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 1
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 oriented 2
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 3
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 4
Regulatory objectives Clear objectives constitute vision and purpose of our regulatory regime Establish benchmarks for our performance Set the principles by which we exercise our powers Increase transparency and accountability to the public 5
5 key regulatory objectives Maintain and promote fair, efficient, transparent and orderly securities, futures and related financial markets Promote public confidence in and understanding of 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 6
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 7
Enforcement Powers Bill will give SFC the necessary powers to effectively supervise licensed intermediaries and investigate suspected misconduct in management of 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 8
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 9
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 10
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 11
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 12
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 13
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 14
Licensing Regime Currently, registration by categories depending on business functions: securities dealer commodities trading dealer leveraged foreign exchange trader investment adviser commodities trading adviser 15
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 16
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 17
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 18
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 19
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 20
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 21
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 22
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 overseas trustees and investment advisers 23
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 24
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 25
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 26
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 27
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