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The Process Review Panel for the Securities and Futures Commission today (July 27) published its fifth annual report covering the work of the PRP from January 1, 2005 to December 31, 2005.
"In 2005, the panel reviewed 58 completed cases and the procedures of the Securities and Futures Commission (SFC) covering various areas of its work. The PRP has found that in general, the SFC had been adhering to its established internal procedures in their decisions and actions. The panel has also identified certain areas where there could be room for improvement," panel chairman Mr Vincent Cheng said.
In the past year, the panel reviewed completed cases and internal procedures of the SFC which cover the following areas of the SFC's regulatory functions ¡V
(a) licensing of intermediaries;
(b) inspection of and prudential visit to intermediaries;
(c) authorisation of collective investment schemes;
(d) handling of complaints;
(e) investigation and disciplinary action; and
(f) processing of listing applications under the Dual Filing regime.
The panel also considered views from the industry on the SFC's procedures with a view to identifying areas for improvement and referred the industry's comments and proposals to the SFC for consideration.
The fifth panel annual report contains observations and recommendations which cover a wide spectrum of the SFC's regulatory work. Specific observations and improvements arising from the past year's review that are adopted by the SFC include -
Licensing of intermediaries
(1) Seeking clarification from the SFC on the measures in place to ensure fairness and consistency in the shortlisting of licence applications for police vetting.
Inspection of and prudential visit to intermediaries
(2) Issuing a letter of deficiencies to the inspection target as soon as possible upon completion of inspection field work so that the company could take remedial actions immediately.
(3) Enhancing the case management system of the SFC to include the date and identity of the approving officer in the records on findings of inspection or prudential visit for the sake of facilitating PRP's reviews.
(4) Seeking clarification from the SFC regarding the considerations taken into account in the selection of companies for inspection vis-ˆj-vis prudential visit.
Authorisation of collective investment schemes
(5) Keeping the application process for approval of collective investment products under review to ensure that there was no abuse of the system.
Handling of complaints
(6) Updating the complaint handling procedure to reflect the new arrangement that the SFC would issue an interim reply to a complainant at quarterly intervals to show that the case was receiving attention.
Investigation and disciplinary action
(7) Promoting awareness of the prevailing guidelines relating to the responsibilities of brokers and omnibus account operators in monitoring the trading activities of their clients.
(8) Giving proper documentation on the deliberation in relation to whether a case involving a bank should be brought to the attention of the Hong Kong Monetary Authority for the possible lack of complementary measures on the part of the bank in monitoring trading activities of its clients.
(9) Ensuring that there would be clear distinction between warning and advice in a letter that combines both.
(10) Ensuring that the deliberation in relation to a settlement agreement, in particular for accepting settlement on no-admission basis should be sufficiently documented.
(11) Giving proper documentation on the basis for setting the amount of a fine originally proposed and the justifications for its subsequent variation. The SFC already had a procedure to document considerations relevant to a fine in the form of a proforma checklist.
(12) Setting a maximum ceiling for reduction of fines which, following the practice in UK, could be at 30%. The SFC agreed that, as a guideline, a maximum discount for cooperation should be fixed and 30% appeared to be a reasonable benchmark.
(13) Seeking clarification from the SFC on the measures in place to ensure a comparison with similar previous cases in determining the size of a fine would be followed consistently and to enhance the transparency of the SFC's decision. The SFC advised that there was already a mandatory requirement in the SFC's process manual that a comparison with similar previous cases should be made in a recommendation for penalty and it was the SFC's standing practice to disclose as far as possible its deliberation on penalty in its notice of decision and statement of reasons.
(14) Disclosing to the public the aggravating and mitigating factors relevant to fining to enable the market players to better understand the penalty that could be imposed for particular misconduct. The SFC published the Disciplinary Fining Guidelines, which set out the factors that the SFC takes into account in exercising its fining power.
(15) Conveying to the public, where appropriate, that the punitive and deterrent results in settlement were comparable to those resulting from other disciplinary action that did not settle, in order to improve transparency of the SFC's decision.
(16) Making reference to the practice in other jurisdictions, where appropriate, for the calculation of an ex-gratia payment in a particular case.
Processing of listing application under the Dual Filing regime
(17) Reminding The Stock Exchange of Hong Kong Limited to expedite the process in despatching listing applications and related documents to the SFC.
(18) Seeking clarification from the SFC on the procedures in place for the SFC to be kept appropriately informed of the major developments in respect of listing applications.
Other issues
(19) Conducting more briefing sessions on subjects of concern to the industry.
(20) Publicising the names of entities which have been granted "exempt principal trader" and "exempt fund manager" status under the Code on Takeovers and Mergers.
(21) Ensuring that sufficient time would be given for the public to submit response in its consultation exercises.
(22) Assessing the adequacy of staff professionalism and experience, and the impact of staff turnover on the SEHK's performance of the regulation of listing matters in the SFC's regular audit review.
"We appreciate the co-operation and support rendered by the commission to the work of the panel and look forward to continuing to work closely with the commission in future," Mr Cheng said.
In the coming year, the panel will continue to discuss with the SFC on issues relating to the SFC's internal procedures concerning the issue of warning letters to intermediaries, and the conclusion of settlement agreements with persons on whom disciplinary action has been proposed.
"We welcome views from the public, in particular the market participants affected by the SFC's internal procedures, on our work in the coming year," Mr Cheng added. People may submit views to the panel by email (Email address: prp@fstb.gov.hk).
The report and its Executive Summary can be downloaded from the Financial Services and the Treasury Bureau's website (www.fstb.gov.hk/fsb/topical/preport05.htm).
Ends/Thursday, July 27, 2006
Issued at HKT 17:01
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