Securities & Futures Commission of Hong Kong

SFO and You

Q1:

What is the SFO?

A:

Effective 1 April 2003, the Securities and Futures Ordinance (SFO) consolidated and modernised the 10 previous ordinances regulating the securities and futures markets in Hong Kong. The SFO provides a clear and user-friendly regulatory framework for a fair, efficient and transparent market and ensures that Hong Kong’s market regulation is on par with international best practice, affords appropriate protection for investors and facilitates market development. 

Q2:

What does the SFO mean to you as an investor?

A:

The SFO and its subsidiary legislation include a number of initiatives to protect investors’ interests and defend their rights.

Investor compensation arrangements

Q3:

What are the investor compensation arrangements under the SFO?

A:

The SFO provided for the establishment of the Investor Compensation Fund to compensate investors who suffer pecuniary losses as a result of defaults of licensed intermediaries or authorized financial institutions occurring on or after 1 April 2003. The Fund is administered by the Investor Compensation Company Limited (ICC), an independent company responsible for receiving, assessing and determining claims against the Investor Compensation Fund, making payments to claimants and pursuing recoveries against defaulting licensed intermediaries or authorized financial institutions.

The compensation limit is $150,000 per investor for trading in securities and futures contracts, respectively. For joint accounts, each account holder is subject to a maximum compensation limit of $150,000.

Q4:

How does the per-investor compensation limit work?

A:

Example 1: If Mr A holds shares of $250,000 with Blue Company and has deposited $100,000 with the firm for trading futures contracts, what is the compensation limit for Mr A if Blue Company defaults?

Based on the per-investor compensation limit of $150,000 for trading in securities and futures contracts respectively, the maximum payments for Mr A's claim would be $150,000 for shares and $100,000 for futures contracts, totalling $250,000.

Example 2: If Ms B has two accounts with White Company holding shares of $120,000 and $140,000 respectively, what is the maximum compensation for Ms B if White Company defaults?

Ms B would be entitled to a maximum payment of $150,000 as the compensation limit is applied on a per-investor basis regardless of how many accounts a person has at the defaulting intermediary.

Example 3: If Mr and Mrs C have a joint account with Red Company holding shares of $1 million, what is the maximum compensation for each of them if Red Company defaults?

Mr and Mrs C could each claim a maximum of $150,000 compensation as the compensation limit is applied on a per-investor, rather than a per-account, basis.

Transparent market disclosure

Q5:

What are the disclosure requirements under the SFO?

A:

Disclosure requirements are contained in Part XV of the SFO. An outline providing guidance on them can be found on the SFC website. Key requirements include the following:

  • the notification period for those with a notifiable interest is three business days;
  • the disclosure threshold for substantial shareholders is 5%; and
  • further movements which take their interests through a whole percentage level (eg, from 5.9% to 6.2%) should be disclosed.

Example 1: Where the holding of a substantial shareholder increases from 5.9% to 6.2%, notification will be required as the change results in the interest crossing over a whole percentage number, ie, 6%. But where the interest increases from 6.1% to 6.9%, no disclosure will be necessary.

Substantial shareholders must disclose short and long positions separately and these cannot be netted off. A person with a short position will first be required to make a disclosure if the percentage level of his short position reaches 1% or more. Thereafter, as with long positions, a disclosure is only prompted by a change that results in the short position crossing over a whole percentage number which is above 1%, or by the substantial shareholder ceasing to have a short position of at least 1%.

Example 2: Where a substantial shareholder takes a short position of 1.2%, disclosure will be required as it is above 1%. Where the short position increases from 1.2% to 1.9%, no disclosure will be prompted. But where the short position reaches 2.1%, disclosure will be required as the change results in the short position crossing over a whole percentage number, ie, above 2%. Disclosure will also be prompted where the short position is closed out.

There is no disclosure threshold for directors and chief executives of listed companies, who must disclose interests or short positions in shares and debentures of their company and any associated company of that company.

In addition, substantial shareholders and directors are required to disclose their interests in shares arising under all types of derivatives and any change in the nature of an interest in shares (eg, on exercise of an option). Such interests must be included when calculating the percentage level of a substantial shareholder's and a director's interest. 

Q6:

What is the reporting procedure?

A:

One of six standard disclosure of interest forms must be completed and sent to both The Stock Exchange of Hong Kong Limited (SEHK) and to the listed company concerned. The forms along with instructions can be downloaded from the SFC website or the HKEx website.

Combating market misconduct

Q7:

How are cases of market misconduct dealt with under the SFO?

A:

The Market Misconduct Tribunal (MMT) handles civil cases of all forms of market misconduct in addition to insider dealing, including market manipulation, price rigging and related abuses, and the dissemination of false or misleading information about securities or futures contracts. The MMT decides cases on the lower civil standard of proof and can impose a range of civil sanctions such as issuing disgorgement of profits, "cease and desist", and "cold shoulder" orders as well as disqualifying a person from directorship or management of a company.

As an alternative to civil proceedings, all forms of market misconduct are subject to criminal prosecution which may result in more severe penalties on conviction, including up to 10 years' imprisonment or a fine of up to $10 million.

Q8:

Is suspected market misconduct subject to civil proceedings before the MMT or criminal prosecution?

A:

The SFC can refer a report of suspected market misconduct after an investigation to either:

  • institute proceedings before the MMT; or
  • to the Department of Justice to consider criminal proceedings on indictment.

The decision to choose either the criminal or civil route will be made in accordance with the Department of Justice's Prosecution Policy. The SFC can also summarily prosecute less serious market misconduct cases in the Magistrates' Court.

Dual filing regime

Q9:

What is the dual filing regime under the SFO?

A:

The dual filing regime established the SFC as the statutory regulator of corporate disclosures. Listing applicants and listed companies are required to file their disclosures and listing application materials with both SEHK and the SFC.

To facilitate compliance and avoid additional costs, companies and applicants can file the listing application and disclosure materials with SEHK only, provided that they have pre-authorized SEHK to forward the documents to the SFC. The SFC's vetting of the listing application will not cause any delay in the process as it will run concurrently with SEHK's consideration of the listing application under its own rules. Listed companies' public disclosures will not be subject to the SFC's pre-vetting. Thus, there will be no delay in disseminating the information.

The dual filing arrangements assist us in using our investigatory powers and, where appropriate, in prosecuting those who intentionally or recklessly provide false or misleading information.

Q10:

What are the respective roles of the SFC and SEHK?

A:

SEHK is the frontline regulator of all listing-related matters and of issuers listed on its markets. It serves as the primary point of contact for listing applicants and listed companies.

The SFC exercises its investigatory and prosecution powers against persons filing false or misleading information. It is able to comment on the draft listing documents and related disclosure materials, and may require further information to be provided. If the information provided in these documents is insufficient or misleading, the SFC has a reserve power to object to the company's listing application.

For more on their respective roles, please refer to the Memorandum of Understanding Governing Listing Matters between the SFC and SEHK.

Q11:

Which regulator handles complaints against listed companies?

A:

As the frontline regulator of all listing-related matters, SEHK has primary responsibility for handling complaints of suspected misconduct in respect of the Listing Rules. You should first approach SEHK to lodge a complaint against a listed company, except in relation to takeovers and mergers which are governed by codes administered by the SFC.

Redress through civil courts for market misconduct

Q12:

How do I seek redress for market misconduct under the SFO?

A:

You have statutory rights of action through the civil courts if you have suffered financial loss caused by any form of market misconduct. The MMT's findings in relation to market misconduct will be admissible in evidence in a private civil action. In order to succeed in such a claim, the court has to be satisfied that it is "fair, just and reasonable" that compensation should be paid in the circumstances of the case.

Q13:

Are criminal convictions for market misconduct admissible in evidence?

A:

Convictions are admissible in evidence for the purpose of proving that an offence was committed, but only where relevant to the issues in a private civil action. The courts tend to judge relevance strictly. A conviction for market misconduct would usually be relevant to a private action by an investor if it is related to the same event.

Q14:

When can I institute proceedings for compensation for loss caused by market misconduct? Is there any time limit for exercising my right?

A:

You can institute proceedings at any time after your loss. It is not necessary to wait for the findings of the MMT or a court, although it would help your case if there were such findings.

You have to exercise your private right of civil action within six years from the date on which the act of market misconduct occurred.

Q15:

Who can be sued in proceedings for compensation for loss caused by market misconduct?

A:

The following persons could be liable to pay compensation for loss resulting from market misconduct:

  • any person who has committed a relevant act in relation to the commission of market misconduct;
  • directors of a company which has committed market misconduct with their consent or connivance; or
  • other persons who have assisted or connived with another person in committing market misconduct knowingly.

The individual types of market misconduct would have to be examined to determine the degree of involvement which would expose a person to civil liability. For example, any person who discloses or authorizes the disclosure of false or misleading information may be guilty of disclosure of false or misleading information inducing transactions under the SFO if he knows or is negligent or reckless as to whether the information is false or misleading (unless one of the statutory defences applies).

Q16:

How can I take civil action? Do I need a lawyer?

A:

You should seek legal advice before suing a person for market misconduct.

Q17:

What if I can't afford the expense of court proceedings? Is it possible to seek legal aid?

A:

You may apply for legal aid provided that you are eligible (ie, your financial resources do not exceed the statutory amount and the proceedings are within the scope of the Legal Aid Ordinance). The Legal Aid Department decides according to the law whether an applicant is eligible for legal aid, judging each case on its own merits. You must have a reasonable case in order to be granted legal aid. For more information, please refer to the Legal Aid Department's website.

Q18:

Can the SFC help investors to take civil action?

A:

It is not appropriate for the SFC to intervene in private legal proceedings. The SFC cannot help investors get legal aid.

Q19:

What should I consider before taking civil action?

A:

Think about it carefully before incurring the expense of court proceedings. Any prospective litigant should take into account the factors which are relevant in any court proceedings, such as the strength of the case, evidence, cost of court proceedings, likelihood and level of an award of damages, and financial position of defendant (ie, whether the defendant has the means to pay damages).

Private action for false public communication

Q20:

What private right of action do I have against the provision of false public communication under the SFO?

A:

Investors suffering losses as a result of false or misleading public statements concerning securities or affecting the price of securities made fraudulently or negligently have a clear statutory right of action against those involved in issuing such statements. Therefore, those persons who are responsible for issuing false or misleading information concerning securities, whether knowingly, recklessly, negligently or carelessly, may be liable to those who suffer financial losses as a result of relying on such information.

That said, it is recognised that certain persons (eg, printers, live broadcasters or certain Internet service providers) may not be "culpable" even though technically they may have played a role in disseminating the information. Defences include exemption for those acting in good faith as mere conduits of information provided they have not altered the information they were given to disseminate.

Q21:

How can I take legal action? What should I consider?

A:

Please refer to the previous section on "Redress through civil courts for market misconduct".

A single licensing regime

Q22:

How does the licensing regime work under the SFO?

A:

Under the SFC's licensing system, a person only needs one licence or registration to carry on different types of regulated activity provided that he or she is fit and proper to do so. Regulated activities as defined by the SFO include:

Type 1: dealing in securities (including stocks, bonds, stock options and funds)
Type 2: dealing in futures contracts (including futures and index options)
Type 3: leveraged foreign exchange trading
Type 4: advising on securities
Type 5: advising on futures contracts
Type 6: advising on corporate finance
Type 7: providing automated trading services
Type 8: securities margin financing
Type 9: asset management
Type 10: Providing credit rating services

You can check the licence status and the types of licensed regulated activities of individuals and companies in the Public Register of Licensed Persons and Registered Institutions on the SFC website.

The Register contains information on the status of licensees, including their names, contact details and conditions attached to each licence. It also contains names of the responsible officers supervising the firm's regulated activities and the representatives who carry on this business.

In addition, licensed corporations are required to provide the SFC with contact information of their complaints officers. Such information is available in the Public Register, facilitating investors to lodge their complaints where necessary with the licensee(s) concerned.

To increase transparency and enhance confidence in the market, the Register also shows the five-year disciplinary track records of licensed persons (ie, licensed corporations and their representative).

Certain licensed corporations are required to take out and maintain fidelity insurance, thereby increasing the possibility and amount that investors may be compensated by those licensed corporations in relation to losses caused by fraudulent acts. This serves as the first tier of investor protection in addition to the Investor Compensation Fund.

The SFC's licensing regime caters for operators providing automated trading services. Different procedures will apply depending on the nature of the services.

To ensure a level playing field, banks are required to be registered with the SFC as registered institutions in order to carry on securities and futures businesses. The Hong Kong Monetary Authority (HKMA) is the frontline regulator of banks' securities and futures operations and it maintains a register of the banks' frontline and supervisory staff who are involved in such operations. 

Regulation of intermediaries

Q23:

What sanctions are available under the SFO?

A:

In regulating market intermediaries, the SFC is empowered to:

  • issue private or public reprimands;
  • suspend or revoke licences;
  • impose an order prohibiting the entity or the person from:
      • applying to be licensed or registered;
      • applying to be approved as a Responsible Officer of a licensed corporation;
      • applying to act as an Executive Officer of a registered institution;
      • seeking to have his or her name entered into the registered maintained by the HKMA through a registered institution; and
  • Fine up to $10 million, or three times the amount gained from or loss avoided for the improper conduct, whichever is higher.

Those involved in the management of a corporation are also criminally liable for an offence by the corporation under the SFO if the commission of the offence has been "aided, abetted, counselled, procured or induced by" or is otherwise attributable to them.

To ensure a level playing field, banks engaging in securities and futures activities in Hong Kong are also governed by the same rules, codes and guidelines as SFC licensed corporations. Banks' securities and futures businesses, their frontline and supervisory staff and other parties involved in management are equally subject to sanctions under the SFO.

SFC’s inspection and investigatory powers

Q24:

What are the SFC's inspection and investigatory powers under the SFO?

A:

The SFC is empowered to obtain documents and explanations from listed companies and the parties most closely connected with them, including their auditors, banks and transaction counterparties. We are able to look at the company auditor's working papers. With adequate checks and balances, our powers under the SFO serve as an effective tool for conducting inquiries into misconduct of listed companies which may have prejudiced the interests of shareholders.

Auditors of listed companies who report to us any suspected fraud or misconduct in the management of a listed company are provided with statutory immunity from civil liability, if such reports are made in good faith. This should encourage auditors who may identify possible fraud or irregularity in conducting an audit of a listed company to protect the public interest by reporting their concerns to us.

Our supervisory powers enable us to inspect licensees and associated entities of intermediaries (eg, nominee companies). To protect investors, these associated entities are subject to the same set of rules as intermediaries (with certain exceptions and limitations). 

Operational requirements on intermediaries

Q25:

What are the operational requirements on intermediaries when dealing with their clients?

A:

Contract notes: After a transaction is executed, your intermediary has to issue you with a contract note by the second trading day after the transaction day, ie, T+2. This requirement does not apply in relation to the conduct of asset management.

Daily statements: All firms entering into margined transactions (eg, futures and options), except in the course of conducting asset management, are required to issue clients with daily statements of accounts by T+2.

Monthly statements: All firms except in relation to the management of a collective investment scheme are required to issue clients with a monthly account statement within 10 days for asset managers and within seven days for other firms.

Receipts: All firms, including associated entities receiving client assets, are required to provide receipts for their clients within two days.

Segregation of client money: Your intermediary has to put your money into a segregated trust account within one day from the date of receipt, subject to the cheque being counted as received upon clearance.

Client standing authority: An intermediary can get a written standing authority from its client to deal with client securities or securities collateral in one or more specified ways (eg, to re-pledge a margin client's securities to borrow money from a bank, or to apply a client's securities pursuant to a securities borrowing and lending agreement).

Unless an investor qualifies as a professional investor1, a standing authority has to be renewed every year. Alternatively, the firm can be "deemed" to have renewed a standing authority as long as the firm reminds the client about the impending expiry in writing at least 14 days in advance, the client does not object, and the firm issues a written confirmation within one week after the date of expiry. The requirements for renewal of standing authority in relation to client money are similar to those in relation to client securities.

Record keeping: Unless otherwise stated in the SFO or any of its subsidiary legislations, all intermediaries have to keep business records for not less than seven years in general, and to keep records showing particulars of orders for not less than two years.

1 If you qualify as a professional investor and would like to be treated as such, you would need to provide financial proof (such as financial statements or custodian statements) to your intermediary to establish that you are so qualified.

Under the law, with an agreement in writing, an intermediary is able to dispose of securities of a cash or a margin client if the client fails to settle his or her liabilities. Hence, it is in the interest of the intermediaries to provide for this in their client agreements if they have not already done so. While the law provides for such right of disposal, investors are not required by law to grant this right to their intermediaries.

In all, investors are urged to scrutinise any standing authority or client agreement that they have been asked to sign to ensure that they fully understand and accept all the terms. It would be too risky to simply accept the intermediaries' words that all new or amended terms are required under the new law.

Accountability of the SFC

Q26:

What are the external checks and balances under the SFO?

A:

The SFC is subject to a number of independent checks and balances. These include:

  • our Non-Executive Directors, who look closely at our performance and internal controls;
  • the Ombudsman, which handles complaints against the SFC and its staff for alleged maladministration;
  • the Process Review Panel, which reviews and advises on the adequacy of our internal procedures and operational guidelines;
  • the Securities and Futures Appeals Tribunal (SFAT), which reviews specified decisions made by the SFC; and
  • the courts, which handles judicial reviews of SFC decisions.

We also report regularly to the Financial Secretary of the HKSAR Government through the Financial Services and the Treasury Bureau. Our annual accounts are tabled before the Legislative Council for scrutiny.

Q27:

Can an investor make an appeal to the SFAT?

A:

The right of appeal under the SFAT is primarily for those regulatees aggrieved by decisions made in respect of them. However, an investor may appeal to the SFAT in relation to the amount of his or her claim against the Investor Compensation Fund as assessed by the Investor Compensation Company.

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