A new Composite Securities Bill Current Securities Ordinance vintage - - PowerPoint PPT Presentation

1

A new Composite Securities Bill

 Current Securities Ordinance vintage 1974  Major changes in UK, Australian and US

securities legislation

 Consolidation of securities regulation

recommended in 1988 Davison Report

 A new law for the Millenium

2

Composite Securities and Futures Bill



Consolidate, update and harmonize 9 different Ordinances



Incorporates 1996 Composite Bill which went to public consultation



Incorporates recent market changes & lessons of Asian crisis



Bring law up-to-date, user, technology and innovation friendly



New regulatory framework will be more disclosure

• riented

3

Strategic Review post Davison

Strategic review and definition of:

 Role of SFC  Regulatory objectives  The kind of market HK ultimately wants  Who, what, how and why we want to regulate

4

Key Proposals

 Clarification of regulatory objectives of SFC  Strengthened supervisory and investigative

powers

 Civil fine based enforcement  Market Misconduct Tribunal  A streamlined licensing regime for market

intermediaries and advisers

 New regulation on electronic trading  Expanded accountability and checks and

balances for SFC decisions

5

Regulatory objectives

 Clear objectives constitute vision and purpose of

• ur regulatory regime

 Establish benchmarks for our performance  Set the principles by which we exercise our

powers

 Increase transparency and accountability to the

public

6

5 key regulatory objectives

 Maintain and promote fair, efficient, transparent

and orderly securities, futures and related financial markets

 Promote public confidence in and understanding

• f the financial system, and to secure appropriate

degree of protection for investors in securities

 Minimize crime and misconduct in the securities,

futures and other related financial markets

7

Regulatory Objectives (2)

 Reduce systemic risks in the securities, futures

and related markets

 Assist Government in maintaining stability and

integrity of the monetary and financial systems in Hong Kong

8

Enforcement Powers

 Bill will give SFC the necessary powers to

effectively supervise licensed intermediaries and investigate suspected misconduct in management

• f listed companies. These include power to:

 under s.29A SFCO:  ask for explanation of entries in books and

records

 inspect counterparty books to confirm

questionable transactions

9

Enforcement Powers (2)

 obtain working papers of auditors  access banking records  Under s.30 SFCO: inspect matters relating to

associated corporations that are not licensed intermediaries

 under s.33 SFCO: SFC’s investigation

powers to be extended to cover intermediaries and persons in management in respect of suspected misconduct

10

Disciplinary Powers

 Current disciplinary sanctions for licensed

intermediary misconduct limited:

 private or public reprimand  revocation or suspension of registration or

license

 Need fuller range of disciplinary tools to tailor

sanction to gravity of misconduct

 New power to

 Impose civil fines  Order partial suspension of business

11

Disciplinary Powers (2)

 Civil fines an effective sanction tool; adopted in

US since 1991

 UK FSM Bill also proposes civil fines by FSA

for misconduct of intermediaries

 Legislation will set a maximum amount that the

SFC may fine

12

Market Manipulation

 Market manipulation activities are currently

criminal offences

 Activities harm market, but difficult to prove

beyond reasonable doubt and obtain conviction

 Criminal sanctions not effective as deterrent  Need to consider effective strategy to tackle

market manipulation

13

Market Misconduct under the Bill

 Market manipulation is one form of market

misconduct, like insider dealing

 All forms of market misconduct (affecting the

market as a whole) will be dealt with by Market Misconduct Tribunal (MMT)

 Civil standards of proof apply  Conduct involving specific acts of fraud against a

victim will remain criminal and dealt with by Court

 Suspected cases of market misconduct must first be

referred to DoJ

14

Market Misconduct Tribunal

 Based on successful model of Insider Dealing

Tribunal

 Headed by High Court Judge + two market

practitioners

 Civil sanctions for market misconduct:

 Disgorgement of profits made/losses avoided; and  Pecuniary Penalties of up to the higher of:  3 times profits/losses, or  HK $10,000,000

15

Licensing Regime

 Currently, registration by categories depending

• n business functions:

 securities dealer  commodities trading dealer  leveraged foreign exchange trader  investment adviser  commodities trading adviser

16

Market innovation breaks down categories

 Categorization breaking down in face of product

and market innovations and investor sophistication

 Current intermediaries dealing with securities &

futures need 4 separate licences

 For HK to stay ahead and remain competitive:

 industry intermediaries must have the

knowledge and expertise

 Regulatory regime must minimize the

administrative burden on our market

17

New Licensing Regime

The Bill will provide:

 Single licence, specifying scope of permitted

business

 Activities within different categories of

permitted business redrawn to follow actual practice, with grandfathering provisions for present registrants

 Exempt status to authorized institutions only

18

New Licensing Regime (2)

 Professionals (trading as principals) continue not

to need licence but subject to certain reporting and Code of Conduct requirements

 Licensed persons to be supervised by at least two

responsible officers

 Licensed status limited to corporations only -

existing sole proprietorships and partnerships given 2 years to incorporate

19

Electronic Trading Systems

 Advent of electronic communications networks

(“ECNs”) and automated trading systems (“ATSs”) a global phenomenon

 Our regulatory regime must provide environment

to

 facilitate growth  suppress fraud and misconduct  reduce systemic instability and risks

20

Regulatory Approach and Experience

 Experience of SFC and other regulators - no

single set of rules is appropriate for the whole range of facilities and services on offer

 US - regulate as dealers, but imposes additional

requirements on disclosure, admission of system participants, etc. In 1998, US began to also register ATSs and ECNs as exchanges

 UK - regulate as service company, broker or

recognized investment exchange, with level of regulation increasing accordingly

21

Regulation of Electronic Trading Systems

The Bill will:

 Adopt flexible approach to regulation of ATSs &

ECNs

 SFC to have sufficient range of powers to

facilitate and regulate these trading facilities

 Purpose of regulation is to ensure operations of

an ATS/ECN are fair, efficient and transparent and its risks are properly managed

22

Disclosure of Interests in Securities

 Information is at the centre of an efficient market

 enables investors to make better decisions  maintains level playing field

 HK regime is disclosure-based but there is room

for further enhancements to meet best international standards

 In June 1996 SFC published public consultation

paper with proposals for further disclosure

23

Disclosure of Interests in Securities (2)

 The Bill will

 Lower initial shareholding disclosure

threshold - from 10% to 5%

 Shorten disclosure notification period - from

5 to 3 days

 Increase disclosure requirements for

derivative products

 Level disclosure obligations of local and

• verseas trustees and investment advisers

24

Statutory Backing for Listing Rules and Liability for Misstatements

 Two essentials of every vibrant securities market:

 compliance with listing rules  full and accurate disclosures

 SFC embarked on study in 1998 on giving

“teeth” to the Listing Rules

 Bill will authorize SFC to apply for court order

 compelling compliance with Listing Rules;

failure to comply will constitute contempt of court

25

Statutory Backing for Listing Rules and Liability for Misstatements (2)

 disqualifying director of a listed company

who has wilfully or persistently failed to discharge his duties under Listing Rules or the Takeovers Code

 Bill will also establish civil liability for

 omissions and misstatements made under the

Listing Rules or Takeovers Code

 failure to proceed with an announced

takeover offer without consent of the Takeovers Executive or Panel

26

Transparency and Accountability

 SFC strongly believes that the regulator should

be both transparent and accountable, subject to requirements of secrecy and confidentiality

 Checks and balances on SFC’s functions and

powers:

 clear objectives, functions and powers will

provide benchmarks for measuring SFC’s performance

27

Transparency and Accountability (2)

 Judicial reviews of SFC decisions  Complaints to the Ombudsman on SFC’s

action

 DOJ to conduct independent review of

possible prosecutions and market misconduct cases

28

Securities and Futures Appeals Tribunal

 Existing Securities and Futures Appeals Panel

will be upgraded to a Securities and Futures Appeals Tribunal (SFAT)

 Headed by High Court Judge with prominent

market practitioners

 Conduct full merits review of all SFC’s licensing

and disciplinary decisions (including decisions to reprimand)

 SFAT has power to affirm, vary or substitute

SFC’s decision

29

Other Safeguards under Bill

Bill will continue to ensure due process and provide procedural safeguards to those regulated Investigations:

 Before investigation, SFC must have reason to

suspect fraud, insider dealing, misconduct, etc.

 Persons investigated to be told of their right

against self incrimination

 Search warrant required for SFC officer to

enter premises and seize documents

30

Other Safeguards under Bill (2)

Discipline:

 No action to discipline taken without first

giving the person affected the opportunity of being heard

 All decisions to be in writing, stating reasons  Decisions fully appellable on the merits to

SFAT

31

Transparency of SFC’s internal due process

 Since its inception in 1989, SFC has consistently

upheld regulatory standards

 SFC’s powers subject to rigorous checks and

balances

 Secrecy obligations result in lack of transparency in

SFC’s work and whether it has acted consistently and impartially

32

Independent Process Review

 Separately from the Bill, an independent Process

Review Panel (PRP) will be established

 PRP to review the SFC’s investigatory

procedures and other process, to ensure that SFC

 follows proper due process procedures  acts impartially and consistently

33

Independent Process Review (2)

 Panel will comprise

 majority of independent, prominent public

persons

 some non-executive SFC directors

 Panel members to be appointed by Chief

Executive and to report directly to Financial Secretary

34

Public Consultation

 SFC seeks public and market views on proposed

changes

 Consultation Paper on Proposed Licensing

Regime will be issued on 30 June 1999

 An Overview Guide on entire Bill and detailed

guides on the major changes in different parts of the Bill will be issued on 5 July 1999

 The Government and SFC will take into account

comments from the public in finalizing proposed changes

35

The Way Forward

 Bill intended to be introduced in LegCo in

December 1999

 We need to work together to:

 support and foster Hong Kong’s drive for

excellence in financial services

 secure Hong Kong's position as a premier

international financial centre