Press Release
LCQ14: Investigatory powers of SFC
Wednesday, May 26, 1999
Following is a question by the Hon Cheung Man-kwong and a reply by the Secretary for Financial Services, Mr Rafael Hui, in the Legislative Council today (Wednesday):
Question :
Section 29A of the Securities and Futures Commission Ordinance (Cap. 24)("SFCO") empowers the Securities and Futures Commission ("SFC") to inspect a listed company's books and records if its directors and officers are suspected of impropriety in the management of the company's affairs. According to the SFC's 97/98 Annual Report, the power was invoked on two occasions during the year. In this connection, will the Government inform this Council:
(A) whether it knows
(i) the reasons for the SFC to have invoked such power in 1997/98 on two occasions only;
(ii) of the circumstances under which the SFC will exercise such power, or decide to refer the cases to the Financial Secretary for determining whether an inspection should be initiated under the Companies Ordinance ("CO")(Cap. 32);
(iii) Whether the SFC is subject to any constraint in invoking such power; if so, what the constraints are;
(iv) Whether the SFC has exercised such power since April 1998 to inspect listed companies with financial problems; if so, of the number of companies inspected and the progress of such inspections; if not, the reasons for that? and
(B) of the criteria the relevant authorities adopt in determining whether inspections should be initiated on companies suspected of impropriety, under the SFCO and CO?
Madam President,
(A)(i) Since the introduction of the powers under section 29A of the Securities and Futures Commission Ordinance ("SFCO") in 1995, there have been 7 inspections conducted of listed companies' books and records, of which 2 are instigated in the 1997-1998 financial year. Inspection under section 29A can be initiated only under one of the four following types of circumstances stipulated under the law -
(a) it appears to the Commission that there are circumstances suggesting that the business of a company which is or was at the relevant time a listed company has been or is being conducted with intent to defraud its creditors, or the creditors of any other person, or otherwise for a fraudulent or unlawful purpose or in a manner oppressive to any part of its members, or that it was formed for any fraudulent or unlawful purpose; or
(b) it appears to the Commission that there are circumstances suggesting that persons concerned with the formation of the company or the management of its affairs have in relation to the formation of management been guilty of fraud, misfeasance or other misconduct towards it or its members; or
(c) it appears to the Commission that there are circumstances suggesting that its members have not been given all the information with respect to its affairs that they might reasonably expect; or
(d) if the Commission decides to provide assistance to investigate a matter relating to the company under section 59A (Section 59A of the SFCO empowers the SFC to conduct investigations into matters as per request by overseas regulators.) the circumstances giving rise or pertaining to the matter are, in the opinion of the Commission, of a nature similar to the circumstances giving rise or pertaining to a matter referred to in paragraph (a), (b), or (c).
Circumstances under (a) and (b) are fraud related and would invariably give rise to simultaneous Police or ICAC involvement. It has been considered redundant to examine matters that are already or likely to be pursued by these law enforcement agencies. Also, instances arising from (b) in relation to the formation of a company have been rare, due to the vetting procedures undertaken by sponsors, auditors, and the Listing Division of SEHK prior to any company being listed.
Circumstances under (c) appear to offer wide scope for invoking the investigatory powers. However, as listed companies are required to furnish financial information twice a year and are subject to scrutiny in respect of each corporate announcement they issue, there are many avenues for the Stock Exchange to request for such information. Investigative powers are only invoked if all attempts fail.
Circumstances under (d) are entir