is much needed to
bring Hong Kong on par with international standards and maintain our
competitiveness as a major international financial centre,” Mr. Ip said. “Early
enactment of the Bill will help us achieve this goal and meet the challenges
presented by increasing globalisation and new market developments.”
The Bill represents the fruit of an intensive consultation exercise, which
started in July 1999 with exposure of the draft policy proposals, and followed by
the publication of detailed drafting provisions in the form of a White Bill in April
2000.
“We are encouraged by the general support of the community for the
broad objectives and direction of the proposed regulatory regime enshrined in the
White Bill. Market comments on the White Bill have been useful for us in ensuring
that compliance by market practitioners with the proposed legislation will not entail
an excessive burden,” he said.
“We believe that the Bill has gone a long way in addressing market
concerns and interests of all parties, without compromising the overall
effectiveness of the new regulatory regime,” he added.
The Securities and Futures Bill consolidates and modernizes ten existing
Ordinances governing the securities and futures market. It aims to establish a
regulatory framework for the development of a fair, orderly and transparent market
that is on a par with international standards and practices.
Major new regulatory measures include –

the introduction of a single licence for market intermediaries to
streamline regulatory arrangements and improve the quality of
intermediary services;
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establishment of a civil Market Misconduct Tribunal and expansion of
the existing criminal route to combat market misconduct, together with
new investigative power for the Securities and Futures Commission for
a fairer and more orderly market;

modernizing the regime for disclosure of securities interests to enhance
market transparency; and

instituting a flexible framework for the regulation of new products and
services to facilitate market innovation.
“We have refined the White Bill, having regard to market comments on
the proposed regulatory regimes for licensing intermediaries, combating market
misconduct and enhancing disclosure of securities interests,” Mr Ip said.
“In refining the Bill, we are mindful of the need to be on a par with
international standards and practices, with necessary adjustments to address local
characteristics and concerns; to strike a reasonable balance between protecting the
investors and facilitating market development; to simplify procedures and
processes to make them more user-friendly and minimize regulatory burden; and to
put in place adequate checks and balances for the proper exercise of regulatory
powers,” he said.
“During the passage of the Bill through the legislature, the
Administration and the Securities and Futures Commission will continue to engage
the market practitioners, professional bodies and relevant parties in preparing
subsidiary legislation to be made under the Bill. We welcome further views to
improve the Bill and its future implementation,” he said.
“For this important legislative reform exercise to succeed, we would
need full support of our legislators, market players, professional bodies and other
concerned parties. We look forward to enactment of the Bill within the current
legislative session in order to stay ahead as a major international financial centre,”
he said.
Further information on the Bill is available on the website of the
Financial Services Bureau at www.info.gov.hk/fsb. The Bill will be published in
the Gazette on 24 November and an electronic copy of it will be available on the
above website from 17 November onwards.
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The government response to comments received during the White Bill consultation
exercise is set out in the section below.
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Securities and Futures Bill
General comments on and major changes to the White Bill
( April – October 2000 )
General Comments
1.
2.
Respondents generally recognise the need for reform and support its broad
direction, including –

the introduction of a single licence regime to streamline the regulatory
framework for intermediaries and upgrade the quality of intermediary
services for better protection of investors;

the establishment of the Market Misconduct Tribunal to reduce market
malpractice and financial crime;

modernising the regime for the disclosure of interests in securities to
enhance quality of information disclosed and market transparency;

building in greater flexibility for new market development, like on-line
trading; and

levelling the playing field for SFC-licensed brokers and the securities
arm of exempt authorised institutions (AIs).
Respondents also welcome the proposed safeguards to enhance the
accountability and transparency of the SFC, including the establishment of
the Securities and Futures Appeals Tribunal and the Process Review Panel.
Major changes to the White Bill
3.
The Bill represents the fruit of an intensive consultation exercise on the
White Bill since its publication in April 2000. It has been refined in light of
comments from the market and the Legislative Council to strike the right
balance between investor protection and market development.
4.
We believe the refinements would go a long way in addressing market
concerns without compromising the overall effectiveness of the new
regulatory regime.
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New Licensing Regime
(a)
Management liability
5.1
Regarding the liability of executive officers, directors, etc., in particular
whether they are regarded as having committed an offence when their
corporation has done so, we consider that it is necessary to take into account
the mental element (i.e. the intention) of the officer. The onus of proof for
the offences will be shifted back to the prosecution.
5.2
Specifically, the strict liability offences under the licensing regime would be
removed. The Bill will be amended in such a way as to restrict the liability
to those officers who have aided, abetted, consented to or connived in the
criminal conduct of the corporation, or when such criminal conduct is
attributable to the officers’ recklessness. The original provision for liability
as a result of neglect on the part of the officers will be removed.
(b)
5.3
(c)
Statutory time limits for compliance
We shall, where possible and without affecting the effectiveness of the
regulatory regime, extend the time limits for complying with the relevant
requirements (e.g. return of expired licences to the SFC). In general the time
limits for compliance will be set at seven days.
“Responsible officers”
5.4
The Bill requires a licensed corporation to nominate at least two
“Responsible Officers”. We shall remove the requirement for at least one of
the “Responsible Officers” to be physically present in Hong Kong. Instead,
as a more flexible alternative, the SFC will, under licensing conditions,
require an intermediary to ensure that there is at least one “Responsible
Officer” available at all times to supervise the business of the licensed firm.
5.5
There should be a clear and reasonable definition for who should be
registered as a “Responsible Officer” in accordance with the relevant
provisions. The Bill will limit the regulatory catch to include directors who
actively participate in or are responsible for directly supervising the conduct
of the regulated activities. This would avoid the need for non-executive
directors, directors of administrative functions or non-Hong Kong based
directors who have no responsibility for the regulated activities to apply to
the SFC for approval as a Responsible Officer.
(d)
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Penalty maxima
5.6
In respect of administrative non-compliance or relatively less serious
offences, the Bill will remove the penalty of imprisonment but preserve the
fine for non-compliance as a deterrent. The offences concerned include (a)
failure to return an expired licence; (b) failure to notify SFC of end of a
financial year; (c) failure to notify SFC of name and address of auditor; etc.
within the specified time limit.
5.7
In rationalising the penalty structure for the offences under the licensing
regime, the penalty maxima for about 10 criminal offences will be lowered.
On the other hand, for some serious offences, an indictable route will be
added as an alternative for bringing prosecution against the worst cases. For
instance, an indictable route will be added to prosecute a licensee for noncompliance with SFC conditions which were imposed as a result of its
failure to comply with the Financial Resources Rules.
(e)
5.8
(f)
5.9
Level playing field
The Bill, together with corresponding amendments to the Banking
Ordinance, will provide a framework for the regulation of the securities arm
of an exempt AI. The HKMA will remain the frontline regulator for AIs to
minimize regulatory overlap. To level the playing field and protect investors,
it will regulate exempt AIs according to standards consistent with those
applied by the SFC to its licensees. These include the “fit and proper” test,
“Responsible Officers” concept, as well as codes of business conduct. The
Bill will vest in the HKMA inspection powers for the day-to-day supervision
of exempt AIs. Changes will be made to the Banking Ordinance to allow the
HKMA to reprimand an exempt AI as a new disciplinary measure. In
addition, under the Bill, the SFC will have the power to revoke an exempt
status.
Preparation of subsidiary legislation
Drafting work for the relevant subsidiary legislation, guidelines and codes is
in progress. Priority would be given to items of market concern, such as the
Client Money Rules, Client Securities Rules, etc. The SFC will release the
first draft of the priority items for market consultation in the next few
months.
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Market Misconduct
(a)
Onus of proof and mental element
6.1
For the six types of market misconduct specified respectively under the civil
and criminal regimes, the onus of proof in market misconduct will be on the
prosecution. Two exceptions are specific acts under the market misconduct
offence of “false trading” namely, “wash sales” and “matched orders” which
are blatantly abusive.
6.2
For offences relating to “disclosure of false or misleading information
inducing transactions in securities or futures contracts”, the onus of proof
will be put firmly on the prosecution. The mental element test with regard to
the act of misconduct will be “knowingly, recklessly or negligently”. The
false information is only relevant to such an offence if it is price sensitive or
induces others to enter into transactions.
6.3
The Bill will also clarify the mental element required to commit the offences
on “false trading” and “price rigging” in securities and futures contracts by
providing that the test of “intentionally” or “recklessly” is to be applied to all
relevant acts under the offence (except for provisions relating to wash sales
and matched orders (see 6.1)).
6.4
The “stock market manipulation” offence is similar to that in overseas
jurisdictions and is adopted almost direct from the Australian law and, in turn,
from US law. It is considered that the mental element is sufficiently clear.
There is no intention to catch genuine hedging or arbitrage activities, nor
would this be the effect of relevant provisions as drafted, as is evident from
the Australian and US experiences. However, the Bill will increase the
number of transactions required to establish “stock market manipulation”
from “a transaction” to “two or more transactions” to address market concern.
(b)
6.5
“Safe Harbours” rules
Under the White Bill, the SFC is empowered to make “safe harbour” rules
only for certain types of market misconduct. The Bill will extend this rulemaking power to any one or more of the six specified types of market
misconduct in both civil and criminal regimes. This will provide the SFC
with more flexibility in making such rules as are appropriate.
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Disclosure of Interests in Securities
7.1
The level of details required to be disclosed with regard to derivatives would
be reduced by removing the need to disclose the exercise period and the
expiry date. The Bill will limit the information which has to be disclosed in
respect of derivative interests to the nature of the equity derivatives e.g.
whether listed or OTC; and the total number, aggregate nominal value and
class of shares, which were the underlying shares of the equity derivatives.
This seeks to avoid affecting the hedging strategies of traders while giving a
fuller picture to the investors.
7.2
“Conduit” stock borrowing/lending activities and certain intra-group
transactions will be exempt from the disclosure requirements to avoid
duplication in disclosure. This aims to reduce regulatory burden.
Financial Services Bureau
10 November 2000