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Following is a question by the Hon Albert Ho and a reply by the Secretary for Security (in the absence of Secretary for Financial Services and the Treasury), Mr Ambrose S K Lee, in the Legislative Council today (May 30):
Question:
I have learnt that more than one-third of the companies listed in Hong Kong are registered companies on the Mainland. As there are differences between the legal systems of Hong Kong and the Mainland, local monitoring authorities may encounter difficulties in monitoring such companies, thereby undermining the interests of local investors. In this connection, will the Government inform this Council:
(a) whether it knows how the relevant authorities ensure that the contents of the prospectuses of Mainland companies to be listed in Hong Kong are accurate; whether they have considered strengthening the regulation of sponsors, including requiring sponsors to bear legal liability in respect of the contents of the prospectuses;
(b) whether it knows how the relevant authorities in Hong Kong collect evidence and take enforcement actions in respect of cases in which the above companies are involved in illegal acts, such as disclosing false or misleading information, failing to disclose connected transactions and conducting insider dealings, and the offences concerned are partly or wholly committed on the Mainland; whether the Government will consider improving the regulatory framework in Hong Kong, such as by making some financial offences of a serious nature offences with extraterritorial effect, so that the persons concerned may also be convicted in Hong Kong for committing such financial crimes on the Mainland; and
(c) given the discrepancies between the laws in Hong Kong and the Mainland on liquidation and receivership of companies, how the Government protects the interests of local investors when local receivers are unable to receive the assets of the above companies, which are mainly on the Mainland?
Reply:
Madam President,
The regulatory structure of the securities and futures industry is enshrined in the Securities and Futures Ordinance (SFO) (Cap. 571), as well as Parts II and XII of the Companies Ordinance (CO) (Cap.32). Under this regulatory structure, the Securities and Futures Commission (SFC) is an independent statutory regulator responsible for, inter alia, maintaining and promoting the orderliness of the securities and futures industry, providing protection for members of the investing public and for minimising crime and misconduct in the industry. To enable SFC to discharge its statutory duties effectively, it has been vested with a wide range of investigative powers such as obtaining documents and explanations from listed companies and parties closely connected with them, and disciplinary powers in respect of its licensees, including sponsors.
Our reply to parts (a) - (c) of the question is set out below.
(a) The CO imposes civil and criminal liability on directors of issuers for misstatements in prospectuses. In recent years, the SFC and the Stock Exchange of Hong Kong Limited (SEHK) have stepped up measures to ensure accuracy of the contents of prospectuses. These measures are set out below:
(i) With the introduction of the SFO in 2003, under section 6 of the Securities and Futures (Stock Market Listing) Rules, the SFC may object to a listing application if, among other things, it appears to the SFC that the application is false or misleading as to a material fact or is false or misleading through the omission of a material fact.
(ii) Listing applications submitted to the SEHK must also be filed with the SFC under the "dual filing regime". Any person who knowing or recklessly provides to the SFC information which is false or misleading in a material respect may commit an offence under section 384 of the SFO. Offenders are liable to criminal fines and imprisonment.
(iii) Changes were made to the SEHK Listing Rules in 2005 to require a sponsor to, among other things, be closely involved in the preparation of the new applicant's listing document, and conduct reasonable due diligence inquiries having regard to the requirements of the Listing Rules to put itself in a position to be able to make the requisite declaration to the SEHK.
(iv) A new sponsor regulatory regime was introduced on January 1, 2007 whereby only those intermediaries that have met the stringent eligibility requirements are allowed to continue to carry out sponsor/compliance adviser work. As of March 31, 2007, 190 Type 6 intermediaries (Note) were imposed with a licensing condition barring them from acting as sponsors pursuant to the new sponsor regulatory regime.
The extension of prospectus liability to sponsors was explored in the SFC's Consultation Paper on Possible Reforms to the Prospectus Regime in 2005. Majority of the respondents commenting on the issue were strongly against the proposal. It was argued that to shift the burden to sponsors would misrepresent their role which was to assist the issuer with its application, not to guarantee the accuracy of the information provided by the issuer itself. In view of public comments, and the introduction of the new regulatory regime on sponsors, the SFC concluded that it would be premature to impose prospectus liability on sponsors.
(b) The market manipulation provisions of the SFO already have extra-territorial effect: they apply to manipulation of Hong Kong exchange traded securities and futures by a person outside Hong Kong and manipulation of foreign exchange traded securities and futures by a person in Hong Kong.
The SFC's investigative powers operate within Hong Kong's borders. If part or all of the events relevant to a crime or misconduct occur outside Hong Kong, the SFC would have to rely on law enforcement arrangements in that place for assistance. Whether assistance is forthcoming will depend on whether local law enforcement authorities are empowered to provide assistance, or whether co-operative arrangements or MOUs have been concluded. This is the case regardless of whether the evidence is in the Mainland or any other jurisdictions.
The SFC's capacity to secure evidence in the Mainland has improved significantly in recent months and is now on a par with the SFC's capacity to secure evidence in other jurisdictions. In early April 2007, the SFC and China Securities Regulatory Commission (CSRC) entered into an improved enforcement cooperation arrangement under which the CSRC could assist the SFC by compelling assistance from people and entities on the Mainland from whom the SFC needed information. The standard of assistance is equal to that available under the IOSCO Multilateral Memorandum of Understanding (MMOU) which is the first global information-sharing arrangement among securities regulators for the purpose of combating violations of securities and derivatives laws. Shortly after entering into enhanced bilateral arrangements with the SFC, the CSRC also became a signatory to the IOSCO MMOU in April 2007. The SFC expects the new investigative cooperation arrangements to improve its ability to take action against crimes or misconduct that have a Mainland element.
On the domestic front, SFC maintains regular communication and good cooperation with local enforcement agencies such as the Police and the Independent Commission Against Corruption, and such cooperation facilitates information sharing among the authorities and co-ordinated investigations on corporate crimes including cross-boundary cases.
(c) Cross-boundary insolvency proceedings is a complex subject involving the recognition of other jurisdiction's insolvency proceedings and the enforceability of rights and claims under that jurisdiction's domestic legal regime. In general, a liquidator should comply with all the legal requirements of the jurisdiction concerned. The Administration notes the difficulties facing each and every jurisdiction, including Hong Kong, Mainland and other jurisdictions, and will continue to monitor international legal developments to promote greater co-ordination and co-operation among jurisdictions to address effectively instances of cross-boundary insolvency, and the recognition of liquidators and receivers from other jurisdictions.
Note: Intermediaries who engage in "Type 6 - Advising on corporate finance" regulated activity.
Ends/Wednesday, May 30, 2007
Issued at HKT 11:56
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