Risk Disclosure Statements For Securities Traded on the Growth Enterprise Market

Recently, the Securities and Futures Commission (SFC) has received several recent reports of clients being allowed to trade on the GEM market without first having to sign a risk disclosure statement.

The SFC wishes to remind all registered dealers that risk disclosure statements must be executed with a client prior to that client buying shares on the Growth Enterprise Market (GEM). Moreover, registered dealers should ensure the risk disclosure statement is in a language the client understands, and should explain to the client its contents.

The SFC Code of Conduct for Persons Registered with the SFC, published in November 1999 (Code), specifically asked that registered persons must have a written Client Agreement that contains a risk disclosure statement. The risk disclosure statement pursuant to the Code is specified in the Schedule I to the Code. The Rules of The Stock Exchange of Hong Kong Limited (Exchange Rules) also require a Stock Exchange member, before accepting or operating a securities trading account for a client, to enter into a prescribed Client’s Agreement which contains a risk disclosure statement. This risk disclosure statement is specified in the Fifth Schedule to the Exchange Rules. This risk disclosure statement states, inter alia, that a registered person will not be able to effect the client’s instructions to deal in securities on GEM if this statement has not been signed or acknowledged by the client.

All registered dealers are reminded that under the Code, registered persons are expected to “know their clients” and as part of that process registered persons are required to have in place Client Agreements. The SFC will not consider that a Client Agreement is in place if it does not contain all its requisite components, such as a risk disclosure statement. The Code also states explicitly that registered persons shall comply with rules of any exchange of which he is a member.

The SFC require that registered dealers remain fit and proper in relation to the manner in which they conduct the business for which they are registered. In this regard, the SFC is guided by the principles and guidelines outlined in the Code. Great importance is placed on registered dealers being fit and proper, and the SFC reviews cases of registered dealers not being fit and proper most stringently. Disregard of requirements to ensure investor protection is not acceptable.