The enactment of the Securities and Futures Ordinance (the "SF Ordinance") on 13 March 2002 was an important landmark in the regulatory history of Hong Kong’s securities market, ending a decade of debate both within the industry and beyond. Although enacted, the SF Ordinance will not be effective until more than 30 pieces of subsidiary legislation also receive legislative consent.
The Ordinance consolidates and repeals 10 existing pieces of legislation, namely:
- the Securities and Futures Commission Ordinance
- the Commodities Trading Ordinance
- the Securities Ordinance
- the Protection of Investors Ordinance
- the Stock Exchanges Unification Ordinance
- the Securities (Insider Dealing) Ordinance
- the Securities (Disclosure of Interests) Ordinance
- the Securities and Futures (Clearing Houses) Ordinance
- the Leveraged Foreign Exchange Trading Ordinance
- the Exchanges and Clearing Houses (Merger) Ordinance
The SF Ordinance seeks to eliminate many uncertainties existing in the current securities legislation and to contribute to modernising the Hong Kong market. However, many aspects of the Ordinance have been, and are likely to remain, controversial. Some issues, such as the delineation of the powers of the Securities and Futures Commission (the "SFC") and the role of the executive arm of the Government, have been politically sensitive.
Although in many cases the current law has been re-stated with no more than minor amendments and clarifications, the SF Ordinance constitutes a wholesale re-organisation of Hong Kong’s securities laws. Many rule changes are subtle and may appear to be insignificant, but can in fact have far-reaching consequences. The market needs to re-educate itself on many areas of the law and new practices may develop over time. It will be interesting to see what approach the SFC and other relevant authorities will take on problems and uncertainties that arise during the period of re-adjustment, before the market is fully conversant with the new regime.
The reforms introduced by the SF Ordinance range from enhancement of the powers of the SFC, setting up a new Market Misconduct Tribunal, re-setting standards of practice for market professionals, to amending various operational requirements to promote market transparency, investor protection and overall fairness.
There will be a substantial restructuring of the licensing regime for financial intermediaries operating in the Hong Kong market. This involves, among other things, introducing a single-licence regime, re-classifying and re-stating the functions for which a licence is required, revising the procedures for institutions and persons applying for a licence to carry out regulated activities, and amending the rules relating to the financial resources of such intermediaries.
There will also be certain rule changes regarding the business conduct of financial intermediaries, which will have repercussions on their daily operations. For example, rules applying to offers of investments, short selling of securities, holding of assets on behalf of clients and the keeping of various records by intermediaries will be re-arrange. Certain activities, such as insider dealing, price rigging and false trading, will be defined as market misconduct. Legislative control will be tightened up, especially in terms of the civil and criminal sanctions that may be imposed on persons guilty of such misconduct. For example, insider dealing, hitherto subject only to disciplinary proceedings of the Insider Dealing Tribunal, will constitute a criminal offence as well as give rise to civil liabilities under the SF Ordinance.
Other important areas of change include the overall regulation of various exchanges and clearing houses, the investor compensation scheme and the rules on disclosure of various interests and positions held in the share capital of Hong Kong-listed companies.
As at the time of writing, no official schedule has been released for the formal launch of the new laws, although it is generally expected that the SF Ordinance and its subsidiary legislation will come into effect within a few months.
© Herbert Smith 2002
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