Since the enactment of the Securities and Futures Ordinance (the "SFO") in March this year, the Securities and Futures Commission (the "SFC") sped up the public consultation process for many pieces of subsidiary legislation to be enacted under the SFO. The new regulatory regime under the SFO is expected to be launched early next year.
The following is a highlight of some major SFO subsidiary legislation put to public consultation by the SFC in the past quarter.
• Increased SFC governance over listed companies
The Securities and Futures (Transfer of Functions – Stock Exchange Company) Order sets out increased SFC involvement in the listing process and governance over listed companies.
Under the new regime, listed companies disseminating information to the public under applicable rules will have to file a copy of the disclosure materials with the SFC. The requirement extends to prospectuses and listing documents. In practice, however, there will be a "deemed filing" procedure whereby companies submitting documents to the Stock Exchange with an authorisation to forward them to the SFC will be deemed to have complied with the SFC filing requirement.
The SFC will also reserve the power to comment on a draft prospectus, and object to a company’s listing if the company does not make sufficient disclosure or fails to observe all applicable rules, or if the listing would not be in the interests of the investing public.
• Price stabilisation
Under the SFO, carrying out price stabilisation or creating a false market in securities constitutes market misconduct and, potentially, a criminal offence. The Securities and Futures (Price Stabilising) Rules, however, provide a "safe harbour" for price stabilisation activities carried out in connection with certain types of offers, which satisfy certain requirements.
For the safe harbour provisions to operate, there must be a public offer with a Hong Kong tranche of not less than HK$ 100 million in size. Both primary and secondary offers can qualify if certain conditions are met.
For permissible stabilisation activities, a stabilising manager must be appointed, who will have oversight and record-keeping responsibilities. Also set out are operational rules, such as the setting of upper limits for stabilising bids, the time period during which stabilisation is allowed and requirements to disclose information about the stabilisation activities.
• Short selling
"Naked" short selling of securities (i.e. selling of securities where the seller does not have an unconditional right to vest the securities in the purchaser) through the Stock Exchange is generally prohibited under the SFO. The Securities and Futures (Short Selling Exemption and Stock Lending) Rules will provide an exemption for market makers when they make a market in securities or hedge their market-making positions.
Currently, "covered" short selling (e.g. where the seller borrows securities to fulfil his settlement obligations) is permitted but is subject to certain reporting requirements. The proposed rules will provide exemptions from such reporting requirements.
• Leveraged foreign exchange trading
Leveraged foreign exchange trading is a regulated activity both at present and under the SFO in future. The Securities and Futures (Leveraged Foreign Exchange Trading – Exemption) Rules excludes from regulation certain foreign exchange trading activities carried out by three specified classes of persons:
a) corporations whose principal business is not leveraged foreign exchange spot transactions, or where the average principal amount involved in such transactions is not less than HK$7.8 million;
b) licensed persons who are performing an act in connection with the sale, purchase or transfer of listed currency warrants; and
c) issuers of listed currency warrants and companies belonging to the same group, provided certain conditions are met.
• Disclosure of interests
The SFO requires a shareholder with an interest in 5% (as opposed to the current 10%) or more in the shares of a listed company to disclose his interest. The Securities and Futures (Disclosure of.Hong Kong corporate/banking September/October 2002 5 HS Interests – Securities Borrowing and Lending) Rules provide simplified disclosure rules and exemptions for specific classes of persons known to be active in the securities borrowing and lending business, provided certain conditions are met. These persons are SFC-approved custodians or lending agents, substantial shareholders who lend through such lending agents, and approved brokers and dealers.
Also put to public consultation was the Securities and Futures (Disclosure of Interests – Exclusions) Regulation. These will replace the current Securities (Disclosure of Interests)(Exclusions) Regulation, which excludes certain interests from the general duty to disclose. The SFC took advantage of this opportunity to amend and rationalise the current rules, for example, by deleting exemptions which in practice do not serve any purpose.
The above rules and regulations are at different stages of the public consultation process. When the final drafts are ready, they will be presented to the legislators for enactment. Under the current plans, the Securities and Futures Ordinance and all the subsidiary legislation related to it will take effect on the same date.
© Herbert Smith 2002
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