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Enoch Yiu

Hong Kong's securities watchdog has issued guidelines to tighten regulation on the suspension of trading in funds, to ensure dealing is halted only in exceptional circumstances.

Under the guidelines, which took effect yesterday, a fund can be suspended from trading only if more than 10 per cent of its net asset value is invested in a stock market that has been closed.

The Securities and Futures Commission is taking a tougher stance on suspension after 1,049 of the about 2,000 funds authorised by the commission in the SAR suspended trading for a week after the September 11 terrorist attacks on the United States.

'In the wake of the closure of the US and some Asian stock markets in September 2001, which resulted in the suspension of a considerable number of funds . . . the SFC considers it useful to provide further guidance to the industry,' it said.

The SFC would continue to allow fund-management company boards to decide if they should suspend funds, but the boards must consider the interests of unit holders.

'The guidance note sets out the SFC's view that suspension of dealing of funds may take place only in exceptional circumstances, having regard to the interests of holders,' the SFC said.

Andrew Procter, SFC executive director of intermediaries and investment products, said the commission would take appropriate action if the interests of fund investors were prejudiced.

'A key underlying principle of open-ended funds is that holders may freely redeem their shares or units on any dealing day,' Mr Procter said. 'The operators of a scheme must firmly embrace this principle when considering whether to suspend dealings.'

Fund managers said the previous rules allowed fund houses to suspend dealing if the funds had substantial investment in a market that had temporarily stopped trading. But they did not say how much exposure should lead to a suspension.

Stewart Aldcroft, managing director of Investec Asset Management Asia, said a 10 per cent trigger point was a good move, as it would make it easier for fund managers to decide if they should suspend trading.

'The new rule will reduce the number of funds eligible for suspension, but it will also remove the uncertainties faced by fund managers,' he said.

The new guidelines also simplify reporting procedures for fund houses applying for a suspension.

Fund managers can now issue a public notice to unit holders through newspapers once funds are suspended, with no need to seek prior approval of the notice from the SFC.

Formerly, managers had to get the notices approved before they could be issued to investors. This created a large workload for the commission as it often had to approve a large number of notices in a short time.

'To ensure timely notification to holders, the SFC will no longer require suspension notices to obtain prior approval but will accept subsequent filing of such notices,' the SFC said.

The SFC is considering further amending the rule on publishing the notices in daily newspapers. The commission said it would consider alternative means of notification, such as putting notices on a Web site.

The guidelines also remind fund managers to continue to accept redemption requests during the suspension period.



Managers welcome guidelines issued in aftermath of mass closures due to US terror attacks