SFO Subsidiary Legislation GazettedA

The SFC announces that the second batch of four items of subsidiary legislation necessary for the commencement of the Securities and Futures Ordinance (SFO) are gazetted today.

Together with the seven items published last week, 11 items have now been gazetted. More items will be gazetted next week.

The four items published in the Gazette today are:

Rules under the SFO (S&F stands for Securities and Futures)

1. S&F (Client Securities) Rules

2. S&F (Client Money) Rules

3. S&F (Associated Entities - Notice) Rules

Notice under the Companies Ordinance

4. Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) (Amendment) Notice 2002

A brief background of the rules and the notice is attached to the endnotes.

Background of the SFO

The SFO was enacted on 13 March 2002. It consolidates and modernises 10 existing Ordinances governing the securities and futures markets into a composite piece of legislation to keep the Hong Kong regulatory regime on a par with international standards and practices.

For effective regulation, the SFO provides flexibility in addressing changing market practices and global conditions by empowering the Chief Executive in Council, the Financial Secretary, the Chief Justice and the SFC to prescribe detailed and technical regulatory requirements as necessary by way of subsidiary legislation, to supplement the regulatory framework laid down under the primary legislation.  A total of 39 sets of subsidiary legislation have to be put in place for commencement of the SFO.

Each set of the draft subsidiary legislation has gone through a consultation process where appropriate.  The relevant rules or orders have been amended where necessary to reflect the comments received during the consultation.

On 22 February 2002, the House Committee of the Legislative Council established the Subcommittee on Draft Subsidiary Legislation to be made under the SFO. From March to October, the Subcommittee has held 12 meetings to study the subsidiary legislation in draft form.

Way forward

Once gazetted, the subsidiary legislation is subject to the LegCo negative vetting process, which takes seven weeks.

The subsidiary legislation will come into operation on the day appointed for the commencement of the SFO. An announcement of the date for commencement is expected to be made before the end of 2002.

The Gazette is available at the Government Publications Centre, and accessible on the website of the Government Printer or via the SFC’s website (under the SFO Section).

Ends

Notes to Editor:

1.   A brief background introduction of the rules and the notice

1.   S&F (Client Securities) Rules

The Rules prescribe the manner in which intermediaries and their associated entities must treat and deal with client securities and securities collateral received or held in Hong Kong. The Rules only apply to securities listed on the Stock Exchange of Hong Kong and interests in collective investment schemes authorized by the Commission.  Different provisions are included for different intermediaries and their respective associated entities, depending upon the type of regulated activity for which an intermediary is licensed or registered. The requirements, which are mainly drawn from the existing sections 81, 81A and 121AB of the Securities Ordinance (SO), also apply to associated entities. The concept of “associated entity” was introduced in the SFO as part of the package to impose direct regulation on companies which hold client assets of intermediaries. In the context of securities, this is designed to regulate the way nominee companies, operated by securities firms within the same group, treat and deal with client securities and securities collateral so that they match the standards to be expected from the intermediaries themselves, thereby according a greater degree of protection to investors.

2.   Securities and Futures (Client Money) Rules

The Rules prescribe the manner in which licensed corporations and their associated entities must treat and deal with client money of the licensed corporations received or held in Hong Kong. The Rules require licensed corporations and their associated entities to establish and maintain segregated accounts for client money in Hong Kong and generally to pay client money into such accounts within one business day of receipt. The Rules also specify the circumstances in which client money may be paid out of such segregated accounts. The requirements are mainly drawn from the existing section 84 and Division 6 of Part XA of the SO, section 46 of the Commodities Trading Ordinance (CTO) and section 23 of the Leveraged Foreign Exchange Trading Ordinance. These requirements will also apply to associated entities except where they are authorized financial institutions. Associated entities will now have to match the standards expected of licensed corporations themselves in relation to client money, thereby according a greater degree of protection to investors.

3.   Securities and Futures (Associated Entities - Notice) Rules

A regulatory gap appears to exist under current legislation in that a securities dealer can discharge his obligation to his client in respect of that client’s securities held in Hong Kong merely by registering those securities in the name of his nominee. To close this regulatory gap, section 164 of the SFO prescribes that only the intermediary, its associated entity (a term that would cover most nominees that hold client assets of an intermediary), and a person falling within the definition of “excluded person” (which includes an authorized financial institution) may hold client's assets in Hong Kong.  Section 165 of the SFO further requires a person to notify the Commission when it becomes or ceases to be an associated entity. The Rules supplement section 165 by prescribing the particulars that have to be submitted to the Commission together with the notification of becoming or ceasing to be an associated entity.

4. Companies Ordinance (Exemption of Companies and Prospectuses from Compliance with Provisions) (Amendment) Notice 2002

The Notice would replace the existing 1993 notice which exempts any mutual fund corporation authorized by the SFC under section 15(1) of the SO from compliance with the requirements of sections 38(1), 38(3), 342(1) and 342(3) of the Companies Ordinance (CO).   The existing notice will lapse when the SFO comes into force so it needs to be replaced. In authorizing a mutual fund corporation under section 104(1) of the SFO, the Commission, having regard to the features of the corporation, will impose conditions regulating, among other matters, the content and language of documents prepared for offering shares in the corporation to the public. Such conditions serve similar regulatory purposes to the requirements under the CO. Therefore, it is considered that it would be unduly burdensome to require mutual fund corporations authorized under section 104(1) of the SFO to comply with these CO provisions as well, hence the exemption.