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Enoch Yiu

Insider dealing will be made a criminal offence punishable by up to 10 years in prison under wide-ranging changes to securities laws designed to upgrade corporate governance and boost Hong Kong's competitiveness as a global financial centre.

 Investors will be able to sue for compensation anyone who gives false information to the public, and the Securities and Futures Commission will be granted wider investigative and executive powers.

 The proposals are among the key recommendations of a Government consultation paper on the Composite Securities and Futures Bill unveiled yesterday.

 The bill, which has been in the drafting stage since 1992, will consolidate and update all 10 securities and futures-related ordinances into a single law.

 'The bill will enhance investor protection,' Rafael Hui Si-yan, Secretary for Financial Services, said yesterday.

 'It will also establish a regulatory framework to match international practices and to meet with the requirements of the 21st Century.'  Under the bill, the SFC may decide whether to take civil or criminal action against various forms of market malpractice, including insider dealing.

 At present, insider dealing is a civil matter and offenders face only fines or disqualification as directors.

 'Many legislators and market participants have complained the penalties are not severe enough to discourage insider-dealing activities,' Mr Hui said.

 The proposed changes also give the SFC more flexibility to deal with malpractices such as market manipulation and deception, since at present these can only be pursued through the criminal courts.

 There have been few successful prosecutions due to the high level of proof required in criminal cases.

 A market misconduct tribunal will be established to carry out civil proceedings for all market-malpractice cases, expanding the role of the present insider-dealing tribunal.

 'The SFC could decide to use either civil or criminal proceedings to handle market malpractice, depending on the evidence it has and the seriousness of the case,' said Mr Hui.

 The highest criminal penalty for all market malpractice charges would be 10 years in prison and a fine of HK$10 million.

 Civil penalties available to the market misconduct tribunal would include fines, disqualification as directors and bans on trading in the local markets.

 Mr Hui said the bill would widen the powers of the SFC, for example giving it access to the working papers of listed companies' auditors.

 The bill would also give the SFC the power to intervene in civil proceedings between third parties, enabling it to submit expert opinion to courts that are handling the cases.

 To safeguard investors' assets, the bill will empower the SFC to require brokers and other intermediaries to transfer custody of their clients' property to the commission.

 The SFC will also be empowered to regulate automated trading systems (ATS), including electronic communication networks, which operate as cyberexchanges.

 Under the bill, ATS operators must get licences from the SFC and be members of Hong Kong Exchanges and Clearing.

 The bill recommended the establishment of an appeals tribunal and a process review panel to ensure the commission would exercise its expanded powers properly, Mr Hui said.

 It also recommends the setting up of a new insurance-based compensation scheme for clients of defaulted brokers.

 To enhance market transparency, the bill requires the disclosure of large positions in the futures and options markets, and proposes to cut the shareholding disclosure threshold from 10 per cent to 5 per cent.

 The consultation period - the fourth held on the bill since 1992 - will last for three months. The Government plans to table the bill to the Legislative Council in November and hopes the legislation process will be completed by April next year.



Insider dealers risk jail under new rules