Securities And Futures Commission
Briefing Paper to
LegCo Panel On Financial affairs
supervision of stockbrokers
- progress report on the case of Wei Xin Securities Ltd,
- application of 'fit and proper'; criteria to the controlling shareholder of a registered dealer
2 July 1996
Supervision of stockbrokers
The following update the information provided to the Panel in the SFC note of 29 May 1996.
1.1 In late May and early June, the provisional liquidators reached agreements with clients of Wei Xin, who owned the two types of June warrants (Carr I - Amoy W96 with expiry date of 17 June and Fairyoung warrants with expiry date of 30 June) held by Wei Xin, to take action to preserve the value of the warrants. Under the agreements, the clients gave consent to the provisional liquidators to allow them to sell the warrants in the market or to transfer the warrants to the clients at an agreed price for disposal by clients themselves. Sales proceeds and money collected by the provisional liquidators are currently kept in an interest bearing account in the name of the provisional liquidators. The money will not be released until such time as the ownership of the warrants is resolved to the satisfaction of the Courts.
1.2 At present, the provisional liquidators are still awaiting advice from their lawyers on the various legal issues which are considered by them as important in making decisions on the distribution of clients' securities held in the Central Clearing and Settlement System.
1.3 The petition by Bridge and Company International Broking Limited, a cash client of Wei Xin, to wind up Wei Xin will be heard on 3 July.
2.1 In order to ensure market participants generally, and investors in particular, have confidence that the people and organisations with whom they deal are efficient, honest and financially sound and will treat them fairly, the Commission requires participants to be registered and one of the requirements for registration is that the applicant must be fit and proper.
2.2 Although the term "fit and proper" is not defined in the legislation, Section 23(3) of the SFC Ordinance provides that the Commission shall, in determining the fitness and properness of a person, have regard to, among other things, that person's reputation, character, financial integrity and reliability. The Commission has also published guidelines on the Fit and Proper Criteria for the guidance of applicants and registrants. These guidelines indicate the manner in which, in the absence of any particular consideration or circumstance, the Commission proposes to perform its function of administrating the fit and proper test.
3.1 Section 23(2) of the SFC Ordinance provides that the Commission in considering whether a corporate registrant is fit and proper, shall have regard to the financial status, qualifications and experience, ability to perform functions efficiently, honestly and fairly and the reputation, character, financial integrity and reliability in respect of each of its directors and officers.
3.2 In respect of a corporate registrant, Section 23(6) provides further that the Commission may take into account any matter relating to any substantial shareholder of the company, any other company in the same group of companies and any director or officer of any such other company. Substantial shareholder is defined in the section as anyone having a 10% shareholding in the corporate registrant. The definition was expanded for the purposes of section 26A to include a person holding 35% shareholding in an up stream company which owns 10% of the registered person.
3.3 Section 26A was intended to complement section 23 by preventing circumvention of the fit and proper test by people who are not fit and proper taking over existing registrants by assuming control over a registered person or its holding company. It requires such persons to seek Commission approval prior to assuming control. Section 26A(5) provides that approval will not be given unless the Commission is satisfied that the registrant will remain fit and proper if the approval is granted.
4.1 In order to determine whether a person has assumed control of a company which holds 10% or more of the shares in a registrant, Section 26A adopts the "general offer" trigger point of 35% in the Hong Kong Codes on Takeovers and Mergers and Share Repurchases as the level at which influence or control may be exercised.
4.2 Whilst the trigger point gives a measure of certainty to the market, its adoption creates a threshold below which a person would not be regarded as having assumed control of a substantial shareholder of a corporate registrant for the purposes of the section. This was the situation in the case of Allied Properties' acquisition of 33.18% in Sun Hung Kai Co.
4.3 The Commission does not agree with the view that this has created a loophole in the legislation as such a situation will inevitably occur irrespective of the choice of threshold. It can only be cured if the Commission was given unfettered powers to inquire into any shareholding change, however minute, in a registrant or its holding company. This is obviously undesirable. This does not, however, mean that the Commission is powerless to intervene in a below-threshold acquisition, where such acquisition may impact upon the continuing fitness and properness of the registered person. Under section 56 of the Securities Ordinance the Commission is empowered to inquire at any time into the continuing fitness and properness of a registered person. Where "management control" of a registrant is acquired by a person who is not fit and proper, the Commission may, after making the inquiry, and irrespective of the percentage of acquisition (whether below the section 26A threshold or otherwise) revoke or suspend the registration on the grounds of the lack of fitness of a person concerned in its management.
Last Updated on 18 Aug, 1998
