Press Release
LCQ20: Regulatory framework in place for intermediaries
Wednesday, May 10, 2000
Following is a question by the Hon Sin Chung-kai and a written reply by the Acting Secretary for Financial Services, Mrs Rebecca Lai, in the Legislative Council today (May 10):
Question
Will the Government inform this Council whether it will request the Securities and Futures Commission to:
(a) study the relevant regulatory requirements in advanced countries in America and Europe and, by reference to such requirements, draw up guidelines to prohibit intermediaries of the stock and futures markets from publishing statements or market analyses, or making trading recommendations to their clients for the purpose of influencing the prices of securities and futures, and thereby seeking advantage; and
(b) amend the relevant codes and guidelines to the effect that intermediaries are required to declare regularly the securities and futures trading activities they, their employees and representatives conduct as principals, and impose sanctions against those intermediaries failing to comply with such requirements?
Reply
Madam President,
(a) The business and conduct of registered intermediaries are subject to the regulation of the Securities and Futures Commission ("SFC") on the basis of the relevant ordinances and subsidiary legislation, as well as codes and guidelines promulgated by the SFC.
There are specific provisions in the laws which prohibit manipulation of the market and the creation of a false market in the trading of securities and futures contracts on the stock market and futures market. The ambit of these legal provisions is similar to that of laws in US and UK, although the provisions are not identical.
Section 135 of the Securities Ordinance (Cap. 333) prohibits any persons from circulating or disseminating any statement or information for the purpose of manipulating the prices of any securities traded on the Stock Exchange of Hong Kong. Section 138 of the same Ordinance also prohibits any person from making any false, misleading or incomplete statements of a material nature for the purpose of inducing the sale of the securities of any corporation. There are also similar provisions in the Commodities Trading Ordinance (Cap.250) with respect to the trading of futures contracts. Any person including market intermediaries who contravenes these provisions shall be guilty of an offence and shall be liable on conviction on indictment to a fine and imprisonment.
In order to strengthen the deterrence against false public disclosure, the Securities and Futures Bill, recently published in the form of a White Bill, introduces a dual civil and criminal regime in combating market misconduct. Clauses 287 and 291 of the Bill introduce clearer definitions of, and enhance the sanctions against, the disclosure of false information inducing transactions in securities or futures contracts. Moreover, Clauses 200, 268 and 295 explicitly empower the investors to protect themselves through civil actions to seek compensation for loss as a result of such misconduct. With these new regulatory measures, we hope to send a clear message to market participants that they should recognise their duty of care in ensuring that the statements they make to the public are not false.
The Bill is under consultation until end June. We welcome public comments to refine these provisions to better achieve our policy objective to improve the quality of public disclosure in the securities market.
As regards the Code of Conduct For Persons Registered with the SFC ("Code of Conduct"), one of the seven principles set out therein is the principle of "honesty and fairness". These seven principles are consistent with the principles developed by the International Organisation of Securities Commissions ("IOSCO") and adopted by most of the developed markets.
The Code of Conduct provides, among other things, that a registered person (Note) should act honestly, fairly and in the best interest of his clients and the integrity of the market. He should try to avoid conflicts of interest, and when these cannot be avoided, should ensure that his clients are fairly treated. The Code of Conduct also provides that where a registered person advises or acts on behalf of a client, he shall ensure at all times that any representations made and information provided to the client are accurate and not misleading.
In addition, the Management, Supervision and Internal Control Guidelines for Persons Registered with or Licensed by the SFC ("Internal Control Guidelines") requires a firm in the business of offering investment advice for remuneration to adopt measures and procedures to ensure that such advice is based on thorough analysis, taking into account available alternatives, and that such advice is appropriate for the relevant client.
Contravention of the Code of Conduct and the Internal Control Guidelines could be liable to civil sanctions by the SFC.
The SFC will continue to keep our regulatory regime under review, taking into account developments and practices in other major markets.
(b) On the question of disclosure, the Code of Conduct requires a registered person to make disclosure to client, wherever he has a material interest in a transaction with or for a client, or a relationship which gives rise to an actual or potential conflict of interest in relation to such transaction. Unless he has disclosed that material interest or conflict to the client and has taken all reasonable steps to ensure fair treatment of the client, he shall neither advise, nor deal in relation to that transaction. In addition, the Code of Conduct also provides that a registered person shall not knowingly deal in securities or futures contracts for another registered person's employee unless he has the written consent of the second registered person (i.e. the employer).
The Internal Control Guidelines also requires the management of intermediaries to establish procedures to ensure that its staff's trading activities are not prejudicial to the interests of its clients. Staff members are required to disclose to the intermediary, on joining and regularly afterwards (at least semi-annually), details of holdings and trading activities in which they have an interest in relation to specific securities, futures and other investment products in which the firm deals in or in respect of which the firm acts as an investment adviser or commodity trading adviser. All transactions for staff accounts must be separately recorded and diligently monitored by independent senior management.
The Intermediaries Supervision Department of SFC conducts routine inspections on registered intermediaries to ensure compliance with the relevant codes and guidelines mentioned above. If there are proven breaches to the relevant codes and guidelines, SFC may, pursuant to section 56 of the Securities Ordinance or section 36 of the Commodities Trading Ordinance, initiate inquiry against the registered person and if it thinks fit, revoke or suspend the person's licence or reprimand him.
The Securities and Futures Bill also introduces new regulatory requirements to upgrade the quality of intermediaries' service. Under the proposed licensing regime, the Bill will impose a greater responsibility upon the senior management of intermediaries in ensuring compliance with important regulatory requirements by their staff through more effective disciplinary measures, and for the more critical requirements, appropriate legal sanctions. Specifically, SFC will publish Business Conduct Rules under Clause 159 of the Bill to spell out more clearly the requirements governing the fitness and properness of the conduct of intermediaries in ensuring that they are executing clients' orders in the best interest of their clients and with due regard to any possible conflict of interest.
As the current regulatory regime already requires disclosure by registered persons in cases of actual and potential conflicts of interest and such disclosure could be subject to the inspection by the SFC, it is considered that there is no apparent need at present to require on a compulsory basis all registered persons to disclose generally or regularly their proprietary and personal dealing activities to the SFC. The SFC will keep the regulatory regime under review and propose improvements where deemed necessary and appropriate.
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Note: A "registered person" is a person registered under the Securities Ordinance (Cap. 333) or the Commodities Trading Ordinance (Cap. 250) as a dealer, dealing partnership, dealer's representative, investment adviser, commodity trading adviser, investment advisers' partnership, investment representative, and commodity trading adviser's representative.