4. Immunity for Auditors Who Choose to Report Suspected Fraud (Part XVI of the Securities and Futures Ordinance)
The SFO contains provisions to provide auditors of listed companies who report to the SFC any suspected fraud or misconduct in the management of a listed company with statutory immunity from liability under common law (s. 381). The choice to report is on voluntary basis. The SFO intends to give immunity from the threat of civil liability to auditors who choose to report the suspected fraud to the SFC in the course of their auditing work.
5. Regulation of Automated Trading Services in Hong Kong (Part III of the Securities and Futures Ordinance)
Automated Trading Services (“ATS”) is considered as a kind of new trading method which on one hand facilitates the trading of different products in the financial market through computer; on the other hand, raises a number of important regulatory issues which are not adequately addressed in the present regime. Seeing this problem, the SFO requires a person seeking to provide ATS to obtain approval from the SFC. The SFC would then examine the specific characteristics and risks of the ATS to determine the regulatory approach best suited to it. The maximum penalty for a person who provides ATS without the approval of the SFC is a fine up to $5,000,000 and to imprisonment for 7 years (ss. 95 – 101).
6. Enhanced Transparency in the Professional Investors Markets in Hong Kong (Part III of the Securities and Futures Ordinance)
Persons who act as principals and deal solely with professional investors are not required to be licenced by the SFC. Nevertheless, their activities can have significant impact on the market, and information about them is essential to proper management of systemic risks. The SFO includes large position reporting requirements in the futures and options markets which would bring Hong Kong’s reporting standards compatible with those of other major international financial centre.
7. Joining in Litigation between Third Parties by the SFC (Part XVI of the Securities and Futures Ordinance)
As financial markets and their infrastructure become increasingly complex, the disputes between private parties are more and more likely to have an impact on the rest of the market system. The SFO gives the SFC locus standi to intervene in proceedings (other than criminal proceedings) between third parties in appropriate cases to provide its regulatory perspective and expert opinion subject to the following safeguards :
- intervention must be in public interest
- parties to the litigation may challenge the intervention,
- court to decide whether and the terms on which SFC may intervene (ss. 385 – 389).
8. Creation of Investor Compensation Company (Parts III and XII of the Securities and Futures Ordinance)
There are currently two compensation schemes – the Unified Exchange Compensation Fund and the Commodities Exchange Compensation Fund. Both rely in part on deposits paid by members of the exchanges and statutory transaction levies. The schemes provide a maximum level of compensation for each broker – $ 8 million and $ 2 million for per stockbroker and per futures broker respectively.
The SFO provides a new investor compensation system in Hong Kong to substitute the existing schemes. Contrary to the present per broker limits, the new regime would be based on a per investor compensation limit. This would enable more transparency and allow investors to know precisely what level of compensation would be available to them should their intermediaries fail.
The new regime would be administered by an independent investor compensation company, which would be required to apply prudent principles to managing its funds, inter alia, the possibility of seeking insurance to minimize costs to the industry (ss. 79 – 90).
9. Empanelling of Hong Kong Securities and Futures Appeals Tribunal (Part XI of the Securities and Futures Ordinance)
The SFO implements the proposal of replacing the existing part-time Securities and Futures Appeal Panel with an independent full-time Securities and Futures Appeals Tribunal. A much wider range of decisions would be subject to appeal to the Tribunal. The Tribunal’s job would be to review the SFC’s decisions, which have been appealed to it, including almost all licensing-related and disciplinary decisions, and would be made by the person against whom the decision was made, within twenty-one days of notice of the decision (ss. 216 – 229).