bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

helpersCheckIsPostiesArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

moreOnThisArticles

urlAlias

commentCount

authorLocations

authors

corrections

sponsorType

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

additionalInfoBoxes

quizIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

SCMP Reporter

Critics have attacked the Government's proposed Securities and Futures Bill for failing to protect minority shareholders and for giving banks an unfair advantage over stockbrokers.

The burden of proof for market misconduct and banks' 'exempt dealer' status dominated debate on the controversial legislation at a Legislative Council bills committee hearing yesterday.

Larry Lang, chair professor of finance at the Chinese University of Hong Kong, complained that minority shareholders had been overlooked in the process of drafting the bill, which had favoured powerful interest groups such as international investment banks.

'The objective of the bill is to protect shareholders, yet there is no representation from minority shareholders,' he told the committee.

'The design of this consultation is geared towards the benefit of interested parties.'

Debate has intensified since the Government dropped some of the 'strict liability' provisions for market misconduct contained in a consultation paper published last April.

Mr Lang claims the Government caved in under pressure from a group of 10 investment banks after they entered a joint submission complaining that the bill was too harsh.

However, the Government said the changes were clarifications and argued that the bill's market misconduct provisions were in line with those of overseas jurisdictions.

Strict liability effectively shifts the burden of proof on to the defendant, since the prosecution has only to raise the fact of misconduct and does not need to prove intent.

In last year's White Bill consultation, disclosure of false or misleading information inducing transactions was made a strict liability offence. However, in the Blue Bill now before Legco, this has been amended so the prosecution now has to prove intent, recklessness or negligence on the part of the defendant.

Wash sales and matched orders (contrived trades designed to raise trading volume) remain strict liability offences.

Mr Lang argues the US system places a greater burden of proof on the defendant, although this has been disputed by regulators and the investment banks.

He said minority shareholders had less protection in Hong Kong than in the United States because the legal system did not permit class action lawsuits (in which shareholders band together to mount an action), contingency fees (in which lawyers' fees are paid only if the case is won), or no-way defaults (when each party pays its own costs). These provisions should be incorporated into the bill, he said.

Mr Lang also said the powers of the Securities and Futures Commission should be upgraded to those of the US Securities and Exchange Commission, enabling it to compel the production of evidence, for example.

Linklaters partner Pauline Ashall, on behalf of the 10 investment banks, rejected Mr Lang's arguments.

'Only a very minor change has been made in the Blue Bill,' she said. 'If the burden of proof did not fall on the prosecution in these cases, every large transaction that had an impact on the market would be illegal, unless the relevant person could prove the contrary. In our view that would be objectionable.'

For market manipulation offences in the US, the prosecution had to prove that the defendant acted for the purpose of manipulating the market, Ms Ashall said.

In practice, courts in the US have taken evidence of trading coupled with a motive for manipulation as prima facie evidence of intent. It remains to be seen whether Hong Kong courts will interpret the bill's intent provisions in the same way, but Ms Ashall said she saw no reason why they should not.

SFC executive director Mark Dickens said the commission was satisfied it had very similar powers to the SEC to compel the production of evidence.

On the burden of proof, he said: 'We believe that the way the provisions will work from the prosecutor's point of view will be the same [as the US].'

He added: 'We have calibrated [the market misconduct provisions] very carefully against the experience in other jurisdictions and for everything we have done there is a respectable precedent.'

Individual litigants would not be as well placed in Hong Kong as in the US, he conceded. However, this raised fundamental questions about the administration of justice in Hong Kong which went far beyond the purview of the Securities and Futures Bill.

Stockbroking and banking associations also clashed at the meeting over regulation of banks that are also securities dealers.

Under the Securities and Futures Bill, banks would retain their status as 'exempt' dealers, which means they would not be regulated by the Securities and Futures Commission.

Representatives of the Hong Kong Stockbrokers' Association (HKSA) and the Institute of Securities Dealers argued this was a double standard and would give banks an unfair competitive advantage.

'We would like to see a level playing field and uniform regulation,' said HKSA chairman Paul Fan.

The stockbrokers said the exempt dealer status was brought in as a temporary measure more than two decades ago, when banks were not big players in the broking industry. However, with the advent of online trading, banks were moving significantly into the securities business.

The Hong Kong Association of Banks (HKAB) argued it was 'absolutely proper' for the Hong Kong Monetary Authority (HKMA) to continue to act as the banks' front-line regulator.

HKAB legal adviser Marc Harvey said: 'The HKMA knows the banks best.' The HKMA and SFC would liaise to ensure regulation of banks was consistent with that of brokers, he said.

Former legislator Christine Loh called on the committee to conduct more research and canvas the views of the investing public. She urged members not to push the bill through 'in undue haste'.

'Anything more that can be done in this bill to protect investors' rights can only be done in this chamber,' she warned.

The Securities and Futures Bill is Hong Kong's most important piece of securities legislation in decades, consolidating 10 existing ordinances into one. The Government has said it wants the bill to become law by April.

Deputy Secretary for Financial Services Au King-chi told the committee the Government had to balance different interests in the bill. 'Some say that the regulation is too harsh, some that the supervision is too lax. That might mean that we have struck the appropriate balance,' she said.



Bull market helping Exchange Fund contribute to city’s recovery

Hong Kong stablecoin regime a ‘double-edged sword’ for market’s growth, analysts say

Hong Kong’s booming wealth sector to lead hiring and office expansion, HKMA says

Can Hong Kong’s IPO boom plug the hole in the city’s floundering office market?

Hong Kong Monetary Authority (HKMA)

Call for more canvassing