Legislation

Composite Securities and Futures Bill

On 16 April 1996, after many years of deliberation and discussions with various interested parties, the SFC published a Consultation Paper on a Draft for a composite Securities and Futures Bill. The draft Bill, when enacted, will repeal and replace eight of the ordinances currently administered by the SFC. It will enhance the investor protection functions of the SFC whilst promoting a fair, efficient, competitive and informed market, standardise the licensing regime applicable to dealers and advisers in the securities and futures industry, and generally update and modernise the territory's securities legislation in keeping with Hong Kong's status as an international financial centre.

The publication of the proposed draft Bill was followed by a period of consultation, originally set at three months but later extended to seven months. During that period, some 20 private briefings and public seminars were given by the Chairman and senior executives of the SFC and approximately 1,000 persons attended these events. At the same time, 50 written submissions were received from constituents of the financial industry; the SFC had agreed with the thrust of many of the representations made and has modified the draft Bill accordingly. In other cases, after giving careful consideration, the SFC either maintained its views, or, whilst sympathetic to the sentiments expressed, decided that they were outside the context of the Bill and should be placed in a "wish list" for further consideration and discussion with the industry at a future date. The SEHK also made extensive comments and observations. The SFC considered the exercise to be of such importance that on 6 December 1996 a further paper entitled the Main Proposed Revisions to the Draft Bill was presented to the market with a one month consultation period.

Legal Services Division staff are currently discussing with the Financial Services Branch with a view to pursuing the legislative procedure as soon as possible.

Securities (Disclosure of Interest) Ordinance

The Legal Services Division has been working with the other operational Divisions on the proposed amendments to this Ordinance. It is intended to consult the public when the amendments are formulated.

Personal Data (Privacy) Ordinance

The Personal Data (Privacy) Ordinance (PDPO) was enacted in 1995 with the purpose of protecting personal privacy and of facilitating access to personal data. It introduces six data protection principles in relation to the collection, quality, use, security and access of personal data and to the publication of the data user's policy on data protection. The substantive provisions of the Ordinance came into effect on 20 December 1996.

The application of the Ordinance is of considerable significance to the SFC which obtains, uses and retains vast quantities of personal data in the performance of its functions as a financial regulator under the various ordinances which it administers. At the same time, the Ordinance provides exemptions by way of recognising other competing public interests, such as the detection and prevention of crime and the maintenance of the stability of the financial markets, and the SFC as a financial regulator is exempt from certain of the statutory requirements. The Division has worked closely with all other SFC divisions in reviewing their respective operational systems and documentation to ensure compliance with the Ordinance and in organising briefings, in cooperation with the Privacy Commissioner's Office, to assist operational staff to address the specific requirements imposed.

Amendments to Ordinances and Subsidiary Legislation

The Securities and Futures Commission Ordinance (SFCO) was amended to introduce approval requirements for changes in substantial shareholdings in a registered person that is a corporation. A new s26A sets out the restrictions and requirements applicable to persons acquiring substantial shareholdings in corporate registered persons. Similar amendments were also made to the Leveraged Foreign Exchange Trading Ordinance (LFETO).

In order to encourage trading in the financial product, the Securities and Futures Commission (Levy)(Futures Contracts) Order was amended to provide for a nil levy for transactions in the currency futures market of the Futures Exchange.

The SFC is empowered by the Securities Ordinance (SO) to prescribe limits on the number of stock options contracted on the SEHK that may be held by any person, and such limits are prescribed in the Schedule to the Securities (Exchange - Traded Stock Options) Rules. The Schedule was amended twice in the year under review to include 15 new option classes.

The Commodities Trading (Trading Limits and Position Limits) Rules were amended to correspond with parallel rule changes made by the Hong Kong Futures Exchange (HKFE) regarding limits on the amount of trading which can be transacted by any person under futures contracts.

The Securities and Futures Commission (Annual Returns) Rules and the Leveraged Foreign Exchange Trading (Annual Returns) Rules were amended to give the SFC the discretion to accept annual returns from registrants of a common corporate registrant on a common anniversary date.

Litigation and other non-criminal contentious proceedings

Mandarin Resources Corporation Limited (MRC)

The Division has been responsible for the carriage of the petition against Mandarin Resources Corporation Ltd and its controlling shareholder which was filed by the SFC in the High Court on 25 June 1996, following consultation with the Financial Secretary. The petition seeks a number of remedies, including redress for the minority shareholders of MRC arising from the manner in which the affairs of MRC are alleged to have been conducted and/or the winding-up of the company.

The Division has also been involved in protracted litigation arising from the above-mentioned petition proceedings relating to MRC and its controlling shareholder. Particular instances include the withdrawal by MRC of its application for leave to apply for judicial review of the SFC's decision in relation to the company's proposal that its shares resume trading on the SEHK and the permanent stay of a libel action against present and former SFC personnel. The Division continues to be involved in a number of other related proceedings.

The Division also provided legal advice to the Intermediaries Supervision Department regarding Canwell Forex International Ltd (see 1.46 - 1.50), Wei Xin Securities Ltd (see 1.51 - 1.54), Cheung Cheong Woon (see 1.55 - 1.57) and C K Securities Company (see 1.58 - 1.60).

Securities and Futures Appeals Panel

In the course of the year, there have been ten appeals to the Securities and Futures Appeals Panel against the SFC's decisions to revoke or suspend the registrations of registered persons. These appeals have yet to be heard.

Insider Dealing

During the year, the Division gave legal advice on whether the SFC should refer six cases of suspected insider dealing to the Financial Secretary, with recommendations that the cases be referred in turn by him to the Insider Dealing Tribunal. For further details, see paragraphs 3.32 - 3.45.

Criminal cases and disciplinary actions

In the year under review, there have been a large number of prosecutions involving short-selling, as well as unregistered dealing and breaches of the provisions of the Securities (Disclosure of Interests) Ordinance and the Protection of Investors Ordinance (PIO).

In June 1996, the SFC successfully prosecuted the first case of unregistered dealing under the LFETO.

In August 1996, the SFC brought a prosecution under the PIO in the first case which involved advertising on the Internet. The Defendant pleaded guilty at trial.

Other Advisory Services

Following the application by Emperor International Exchange (Hong Kong) Company Limited, in September 1994, for a licence under the Leveraged Foreign Exchange Trading Ordinance to conduct business as a leveraged foreign exchange trader, the Division was involved in advising Licensing Division at all stages up to the granting of the licence on 29 January 1997.

The Division provided legal advice to the Supervision of Markets Division in connection with the SFC's Consultation Paper on Internal Control Guidelines. In addition, proposals were submitted to the Supervision of Markets Divisions with regard to the Unified Exchange Compensation Fund.

The Division also provided general advisory service upon a wide range of matters including the drafting of Letters of Mindedness and Letters of Decision affecting the fitness and properness of registered persons in disciplinary inquires and prospective registrants, restriction notices and the admissibility and sufficiency of evidence in criminal prosecutions.

China related work

H-Shares Arbitration Mechanism

The existing dispute resolution mechanism for H-shares is based upon the legal framework prevailing before the change of sovereignty which makes provisions for the enforcement of arbitral awards originating from China and Hong Kong. Arbitration of disputes relating to H-shares may be held at the China International Economic and Trade Arbitration Commission (CIETAC) or the Hong Kong International Arbitration Centre (HKIAC) at the choice of the parties to the dispute. After 1 July 1997, with the establishment of the Hong Kong Special Administrative Region under Chinese sovereignty, the New York Convention for the enforcement of arbitral awards will no longer be applicable as between China and Hong Kong.

The Division is working closely with government departments and agencies in China and Hong Kong in an effort to review the relevant legal provisions in the two jurisdictions to ensure that the H-share dispute resolution mechanism may continue to be fully implemented and available to investors.

The Division continues to maintain a close working relationship with the China Securities Regulatory Commission on issues of mutual interest.

The Division also continues to be active in conducting seminars and briefings on laws relating to securities and futures regulation for PRC regulators who are seconded to Hong Kong under the terms of the respective Memoranda of Regulatory Cooperation between Hong Kong and the PRC and other visiting professionals and academics. The Division also monitors the development of PRC legislation pertaining to securities, futures, financial and other matters related to its work and prepares summaries for internal use, which assist in enhancing understanding of the two different legal systems and regulatory concepts essential for the efficient monitoring of cross-border investment activities.