Hong Kong Regulator Concludes Consultation on Proposals to Enhance Regulation of Non-Corporate Listed Entities

The Securities and Futures Commission (SFC) has published conclusions on proposals to enhance the regulatory regime for non-corporate entities that are listed on The Stock Exchange of Hong Kong Ltd (SEHK). 

Respondents in general supported the proposals, with comments on technical issues. They agreed that the proposals would help enhance investor protection as well as market transparency for all listed entities, whether they are companies or other types of business organisation.

The SFC will proceed with the proposals and make appropriate recommendations on the legislative amendments to the Government.

The main points of the consultation conclusions are as follows:

• extend the SFC’s supervision and investigation powers under Parts VIII and X of the Securities and Futures Ordinance (SFO), the market misconduct provisions under Parts XIII and XIV of the SFO, the requirement to disclose price sensitive information under Part XIVA of the SFO and the disclosure of interests provisions under Part XV of the SFO to expressly cover non-corporate listed entities (Note 1);
• clarify that, for listed depositary receipts, the overseas issuer whose shares/units are the underlying shares/units (and not the relevant depositary bank) is the “issuer”; and
• exclude entities whose only listed securities are debentures from the Part XV disclosure of interests regime.

Hong Kong Regulator Releases Consultation Conclusions on Regulation of Electronic Trading

The Securities and Futures Commission (SFC), Hong Kong published a consultation conclusions paper on proposals to enhance the regulatory framework for electronic trading (Note 1).

The SFC received 34 written submissions from industry associations, brokerage firms, investment banks and individuals in response to the proposals contained in the consultation paper.  Respondents generally supported the proposals.  Most of the initiatives have been adopted in the conclusions. 

“The initiatives are intended to provide clarity to intermediaries on the standards that they are expected to meet when they conduct electronic trading.  They must have appropriate policies, procedures and controls in place to ensure their electronic trading activities will not pose undue risks to the market,” the SFC’s Chief Executive Officer Mr Ashley Alder said.

“These standards, which are in line with regulations in major international markets and the principles published by the International Organization of Securities Commissions, will help maintain integrity as well as confidence in the market,” he added.

Key aspects of the regulatory regime include:

• Management and supervision- The responsibility to ensure compliance rests with the responsible officers or executive officers and the management of the intermediaries. 
• Adequacy of system- Intermediaries should ensure their electronic trading systems are subject to testing and meet regulatory standards with respect to reliability, controls, security and capacity and that contingency measures in place.  
• Record keeping- Intermediaries should keep, or cause to be kept, proper records on the design, development, deployment and operation of their electronic trading systems.
• Risk management - Intermediaries should put in place risk management and supervisory controls to monitor orders and trades, including automated pre-trade controls and regular post-trade monitoring. 

The new regime which includes amendments to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission and the Fund Manager Code of Conduct will come into effect on 1 January 2014.  The Guidance Note on Internet Regulation issued in March 1999 will be repealed on the same date.

New Regulatory Measures Take Effect under Securities and Futures (Amendment) Ordinance in Hong Kong

The Securities and Futures Commission (SFC), Hong Kong has enacted the Securities and Futures (Amendment) Ordinance 2012 (Amendment Ordinance).

Under the Amendment Ordinance, which will be gazetted, the SFC is empowered to implement the following new regulatory initiatives:

• The establishment of a statutory disclosure regime whereby listed corporations will be required to disclose price sensitive information (PSI) in a timely manner, backed by civil sanctions for non-disclosure of PSI;
• The SFC can directly institute proceedings before the Market Misconduct Tribunal (MMT), without having to first refer the case to the Financial Secretary for his decision, to enforce PSI disclosure requirement, and to deal with the existing six types of market misconduct under the Securities and Futures Ordinance (SFO) (Note 1); and
• The SFC will establish the Investor Education Centre (IEC) to take up broader investor education responsibilities covering the entire financial services sector (Note 2).

Provisions relating to the SFC directly instituting proceedings before the MMT and the establishment of the IEC will come into operation on 4 May 2012.

The PSI disclosure regime will take effect on 1 January 2013 to give listed companies sufficient time to prepare themselves to comply with the new requirements and to set up the necessary internal control systems.

SFC Hong Kong Introduces Changes in Takeover Code

The Securities and Futures Commission (SFC), Hong Kong capital market regulator announced that the following amendments (Note 1) to the Codes on Takeovers and Mergers and Share Repurchases (Codes) will take immediate effect:

• Property valuation requirements now only apply to offers when the offeror is an interested party (Note 2).
• Regarding confirmations of independence of placees in placing and top-up transactions, it is the responsibility of the financial adviser, placing agent and acquirer of the voting rights to confirm the independence of placees.
• The prescribed period for payment of acceptance of an offer is no longer 10 days but seven business days.

The SFC launched a public consultation on the proposed amendments in August 2011 (Note 3) and 18 written submissions were received during the consultation period. The conclusions paper was released on 23rd March.

SFC, Hong Kong to Implement New Guidelines on Anti-Money Laundering and Counter-Terrorist Financing

In a set of consultation conclusions released today, the Securities and Futures Commission (SFC), Hong Kong announced the gazettal of a new set of guidelines on anti-money laundering (AML) and counter-terrorist financing (CFT).

The gazettal of the new guidelines is in line with the SFC’s proposals to provide guidance to the industry relating to, among others, the operation of the provisions of Schedule 2 to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) which shall come into effect on 1 April 2012.

The guidelines will assist licensed corporations and associated entities in designing and implementing appropriate and effective policies, procedures and controls so as to comply with the AMLO requirements and/or other applicable AML/CFT legislation and regulatory requirements.

SFC stated “Associated entity” refers to a company that is in a controlling entity relationship with an intermediary and receives or holds in Hong Kong client assets of the intermediary.

The SFC received a total of 25 submissions from industry practitioners, trade associations and professional bodies in response to the proposed guidelines. Respondents generally found the guidelines helpful, and some sought clarification on specific matters and adaptation of certain requirements to facilitate compliance. The SFC has amended the guidelines in a number of areas to address comments whilst ensuring that they remain in line with international AML/CFT standards. Details of the submissions and the SFC’s responses to the comments are contained in the consultation conclusions.

To coincide with the commencement of the AMLO, the guidelines will take effect on 1 April 2012 to replace the existing Prevention on Money Laundering and Terrorist Financing Guidance Note published by the SFC.

Hong Kong Regulator Concludes Short Position Reporting Rules

The Securities and Futures Commission (SFC),  an independent non-governmental statutory body outside the civil service, responsible for regulating the securities and futures markets in Hong Kong today publishes the conclusions to the Further Consultation on the Securities and Futures (Short Position Reporting) Rules (Rules) ended in November 2011. The proposed Rules attached to the conclusions will be submitted to the Legislative Council for consideration. Subject to the legislative process, the Rules will come into effect on 18 June 2012. 

In view of additional market feedback, the proposed Rules have provided for reporting of short positions on a net basis. They also have been modified to provide greater clarity in certain areas, including reporting obligations in relation to corporate “umbrella” funds and jointly owned short positions. Other than the aforesaid refined policy proposals, the proposed Rules are fundamentally the same as those consulted previously.

Followings are major considered issues of final conclusion of the Rule by the Regulator:

(a) Short positions to be reported to the SFC will be on a net basis;

(b) For corporate ―umbrella‖ funds that have underlying sub-funds, we have provided in the Rules that the net short position that is attributable to each sub-fund is to be treated and reported separately and is not to be aggregated with the positions of other sub-funds within the same ―umbrella‖ fund;

(c) The Proposal will be retained to enable those market participants whose trading activities are conducted on a trading unit/book basis to leverage on their current trading infrastructure for short position reporting. As mentioned in the Further Consultation, the SFC will issue guidelines on the application of the Proposal in due course;

(d) On the question of reporting jointly owned positions, we envisage that this issue is most likely to arise in relation to short positions owned by partnerships. Consequently, we have provided in the Rules that if the partners in a partnership have a reportable short position, then a report submitted by a partner or another person authorized by all the partners, on behalf of those partners, is regarded as having complied with the Rules. A person who has a reportable short position as a partner in more than one partnership must treat the short position attributable to each partnership separately; and

(e) With regard to imposing criminal sanction for a breach of the Rules, as explained in the Conclusions, this approach is consistent with similar provisions in the SFO and other rules made by the SFC for non-compliance with notification requirements.

“The Rules published today have been shaped by extensive consultation with relevant stakeholders to lay down a clear regulatory framework for market participants to report short positions to the SFC,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “With this regime in place, the SFC will be able to perform its role more effectively in monitoring the market, including detection of significant build-up of short positions. We believe our publication of data on aggregated short positions will enhance transparency to the market,” Mr Alder added.