FINANCIAL LAW AND

REGULATIONS
WEEK 6

Securities and Futures Ordinance (SFO)

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Securities and Futures Ordinance
(SFO)
Consolidate and streamline 10 former
ordinances [operational in April 2003]
1) Securities and Futures Commission
2) Commodities Trading Ordinance
3) Securities Ordinance
4) Protection of Investors Ordinance
5) Stock Exchange Unification Ordinance

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Securities and Futures Ordinance
(SFO)

Securities and Futures Ordinance (SFO)

(cont’d)
6) Securities (Insider Dealing) Ordinance
7) Securities (Disclosure of Interest)
8) Securities and Futures (Clearing
Houses)
9) Leveraged Foreign Exchange Trading
10) Exchanges and Clearing Houses
(Merger) Ordinance 3
Objectives of SFO
- promote fair, orderly & transparent market
- cope with new products innovations and
new advances in technological
infrastructures;
- be a regulator with sufficient powers and
discretions (operations are transparent;
accountable to the stakeholders through a
system of adequate checks and balances);
- maintain a par with international practices

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SFO Part I – Preliminary
- contain most of the general definitions
- are applicable to licensed corporations
supervised by SFC, and intermediaries
supervised by HKMA and registered with
the SFC

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SFO Part II – The SFC
Its constitution, Its objectives, Its
functions, Its powers and Its duties
- states the powers of SFC and
its relationships with the Chief Executive,
HKSAR and the Financial Secretary

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SFO Part III
- provide for the recognition by the SFC
exchange companies, clearing houses,
exchange controller, investment
compensation companies, providers of
automated trading services
- they are recognised market operators
(at present, HKEx is the only recognised
exchange controller in Hong Kong )

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SFO Part III
- the SFC supervises all the above
operators in the market to ensure
that they perform their functions
and operations properly

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SFO Part IV – Offers of Investments
- deal with the regulation of investment
products
- control of its marketing activities
- The objective of establishing a properly
regulated environment for the products
available to investors is to encourage the
development of reputable and well-
structured products in the Hong Kong
market and to eliminate dubious products
and schemes. 9
SFO Part V – Licensing and Registration
- cover the licensing of intermediaries,
include registered institutions supervised
by the HKMA who undertake activities
regulated by the SFC
- issue licence on regulated activities to
companies & their accredited individuals

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SFO Part V
- The regime installed under the SFO
provides for a single licence that is given
only to companies, bodies corporate and
individuals accredited to them. They are
referred to as licensed persons.
- 9 categories of regulated activities by
SFC
Type 1: Dealing in securities
Type 2: Dealing in futures contracts
Type 3:Leveraged foreign exchange trading
Type 4: Advising on securities

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SFO Part V (cont’d)
Type 5: Advising on futures contracts
Type 6: Advising on corporate finance
Type 7: Providing automated trading service
Type 8: Securities margin financing
Type 9: Asset management

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SFO Part VI
Empower the SFC to make rules on
- capital requirements (Financial Resources
Rules) on licensed corporations
- safeguarding and control of client assets
and money
- keeping of records (If a person makes
false or misleading entries; destroys any
records; or does not maintain records; he is
guilty of an offence)
- issue of receipts and statements of
accounts to clients 13
SFO Part VI
Have provisions on licensed corporations
(not to registered AFIs) and also to associated
entities of intermediaries on matters relating to:
- audited accounts submitted to the SFC not
later than 4 months after the end of the
financial year
- information about appointment and
removal of auditors
- reportable matter by auditors to SFC
- appointment of auditors by SFC
- powers of appointing auditor by SFC 14
SFO Part VII
- Empower the SFC to make rules
of business conduct for intermediaries
and their representatives which may
specify prohibitions, requirements and
other matters in codes of conduct

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SFO Part VII
- [codes of conduct gives guidance on the
practices and standards which
intermediaries (which would include
registered AFIs) and their representatives
are ordinarily expected to comply with while
conducting regulated activities]

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SFO Part VII
- Failure to observe codes of conduct
may be taken into account to consider
an intermediaries and its representatives
to remain fit and proper for the licence
- The code is admissible as evidence in
proceedings under the SFO before court

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SFO Part VII
* SFO prohibits an intermediary or its
representatives from representations
expressly or by implication that its or
his abilities or qualifications have been
endorsed or warranted by the Government
or the SFC

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SFO Part VIII
- Supervision and Investigations
It provides the SFC with powers to
supervise, inspect and investigate
listed companies and intermediaries
and their staff

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SFO Part VIII
Powers to require information
- SFC can require information which
include records and documents,
explanations and statements on oaths
from listed corporations, any related
corporation, an auditor, present and past
members of staff and any other person.

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SFO Part VIII
- Supervision of intermediaries
Provide SFC with the power to conduct
inspection to ascertain whether an
intermediary has complied with the SFO.
The SFC may inspect the premises and
ask for documents and explanations.

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 SFO Part VIII
- Powers of Investigation
SFC may authorise an employee or with
the consent of the Financial Secretary,
another person to carry out an
investigation.

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SFO Part VIII
- A person fails to comply with the requests
of an investigator is guilty of an offence.
SFC may apply to court for the issue of
a warrant to enter specified premises.
A person destroys or disposes of any
required documents is guilty of an offence.

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- SFO Part IX – Discipline
If a regulated person is guilty of misconduct
or is not a fit and proper person, the SFC
may revoke or suspend his licence,
issue public or private reprimand,
prohibit him from applying for licence,
order him to pay a penalty

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SFO Part XI
- Establish a full-time Securities and
Futures Appeals Tribunal chaired by a
judge to hear appeals against decisions
made by the SFC and the HKMA

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SFO Part XII
- Establish and maintain the Investor
Compensation Fund (to cover losses
incurred by clients of intermediaries in
general including non-exchange
participants)

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 SFO Part XIII
- Establish the Market Misconduct
Tribunal to hear cases of insider trading
and other cases of market misconduct

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SFO Part XIV
- The criminal regime for market
misconduct (maximum of 10 years’
imprisonment and/or fines of up to $10
million)
- All forms of market misconduct, including
insider dealing are subject to prosecution as
a criminal offence.
- A person will not face the “double jeopardy”
of being subject to civil proceedings before
the MMT under Part XIII and prosecution
under Part XIV in relation to the same
conduct
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SFO Part XV
- It reflects the modern trend towards
greater disclosure and transparency
in securities markets which include the
disclosure of ownership in companies,
the interests of directors and chief
executives

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 SFO Part XV
Broad provisions on the duty of
disclosure
- Directors and chief executives of a listed
companies have stronger burden to disclose
interests without any threshold limits. The
burden is reduced where the information
does not significantly contribute to the
supervision of the activities

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SFO Part XV
Power to investigate ownership
- A listed company may investigate any
interests in its shares, short positions in
shares, interests in derivatives which have
the relevant share capital as the underlying.
It has to issue its findings to the relevant
exchange, the SFC and the HKMA

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SFO Part XV
- The Financial Secretary may appoint
inspectors to investigate the control of
a listed company to determine the true
persons financially interested or able to
control the listed corporation

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SFO Part XVI
- Enable the SFC to intervene in
civil proceedings between third parties
in cases which concern matters under
the SFO or statutory functions of the SFC

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Part XVII – Repeals and Related
Provisions
- These are extensive and are designed for
continuity and to ensure a smooth transition
from the old regime of the 10 Ordinances to
the new single SFO.

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Review Question
* One of the key objectives of the SFO is to
enable the regulator with sufficient power.
Discuss the parts of SFO that provide the
regulator (SFC) with the necessary power in
its administration. What are these specific
powers?

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