Securities (Margin Financing) (Amendment) Bill 1999

Amend the Securities Ordinance to regulate securities margin financing and to provide for related matters.

Enacted by the Legislative Council. 1. Short title and commencement

(1) This Ordinance may be cited as the Securities (Margin Financing) (Amendment) Ordinance 1999.

(2) This Ordinance shall come into operation on a day to be appointed by the Secretary for Financial Services by notice published in the Gazette.

2. Interpretation

Section 2(1) of the Securities Ordinance (Cap. 333) is amended by adding--- ""accounting records" (會計紀錄) includes any records relating to trust accounts required to be kept under this Ordinance;

"agent" (代理人) includes a person who acts under an arrangement with another;

"audit" (審計) includes examine;

"business day" (營業日) means a day (excluding Saturday) on which banks in Hong Kong are open for business;

"financial accommodation" (財務通融) means a loan or other arrangement under which a person is or is to be provided with credit, whether directly or through a third party, and in particular includes an overdraft, discounted negotiable instrument, guarantee, a forbearance from enforcing a debt that in substance is a loan, and also includes an agreement to secure the payment or repayment of any such accommodation;

"Insurance Authority" (保險業監督) means the public officer appointed as the Insurance Authority under section 4 of the Insurance Companies Ordinance (Cap. 41);

"Monetary Authority" (金融管理專員) means the person appointed as the Monetary Authority under section 5A of the Exchange Fund Ordinance (Cap. 66);

"officer" (高級人員), in relation to a corporation, means a director, secretary or other person concerned in the management of the corporation;

"record" (紀錄), when used as a noun, means any record of information, however compiled, recorded or stored, and includes---

(a) any book, register or other document containing information; and

(b) any disc, tape or other article from which information is capable of being produced;

"record" (記錄), when used as a verb, includes compile and store;

"registered financier" (註冊融資人) means a person registered as a securities margin financier;

"registered financier's representative" (註冊融資人代表) means a person registered as a securities margin financier's representative;

"securities collateral" (證券抵押品), in relation to a dealer or a securities margin financier, means securities deposited---

(a) with the dealer or financier as security for the provision by the dealer or financier of financial accommodation; or

(b) with any other person to facilitate the provision of financial accommodation by the dealer or financier under an arrangement that confers on the dealer or financier a collateral interest in the securities;

"securities margin financier" (證券保證金融資人) means a person who carries on a business of securities margin financing, whether the person carries on any other business or not;

"securities margin financier's representative" (證券保證金融資人代表), in relation to a securities margin financier, means---

(a) an employee or agent of a securities margin financier who for remuneration performs for the financier any function relating to the business of securities margin financing carried on by the financier, other than work normally performed by an accountant, clerk or cashier; or

(b) a director of the financier who actively participates in, or is directly responsible for supervising, the financier's business of securities margin financing;

"securities margin financing" (證券保證金融資) means providing financial accommodation in order to facilitate the acquisition of securities listed on a stock exchange and, where applicable, the continued holding of those securities, whether or not those or other securities are pledged as security for the accommodation;".

3. Part added

The following is added---

"PART XA

Securities Margin Financing

Division 1---Preliminary

121B. Application of Part XA

(1) This Part applies only to a business of securities margin financing carried on in Hong Kong in so far as the business relates to securities listed on a stock exchange (whether located in Hong Kong or elsewhere).

(2) This Part does not apply to any of the following kinds of business---

(a) the provision of financial accommodation by a registered or exempt dealer in order to facilitate acquisitions or holdings of securities by the dealer for the dealer's clients;

(b) the provision of financial accommodation by a mutual fund corporation in order to finance investment in any of the corporation's mutual funds;

(c) the provision of financial accommodation by an authorized financial institution for the purpose of facilitating acquisitions or holdings of securities by the institution's clients;

(d) securities margin financing that is or forms part of a stock borrowing, or a stock return, as defined by section 19(16) of the Stamp Duty Ordinance (Cap. 117), or any transaction in securities similar to such a borrowing or return;

(e) the provision of financial accommodation by a member of a group of companies to another member of the group in order to facilitate acquisitions or holdings of securities by that other member;

(f) the provision of financial accommodation that forms part of an arrangement to underwrite or sub-underwrite securities;

(g) the provision of financial accommodation to facilitate an acquisition of securities in accordance with the terms of a prospectus.

(3) For the purposes of this section, "group of companies" (公司集團) has the same meaning as in the Companies Ordinance (Cap. 32).

Division 2---Registration of securities margin financiers

121C. Securities margin financing prohibited
except by registered financier

(1) A person must not---

(a) carry on a business of securities margin financing; or

(b) hold out that the person carries on such a business, unless the person is registered as a securities margin financier.

(2) A person who contravenes subsection (1) commits an offence and is liable---

(a) on conviction on indictment, to a fine of $200,000 and to imprisonment for 2 years and, in the case of a continuing offence, to a further fine of $2,000 for each day during which the offence continues; or

(b) on summary conviction, to a fine at level 5 and to imprisonment for 6 months and, in the case of a continuing offence, to a further fine of $500 for each day during which the offence continues.

(3) For the purposes of this section only, a person is taken not to be registered as a securities margin financier while the registration is suspended.

121D. Unregistered person not to act as representative
of registered financier

(1) A person must not---

(a) act as a representative of a registered financier; or

(b) hold out that the person is prepared to act as such a representative, unless the person is registered as a securities margin financier's representative.

(2) A person who contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 4 and, in the case of a continuing offence, to a further fine of $500 for each day during which the offence continues.

(3) For the purposes of this section only, a person is taken not to be registered as a securities margin financier's representative while the registration is suspended.

121E. Who is eligible to be registered under this Part

(1) A person is eligible to be registered as a securities margin financier only if---

(a) the person is a company; and

(b) the company carries on no business other than securities margin financing.

(2) Only a natural person who has reached 18 years of age is eligible to be registered as a securities margin financier's representative.

121F. Application for registration

(1) Any eligible person may apply to the Commission to be registered as a securities margin financier or a securities margin financier's representative.

(2) An application for registration must---

(a) contain such information as is prescribed by Commission rules; and

(b) be accompanied by such documents and by such fee as are so prescribed.

(3) An applicant must, if so required by the Commission, provide the Commission with such further information in relation to the application as the Commission thinks necessary.

(4) An applicant or other person who, in or in relation to an application under this section, makes any representation, whether orally or in writing, that the person knows to be materially false or misleading commits an offence and is liable on conviction on indictment to imprisonment for 5 years.

(5) For the purposes of subsection (4), "representation" (申述) means a representation---

(a) of a matter of fact, either present or past; or

(b) about a future event; or

(6) Proceedings for an offence under subsection (4) may be brought at any time within 6 months after the discovery of the offence.

121G. Grant or refusal of application for registration
as securities margin financier

(1) This section applies to an application for registration as a securities margin financier.

(2) The Commission may refuse the application if---

(a) the applicant is not eligible to make the application; or

(b) the application does not comply with section 121F; or

(c) the applicant has not provided the Commission with such information relating to it or any person employed by or associated with it, and to any circumstances likely to affect its method of conducting business as may be prescribed by or under this Ordinance; or

(d) any director of the applicant is detained under the Mental Health Ordinance (Cap. 136) in a mental hospital or is a person suffering or appearing to suffer from mental disorder within the meaning of that Ordinance; or

(e) any director of the applicant is an undischarged bankrupt or has entered into a voluntary arrangement with the director's creditors within the meaning of the Bankruptcy Ordinance (Cap. 6); or

(f) the applicant does not have the financial resources specified in the financial resources rules as being necessary to enable a business of securities margin financing to be carried on.

(3) The Commission must refuse the application unless at least one director of the applicant is or will be approved by the Commission under section 121I.

(4) The Commission must also refuse the application if the applicant does not satisfy the Commission that it is a fit and proper person to be registered as a securities margin financier.

(5) In considering whether the applicant is a fit and proper person to be registered as a securities margin financier, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the following matters---

(a) the current and past financial status of the applicant and its officers;

(b) the educational or other qualifications or experience of the applicant's officers having regard to the nature of the functions that they will perform if the application is granted;

(d) the reputation, financial integrity and reliability of the applicant and the reputation, character, financial integrity and reliability of the applicant's officers;

(e) any decision granting or refusing an application for authorization made in respect of the applicant---

(i) by the Monetary Authority or the Insurance Authority; or

(ii) by any other authority (whether in Hong Kong or elsewhere) that in the opinion of the Commission performs a function similar to that imposed on the Commission by this section or section 121H or 121I.

(6) For the purposes of this section, the Commission may take into account any relevant information in its possession whether provided by the applicant or by some other person.

(7) For the purposes of this section, the Commission may take into account any information that it has relating to---

(a) any person who is or is to be employed by, or associated with, the applicant for the purposes of the business to which the application relates; and

(b) any person who will be acting as a representative in relation to that business; and

(c) any substantial shareholder of the applicant or of any other company belonging to the same group of companies, or any officer of any such other company.

(8) The Commission must not refuse the application without first giving the applicant an opportunity of being heard.

(9) As soon as practicable after refusing an application made under this section, the Commission must give written notice of the refusal to the applicant and must include in the notice the reasons why the application was refused.

(10) In subsection (5), a reference to authorization includes a reference to registration and licensing.

121H. Grant or refusal of application for registration as securities margin financier's representative

(1) This section has effect where a natural person makes an application for registration as a securities margin financier's representative.

(2) The Commission may refuse the application if---

(a) the applicant is not eligible to make the application; or

(b) the application does not comply with section 121F; or

(c) the applicant has not provided the Commission with such information as may be prescribed by or under this Ordinance; or

(d) the applicant is detained under the Mental Health Ordinance (Cap. 136) in a mental hospital or is a person suffering or appearing to suffer from mental disorder within the meaning of that Ordinance; or

(e) the applicant is an undischarged bankrupt or has entered into a voluntary arrangement with the applicant's creditors within the meaning of the Bankruptcy Ordinance (Cap. 6).

(3) The Commission must refuse the application if the applicant does not satisfy the Commission that the applicant is a fit and proper person to be registered as a securities margin financier's representative.

(4) In considering whether the applicant is a fit and proper person to be registered as a securities margin financier's representative, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the following matters---

(a) the applicant's current and past financial status;

(b) the applicant's educational or other qualifications or experience having regard to the nature of the functions that the applicant will perform if the application is granted;

(d) the applicant's reputation, character, financial integrity and reliability;

(e) any decision granting or refusing an application for authorization made in respect of the applicant---

(i) by the Monetary Authority or the Insurance Authority; or

(f) any matter relating to a person who is or is to be associated with the applicant in relation to the business of the securities margin financier for whom the applicant will act if the application is granted;

(g) any business carried on or proposed to be carried on by the applicant.

(5) For the purposes of this section, the Commission may have regard to any information in its possession whether provided by the applicant or not.

(6) The Commission must not refuse the application without first giving the applicant an opportunity of being heard.

(7) As soon as practicable after refusing an application made under this section, the Commission must give written notice of the refusal to the applicant and must include in the notice the reasons why the application was refused.

(8) In subsection (4), a reference to authorization includes a reference to registration and licensing.

121I. Registered financier not to carry on business
unless it has an approved director

(1) A registered financier must not carry on a business of securities margin financing unless at least one director of the financier is approved by the Commission under this section.

(2) A registered financier that carries on business in contravention of subsection (1) commits an offence and is liable---

(a) on conviction on indictment, to a fine of $200,000 and, in the case of a continuing offence, to a further fine of $2,000 for each day during which the offence continues; or

(b) on summary conviction, to a fine at level 5 and, in the case of a continuing offence, to a further fine of $500 for each day during which the offence continues.

(3) A director of a registered financier, or of a company that has applied to be registered as a securities margin financier, may apply in writing to the Commission to be approved under this section.

(4) The Commission may refuse the application if the applicant---

(a) is not, or has not applied to be, registered as a securities margin financier's representative; or

(b) does not satisfy the Commission that the applicant---

(i) actively participates or will actively participate in the business of securities margin financing that the registered financier or the company that has applied to be so registered carries on or proposes to carry on; or

(ii) is or will be directly responsible for the supervision of that business; or

(iii) is a fit and proper person to supervise that business.

(5) In considering whether the applicant is a fit and proper person to be approved under this section, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the matters specified in section 121H(4).

(6) For the purposes of subsection (4), the Commission may have regard to any information in its possession whether provided by the applicant or not.

(7) The Commission must not refuse the application without first giving the applicant an opportunity of being heard.

(8) As soon as practicable after refusing an application made under this section, the Commission must give written notice of the refusal to the applicant and must include in the notice the reasons why the application was refused.

121J. Commission may impose conditions and restrictions
in granting application for registration

(1) Registration as a securities margin financier or as a securities margin financier's representative is subject to---

(a) such conditions and restrictions (if any) as are prescribed by Commission rules; and

(b) such conditions and restrictions (if any) as the Commission imposes when granting the application for registration or at any time while registration remains in force.

(2) The Commission may, at any time, revoke or vary conditions or restrictions imposed under subsection (1)(b).

(3) The Commission must not impose conditions or restrictions under subsection (1)(b), or vary any such conditions or restrictions, without first giving the registered financier or registered financier's representative an opportunity of being heard.

121K. Special conditions applicable to
registered financiers

(1) Conditions and restrictions that may be imposed on a registered financier under section 121J include (but are not limited to) a condition requiring the financier to lodge and maintain with the Commission a security approved by the Commission for such amount not exceeding the amount prescribed by Commission rules for such purpose.

(2) If a security is lodged with the Commission in accordance with a condition to which registration is subject in accordance with subsection (1), the Commission may apply the security in such circumstances, for such purposes and in such manner as is prescribed by Commission rules.

121L. Special condition applicable to registered
financiers' representatives

It is a condition of registration as a registered financier's representative that the representative must not act for a registered financier other than the financier whose name currently appears in the representative's certificate of registration.

121M. Commission to issue certificate of registration

(1) On granting an application for registration as a securities margin financier, the Commission must issue the applicant with a certificate of registration authorizing the applicant to carry on a business of securities margin financing.

(2) On granting an application for registration as a securities margin financier's representative, the Commission must issue the applicant with a certificate of registration authorizing the applicant to act as a securities margin financier's representative. The certificate must specify the name of the registered financier for whom the applicant is authorized to act.

121N. Information and statements to be
given to Commission

(1) A registered financier must lodge such written information or statements in relation to the securities margin financing business carried on by the financier as the Commission from time to time directs.

(2) If the Commission requires a registered financier to have a statement specified in a direction given under subsection (1) audited by an auditor of the financier before it is lodged, the financier must comply with the requirement.

(3) The Commission may extend the period for compliance with a direction given under subsection (1).

121O. Commission to keep Registers of Securities

Margin Financiers and Securities Margin
Financiers' Representatives

(1) The Commission must keep a Register of Securities Margin Financiers and a Register of Securities Margin Financiers' Representatives for the purposes of this Part.

(2) The Commission must enter in the Register of Securities Margin Financiers the following particulars in relation to each registered financier---

(a) the financier's name;

(b) the name of each of the directors of the financier approved under section 121I;

(d) the date on which the application for registration was granted;

(e) any other matters prescribed by Commission rules.

(3) The Commission must enter in the Register of Securities Margin Financiers' Representatives the following particulars in relation to each registered financier's representative---

(a) the representative's name;

(b) the address of the principal place of business of the registered financier for whom the representative is authorized to act;

(d) any other matters prescribed by Commission rules.

(4) If a person has ceased to be registered under this Part, the Commission must cancel the registration and record the cancellation in the relevant Register.

(5) Whenever the office of the Commission is open for business, any person may, in accordance with Commission rules, inspect the Registers and make a copy of an entry in the Registers relating to a particular person.

(6) A copy of an entry in a Register that purports to be certified by an officer authorized by the Commission is admissible in any legal proceedings as evidence of its contents until the contrary is proved.

121P. Names of registered financiers and registered
financiers' representatives to be
published in Gazette

(1) The Commission must, not less than once in each calendar year, publish in the Gazette the names and addresses of all persons who are registered as securities margin financiers and securities margin financiers' representatives.

(2) If either of the Registers kept under section 121O is amended by adding or removing a person's name, the Commission must publish in the Gazette particulars of the amendment within 1 month after making it.

121Q. Registered financier and registered financier's representative to notify change in particulars

(1) Within 7 business days after a change occurs in a particular prescribed by Commission rules that relates to a registered financier, the financier must give written notice of the change to the Commission.

(2) Within 1 business day after a registered financier ceases to carry on the business of securities margin financing, the financier must give written notice of that fact to the Commission.

(3) Within 7 business days after a person is appointed or ceases to be appointed as a director of a registered financier, the financier must give written notice to the Commission of the appointment or cessation of appointment and the person's name and address.

(4) Within 7 business days after a change occurs in a particular prescribed by Commission rules that relates to a registered financier's representative, the representative must give written notice of the change to the Commission.

(5) Within 1 business day after a registered financier's representative ceases to act for a registered financier, the financier and representative must each give written notice of that fact to the Commission.

(6) A notice required to be given under this section must be in a form provided or approved by the Commission.

(7) A registered financier or registered financier's representative who, without reasonable excuse, fails to comply with a requirement of this section commits an offence and is liable on conviction to a fine at level 2.

121R. Revocation and suspension of registration
of registered financier

(1) The registration of a registered financier is revoked if the financier is struck off the register of companies or is otherwise dissolved.

(2) The Commission may revoke the registration of a registered financier if---

(a) the financier is in liquidation or is ordered to be wound up; or

(b) a receiver, or a receiver and manager, of the financier's property is appointed; or

(d) a levy of execution relating to the financier has not been satisfied; or

(e) the financier enters into a compromise or an arrangement with its creditors; or

(f) the financier or any of the financier's officers is convicted, whether in Hong Kong or elsewhere, of an offence the conviction for which necessarily involved a finding that the officer acted fraudulently or dishonestly; or

(g) the financier or any of the financier's officers is convicted of an offence against this Ordinance; or

(h) the financier contravenes section 121I(1) (whether convicted of the contravention or not).

(3) The Commission must not revoke the registration of a registered financier under subsection (2) without first giving the financier an opportunity of being heard.

(4) The Commission may also revoke a registered financier's registration at the financier's request.

(5) The Commission may, instead of revoking the registration of a registered financier under subsection (2), suspend that registration for such period, or until the happening of such event, as it determines.

(6) The Commission may at any time vary or revoke a suspension of registration of a registered financier if it believes it to be appropriate to do so.

121S. Powers of Commission in relation to
misconduct of registered financier

(1) The Commission may at any time inquire into any of the following matters---

(a) whether a registered financier---

(i) has failed to provide the Commission, whether before or after becoming registered under this Part, with such information relating to the financier, and to any circumstances likely to affect the financier's method of carrying business, as may be required by or under this Ordinance; or

(ii) has provided the Commission with any such information but the information is materially false or misleading; or

(iii) is or has been guilty of any misconduct in relation to the carrying on of the financier's business; or

(iv) for any other reason, is no longer a fit and proper person to be registered as a securities margin financier; or

(b) whether any of the financier's officers---

(i) is or has been guilty of any misconduct; or

(ii) is a fit and proper person to be concerned in the management of the financier's business.

(2) In considering whether a registered financier is a fit and proper person to continue to be registered, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the following matters---

(a) the current and past financial status of the financier and its officers;

(b) the educational or other qualifications or experience of the financier's officers having regard to the nature of the functions that they are required to perform;

(d) the financier's reputation, financial integrity and reliability and the reputation, character, financial integrity and reliability of the financier's officers.

(3) After inquiring under this section into a matter relating to a registered financier or an officer of the financier, the Commission may if it thinks fit---

(a) revoke the financier's registration; or

(b) suspend the financier's registration for such time, or until the happening of such event, as it may determine; or

(4) The Commission must not impose a penalty under this section without first giving the financier or officer concerned an opportunity of being heard.

(5) For the purposes of this section, "misconduct" (失當行為) means---

(a) a contravention of a provision of this Ordinance or of the Securities and Futures Commission Ordinance (Cap. 24) that relates to carrying on a business of securities margin financing; or

(b) a failure to comply with a requirement made by the Commission under this Ordinance or the Securities and Futures Commission Ordinance (Cap. 24) that relates to carrying on a business of securities margin financing; or

(c) a contravention of a condition or restriction of the registration of a registered financier or of the registration of a registered financier's representative who is authorized to act for the financier; or

(d) an act or omission by a registered financier, or by a registered financier's representative who is authorized to act for the financier, that is or is likely to be prejudicial to the interests of members of the investing public.

121T. Revocation and suspension of registration
of registered financier's representative

(1) The registration of a registered financier's representative is revoked by the representative's death.

(2) The Commission may revoke the registration of a registered financier's representative if---

(a) the representative is detained under the Mental Health Ordinance (Cap. 136) in a mental hospital or is a person suffering or appearing to suffer from mental disorder within the meaning of that Ordinance; or

(b) the representative is the subject of a bankruptcy order or enters into a voluntary arrangement with the representative's creditors within the meaning of the Bankruptcy Ordinance (Cap. 6); or

(c) the representative is convicted, whether in Hong Kong or elsewhere, of an offence the conviction for which necessarily involved a finding that the person acted fraudulently or dishonestly; or

(d) the representative is convicted of an offence against this Ordinance; or

(e) the representative ceases to act for the registered financier in relation to whom the representative is registered; or

(f) the registration of the registered financier in relation to whom the representative is registered is revoked or suspended.

(3) The Commission must not revoke the registration of a registered financier's representative under subsection (2) without first giving the representative an opportunity of being heard.

(4) The Commission may also revoke the registration of a registered financier's representative at the request of the representative or the registered financier for whom the representative acts.

(5) The Commission may, instead of revoking the registration of a registered financier's representative under subsection (2), suspend that registration for such period, or until the happening of such event, as it determines.

(6) The Commission may at any time vary or revoke a suspension of registration of a registered financier's representative if it believes it to be appropriate to do so.

121U. Powers of Commission in relation to misconduct of registered
financier's representative

(1) The Commission may at any time inquire into whether a registered financier's representative---

(a) has failed to provide the Commission, whether before or after becoming registered under this Part, with such information relating to the representative as may be required by or under this Ordinance; or

(b) has provided the Commission with any such information but the information is materially false or misleading; or

(c) is or has been guilty of any misconduct in relation to the business of the registered financier for whom the representative acts or formerly acted; or

(d) for any other reason, is no longer a fit and proper person to be registered as a securities margin financier's representative.

(2) In considering whether a registered financier's representative is a fit and proper person to continue to be registered, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the following matters---

(a) the representative's current and past financial status;

(b) the representative's educational or other qualifications or experience, having regard to the nature of the functions that the representative is required to perform;

(d) the representative's reputation, character, financial integrity and reliability.

(3) After inquiring into a matter relating to a registered financier's representative, the Commission may if it thinks fit---

(a) revoke the representative's registration; or

(b) suspend the representative's registration for such time, or until the happening of such event, as it may determine; or

(4) The Commission must not impose a penalty under this section without first giving the representative concerned an opportunity of being heard.

(5) For the purposes of this section, "misconduct" (失當行為) means---

(a) a contravention of a provision of this Ordinance or of the Securities and Futures Commission Ordinance (Cap. 24) that relates to carrying on a business of securities margin financing; or

(d) an act or omission by a registered financier's representative that is or is likely to be prejudicial to the interests of members of the investing public.

121V. Powers of Commission in relation to approved
director of registered financier

(1) The Commission may at any time inquire into whether a director of a registered financier approved under section 121I is no longer a fit and proper person to be responsible for supervising the financier's business of securities margin financing.

(2) In considering whether a director is a fit and proper person to continue to be responsible for supervising the financier's business of securities margin financing, the Commission must, in addition to any other matter that the Commission considers relevant, have regard to the following matters---

(a) the director's ability to be responsible for supervising the financier's business of securities margin financing;

(b) the director's reputation, character, financial integrity and reliability.

(3) After inquiring into a matter relating to a director approved under section 121I, the Commission may, if it thinks fit, cancel the approval.

(4) The Commission must not cancel the approval of a director under this section without first giving the director an opportunity of being heard.

121W. Commission to give written notice of decisions

(1) On deciding to revoke or suspend the registration of a registered financier under section 121R or 121S, or to impose any other penalty on a registered financier or an officer of the financier under section 121S, the Commission---

(a) must give written notice of the decision to the financier or officer; and

(b) must include in the decision a statement of the reasons on which it is based.

(2) On deciding to revoke or suspend the registration of a registered financier's representative under section 121T or 121U, or to impose any other penalty on a registered financier's representative under section 121U, the Commission---

(a) must give written notice of the decision to the representative; and

(b) must include in the decision a statement of the reasons on which it is based.

(3) On deciding to cancel the approval of a director of a registered financier under section 121V, the Commission---

(a) must give written notice of the decision to the director; and

(b) must include in the decision a statement of the reasons on which it is based.

121X. Effect of revoking or suspending registration

(1) Except as provided by Division 4, the revocation or suspension of the registration of a person under this Part does not operate so as---

(a) to avoid or affect an agreement, transaction or arrangement relating to securities margin financing entered into by the person, whether the agreement, transaction or arrangement was entered into before or after the revocation or suspension; or

(b) to affect any right, obligation or liability arising under any such agreement, transaction or arrangement.

(2) A person whose registration is revoked under---

(a) section 121R (other than under subsection (2)(c) or (h) or (4) of that section); or

(b) section 121S; or

(d) section 121U,

is not eligible to apply to be registered under this Part, whether as a securities margin financier or a securities margin financier's representative, before the end of 12 months from the revocation.

Division 3---Conduct of securities margin financing businesses

121Y. Registered financier to provide client with statement of account

(1) This section applies to the following kinds of transactions entered into between a registered financier and a client of the financier---

(a) a deposit of securities collateral or money by or on behalf of the client;

(b) a withdrawal of securities collateral or money by or on behalf of the client;

(d) an adjustment of the terms on which financial accommodation is provided to the client, whether by extension, reduction, credit or debit;

(e) a crediting of income to, or a deduction of charges from, the client's account.

(2) A registered financier must prepare and give to each client of the financier, no later than the end of the next business day after entering into any transaction to which this section applies, a statement of account that complies with subsection (3).

(3) The statement referred to in subsection (2) must include the following information---

(a) the name under which the financier carries on business and the address of the principal place in Hong Kong at which the business is carried on;

(b) the name, address and account number of the client to whom the financier is required to give the statement of account;

(c) the outstanding balance of the account of the client at the beginning and at the end of each day on which a transaction involving the client takes place and details of changes in the balance of that account during that day;

(d) details of all financial accommodation provided to the client, including the nature, limit and expiry date of the accommodation;

(e) the quantity of each description of securities collateral held for the account of the client at the beginning of that day;

(f) the quantity, market price, market value, margin ratio and margin value of each description of securities collateral held for that account at the end of that day;

(g) the quantity of each description of securities collateral deposited to or withdrawn from that account during that day;

(h) all disposals by the financier of securities collateral held for that account during that day and what happened to the proceeds of those disposals;

(i) a breakdown of the income credited, and the interest and other charges debited, to that account on that day.

(4) A registered financier must, within 7 business days after the end of each calendar month---

(a) prepare for each client of the financier a statement of account that complies with subsection (5); and

(b) give the statement to the client.

(5) The statement referred to in subsection (4) must include the following information---

(a) the name under which the financier carries on business and the address of the principal place in Hong Kong at which the business is carried on;

(b) the name, address and account number of the client to whom the financier is required to give the statement of account;

(c) the outstanding balance of the account of the client at the beginning and at the end of that month and details of changes in the balance of that account during that month;

(d) details of all financial accommodation provided to the client during that month, including the nature, limit and expiry date of the accommodation;

(e) the quantity of each description of securities collateral held for the account of the client at the beginning of that month;

(f) the quantity, market price, market value, margin ratio and margin value of each description of securities collateral held for that account at the end of that month;

(g) the quantity of each description of securities collateral deposited to or withdrawn from that account during that month;

(h) all disposals by the financier of securities collateral held for that account during that month and what happened to the proceeds of those disposals;

(i) a breakdown of the income credited, and the interest and other charges debited, to that account during that month.

(6) A registered financier who fails to comply with this section commits an offence and is liable on conviction to a fine at level 4.

121Z. Duties of registered financier with respect to clients' accounts

(1) As soon as practicable after a client of a registered financier requests the financier to provide the client with a copy of a specified statement of the client's account with the financier, the financier must comply with the request.

(2) If the Commission, on the application by a client of a registered financier, so directs, the financier must make available for inspection by the client during the financier's ordinary hours of business the financier's copies of the client's statements of account.

(3) A registered financier is not required to provide or keep available for inspection a copy of a statement of account if---

(a) in the case of a statement of account referred to in section 121Y(2), the statement that was prepared more than 2 years before the request; or

(b) in the case of a statement of account referred to in section 121Y(4), the statement that was prepared more than 6 years before the request.

(4) A registered financier may impose a charge not exceeding an amount prescribed by Commission rules for a copy of a document provided under subsection (1).

(5) A registered financier who, without reasonable excuse, fails to comply with subsection (1) or (2) commits an offence and is liable on conviction to a fine at level 4.

121AA. Restrictions on disposition of securities
collateral by registered financiers

(1) As soon as practicable after securities collateral is deposited with a registered financier, or with another person to facilitate the provision of financial accommodation by the financier, by or on behalf of a client of the financier, the financier must ensure that the relevant securities are---

(a) registered in the name of the client; or

(b) deposited in safe custody in a designated account with an authorized financial institution, a registered dealer or some other institution approved by the Commission for the purposes of this section; or

(2) The Commission may, by written notice given to the institution concerned, approve an institution for the purposes of subsection (1)(b) only if it is satisfied that the institution provides satisfactory facilities for the safe custody of documents.

(3) If securities collateral is deposited with a registered financier, or with another person to facilitate the provision of financial accommodation by the financier, by or on behalf of a client of the financier, the financier must ensure that the relevant securities are not deposited, transferred, lent, pledged, or repledged or otherwise dealt with except as provided by subsections (1) and (4). This subsection has effect even if the client of the financier purports to have authorized (whether in writing or not) the financier or other person to enter into the transaction.

(4) If securities collateral is deposited with a registered financier, or with another person to facilitate the provision of financial accommodation by the financier, by or on behalf of a client of the financier, the financier may---

(a) deposit the relevant securities with an authorized financial institution or a registered dealer as collateral for financial accommodation provided to the financier; or

(b) dispose of those securities in settlement of the client's obligation to maintain an agreed level of margin; or

(c) dispose of those securities in settlement of any liability of the client to repay or discharge the financial accommodation provided by the financier, but only with the written authority of the client or as permitted by Commission rules.

(5) An authority referred to in subsection (4)---

(a) is effective only if it specifies the period for which it is current; and

(b) remains in force for the period so specified or 12 months, whichever is the shorter; and

(6) A registered financier who, without reasonable excuse, fails to comply with subsection (1) commits an offence and is liable on conviction to a fine at level 3.

(7) A registered financier who, without reasonable excuse, contravenes subsection (3) commits an offence and is liable---

(a) on conviction on indictment, to a fine of $200,000; or

(b) on summary conviction, to a fine at level 5.

(8) Nothing in this section affects a lawful claim or lien that a person has in respect of securities collateral deposited with a registered financier or another person to facilitate the provision of financial accommodation by the financier.

121AB. Registered financier to notify Commission if unable
to comply with financial resources rules

(1) If a registered financier becomes aware, or becomes aware of information that ought to make the financier aware, that the financier cannot comply with the financial resources rules, the financier must immediately---

(a) notify the Commission of the fact; and

(b) cease to provide further financial accommodation, otherwise than for the purpose of giving effect to any agreement or arrangement entered into before the time when the financier became so aware.

(2) A registered financier is taken to be aware that the financier is unable to comply with the financial resources rules if any director of the financier is aware or would, with the exercise of reasonable diligence, have been aware of that matter.

(3) If the Commission reasonably believes that a registered financier cannot comply with the financial resources rules, the Commission may suspend the financier's registration pending consideration by the Commission of the matter under section 121R or the report of an auditor appointed under section 121AY.

(4) For the purposes of ascertaining whether or not a registered financier is complying with the financial resources rules, the Commission may---

(a) require the financier and any of its officers, employees or agents to produce for inspection all accounting and other records held by the financier that relate to the financier's business; and

(b) require an auditor of the financier to produce all accounting and other records held by the auditor relating to that business.

(5) The power conferred on the Commission by subsection (4) may be exercised by a person authorized in writing by the Commission for the purpose, subject to the person producing the written authorization before exercising the power.

(6) A registered financier that contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 4 and, in the case of a continuing offence, to a further fine of $250 for each day during which the offence continues.

(7) A person who, without reasonable excuse, fails to comply with any requirement made to the person under subsection (4) commits an offence and is liable on conviction to a fine at level 5 and to imprisonment for 2 years.

Division 4---Contracts with unregistered financiers

121AC. Application and interpretation of this Division

(1) This Division applies to contracts entered into after the commencement of this Division by unregistered securities margin financiers with their clients in connection with the business of securities margin financing carried on by those financiers.

(2) A reference in this Division to an unregistered securities margin financier is a reference to a securities margin financier---

(a) who is not registered under Division 2; or

(b) whose registration under that Division is suspended, but does not include a reference to a person who does not contravene section 121C because of the operation of section 121BH(1).

121AD. Client may give notice of rescission
to unregistered financier

(1) A client of an unregistered securities margin financier who has entered into a contract with the financier may do either of the following---

(a) subject to this section, give to the financier a written notice stating that the client wishes to rescind the contract on the ground that the financier was an unregistered securities margin financier at the time when the contract was entered into;

(b) exercise the entitlement conferred by section 121AF.

(2) A client of an unregistered securities margin financier ceases to be entitled to give a notice under subsection (1)(a) at the end of 28 days after the client has become aware of the facts entitling the client to give the notice.

(3) A client of an unregistered securities margin financier ceases to be entitled to give a notice under subsection (1)(a) if, after becoming aware of the facts entitling the client to give the notice, the client's conduct shows that the client has affirmed the contract.

(4) A notice given under subsection (1)(a) rescinds the contract unless the rescission would prejudice a right, or an interest in property, that has been acquired by a person (other than the unregistered securities margin financier)---

(a) in good faith; and

(b) for valuable consideration; and

121AE. Court may make certain consequential orders
when notice of rescission has been given

(1) If a contract to which this Division applies is effectively rescinded under section 121AD, either the client or the unregistered securities margin financier concerned may apply to the Court for orders under subsection (2).

(2) On hearing an application under subsection (1), the Court may make such orders as it would have power to make if the client had rescinded the contract for misrepresentation by the financier.

(3) The Court is empowered to make an order under this section only to the extent that the order would not prejudice a right, or an interest in property, that has been acquired by a person (other than the unregistered securities margin financier)---

(a) in good faith; and

(b) for valuable consideration; and

121AF. Client may apply to Court for order instead
of giving notice to rescind contract

(1) A client of an unregistered securities margin financier who decides to exercise the right conferred by section 121AD(1)(b) may, within a reasonable period after becoming aware of the relevant facts, make an application to the Court for an order under subsection (3).

(2) If an application is made under this section, the Court may make such orders as it thinks equitable, expressed to have effect until the application is determined.

(3) On hearing an application under this section, the Court---

(a) may make an order that will place the client as nearly as possible in the same position as if the client had effectively rescinded the contract for misrepresentation by the financier; and

(b) may, if the order varies the contract, declare the contract to have had effect as so varied at and after the time when it was originally made.

(4) If the Court makes an order under subsection (3), it may make such ancillary orders as it thinks equitable.

(5) The Court is empowered to make an order under this section only to the extent that the order would not prejudice a right, or an interest in property, that has been acquired by a person, other than the unregistered securities margin financier---

(a) in good faith; and

(b) for valuable consideration; and

121AG. Client may apply to Court for partial rescission

(1) If a client of an unregistered securities margin financier gives a notice under section 121AD purporting to rescind a contract but the notice is not effective because of section 121AD(4), the client may, within a reasonable period after giving the notice, make an application to the Court for an order under subsection (3).

(2) If an application is made under this section, the Court may make such orders as it thinks equitable, expressed to have effect until the application is determined.

(3) On hearing an application under this section, the Court may make an order---

(a) varying the contract in such a way as would place the client in the same position, as nearly as possible without prejudicing an existing right or interest of the kind referred to in section 121AD(4), as if the contract had not been entered into; and

(b) declaring the contract to have had effect as so varied at and after the time when it was originally made.

(4) If the Court makes an order under subsection (3), it may make such ancillary orders as it thinks equitable.

121AH. Saving

The provisions of this Division do not affect the operation of the rules of law relating to misrepresentation (whether under the common law or any enactment), except to the extent that such rules are inconsistent with those provisions.

Division 5---Accounting records of registered financiers

121AI. Registered financier to keep accounting records

(1) A registered financier---

(a) must keep such accounting records as will record and explain the transactions entered into by, and the financial position of, the financier; and

(b) must ensure that those records are kept as required by this section.

(2) The financier's accounting records must be kept in such a way---

(a) as will enable true and fair profit and loss accounts and balance sheets of the securities margin financing business carried on by the financier to be prepared from time to time; and

(b) as will enable those accounts and balance sheets to be conveniently and properly audited; and

(c) as will enable it to be readily established whether or not the financier had complied with the financial resources rules.

(3) The records must be kept in writing in the Chinese or English language or in such a manner as will enable them to be readily accessible and readily converted into writing in the Chinese or English language.

(4) The records must be kept in sufficient detail to show particulars of---

(a) all money received or paid by the financier, including money paid to or disbursed from a trust account; and

(b) all financial accommodation provided by the financier to clients and all payments received from clients; and

(c) all disposals of securities collateral by the financier held for the account of clients, showing in the case of each disposal of securities collateral---

(i) the name of the client; and

(ii) the name of the dealer who effected the disposal; and

(iii) the charge made for effecting the disposal; and

(iv) what happened to the proceeds of the disposal; and

(d) all income received by the financier from other sources; and

(e) all outgoings (including interest) paid by the financier; and

(f) all the financier's assets and liabilities (including contingent liabilities); and

(g) all securities that are not the financier's property and for which the financier is accountable, and all securities that are deposited with a person under an arrangement that confers on the financier a collateral interest in the securities, showing by whom, and for whom, the securities or the documents of title to the securities are held, distinguishing those that are held by a third party for safe custody from those that are deposited as security for financial accommodation provided to the financier.

(5) The records must include copies of acknowledgements of the receipt of securities or of documents of title to securities received by the financier from or on behalf of clients. Each acknowledgement must specify the name of the client and give particulars of the securities concerned.

(6) Without limiting subsection (4), the records must be kept in sufficient detail to show separately particulars of all transactions entered into by the financier with or for the account of its clients.

(7) A registered financier must retain---

(a) for a period of not less than 2 years, a copy of each statement of account referred to in section 121Y(2); and

(b) for a period of not less than 6 years, the records referred to in subsection (1) and a copy of each statement of account referred to in section 121Y(4).

(8) An entry in the accounting and other records of a registered financier is taken to have been made by, or with the authority of, the financier.

(9) A record required to be kept by a registered financier under this section may be kept either by making entries in a bound book or by recording the relevant matters in an electronic device or in any other convenient manner.

(10) A registered financier who keeps records required by this section otherwise than in a bound book must take reasonable precautions to guard against falsification of the records and to facilitate discovery of any such falsification.

(11) A person who---

(a) includes in a record required to be kept by this section information that the person knows to be materially false or misleading; or

(b) destroys, removes or falsifies information that is included in such a record; or

(c) fails to record information in such a record with intent to falsify an entry made or to be made from that information, commits an offence and is liable on conviction to a fine at level 5 and to imprisonment for 2 years.

121AJ. Registered financier to notify Commission
of its financial year

(1) A registered financier must, not later than 1 month after becoming registered, give to the Commission written notice of the date on which its financial year ends.

(2) The Commission may, on the written application of a registered financier, allow the financier to vary the date on which its financial year ends. The application may be approved on such conditions as the Commission considers appropriate.

(3) A registered financier must ensure that, except with the Commission's approval, its financial year does not exceed 12 months.

(4) This section does not affect the operation of section 122 of the Companies Ordinance (Cap. 32) in relation to a registered financier.

121AK. Registered financier to prepare
annual financial statements

(1) A registered financier must, in respect of each financial year of the financier ending after it became registered---

(a) prepare financial statements, consisting of a true and fair profit and loss account and a balance sheet made up to the last day of the financial year, on the basis of such accounting principles (if any) and containing such information as is prescribed by Commission rules; and

(b) lodge the statements with the Commission not later than 4 months after the end of that financial year, together with the report of the financier's auditor containing the information so prescribed.

(2) The Commission may, on an application made by a registered financier or the financier's auditor before the deadline for lodging financial statements with the Commission or, if that period has been extended by an approval or approvals previously given under this subsection, before the end of the period as so extended, approve an extension of the period.

(3) An approval under subsection (2) may be given subject to such conditions (if any) as the Commission decides to impose.

(4) A registered financier who---

(a) fails to lodge financial statements with the Commission before the deadline; or

(b) fails to comply with conditions imposed under sub- section (3), commits an offence and is liable on conviction to a fine at level 2.

Division 6---Registered financiers' trust accounts

121AL. Registered financier required to keep trust accounts

A registered financier must establish and maintain in a licensed bank one or more accounts, to be designated as trust accounts.

121AM. What is to be paid into trust account

(1) A registered financier must pay into a trust account---

(a) all amounts received from or on account of a client other than amounts---

(i) used to reduce the amount owed by the client to the financier; or

(ii) paid to the client, or paid in accordance with the client's directions, within 4 business days after receipt; and

(b) subject to any agreement with a client to the contrary, all amounts derived as interest from the retention in a trust account of any amount mentioned in paragraph (a).

(2) The financier must ensure that all amounts required to be paid into a trust account under subsection (1) are retained there---

(a) until paid to the client or in accordance with the client's directions; or

(b) until required to pay money that the client owes to the financier.

(3) The financier also must ensure that no amount other than an amount of a kind referred to in subsection (1) is paid into a trust account.

121AN. Interest accruing to money in trust
account to belong to client

All amounts that accrue as interest from the holding of money in a trust account kept by a registered financier belong to the client to whom the financier is accountable, subject to any agreement between the financier and the client to the contrary.

121AO. When money to be paid into trust account

A registered financier must ensure that money required by this Division to be paid into a trust account is paid into the account within 4 business days after it is received by the financier.

121AP. Money in trust account not available to meet financier's own debts

(1) Subject to this Division, money held in a trust account of a registered financier---

(a) is not available for the payment of any of the financier's debts or liabilities; and

(b) is not liable to be attached, or taken in execution, under the order or process of a court at the instance of a person who sues to recover such a debt or to enforce such a liability.

(2) A payment of money made from a trust account otherwise than in accordance with this Division is void and a person to whom such a payment is made does not get title to the money concerned.

121AQ. Claim and lien over money held in
trust account not affected

Nothing in this Division affects a lawful claim or lien that a person has in respect of---

(a) money held in a trust account; or

(b) money received by a registered financier that has not yet been paid into a trust account kept by the financier.

121AR. Registered financier to keep accounting
records relating to trust account

A registered financier must, in relation to each trust account kept by the financier under this Division, keep accounting records that record---

(a) all amounts paid into the account, the names of the clients on whose behalf the amounts are held, and the dates on which the amounts were paid into the account; and

(b) all withdrawals from the trust account, the names of the clients on whose behalf the withdrawals were made, and the dates of the withdrawals; and

121AS. Offences against this Division

(1) A person who, without reasonable excuse (and without intent to defraud), contravenes any provision of this Division commits an offence and is liable on summary conviction to a fine at level 3.

(2) A person who, with intent to defraud, contravenes a provision of this Division commits an offence and is liable on conviction on indictment to a fine of $200,000 and to imprisonment for 5 years.

Division 7---Auditing of accounting and other records

121AT. Registered financier to appoint auditor

(1) A registered financier must appoint an auditor to audit the financier's accounting and other records.

(2) As soon as practicable after an auditor retires, resigns or for any other reason ceases to be the auditor of a registered financier, the financier must appoint another auditor to audit the financier's accounting and other records.

(3) A person who---

(a) is an employee of the financier or is an employee of such an employee; or

(b) is an officer of the financier or is an employee of such an officer; or

(c) belongs to any other class of persons prescribed by Commission rules, is ineligible for appointment under this section.

121AU. Registered financier to give notice to the Commission if auditor ceases to hold office or notice of motion to remove or not reappoint auditor is given

(1) If---

(a) a registered financier gives notice to its members of a motion, to be moved at a general meeting of the financier---

(i) to remove an auditor of the financier from office; or

(ii) to replace or not reappoint such an auditor at the end of the auditor's term of office; or

(b) an auditor of a registered financier is removed from office otherwise than in consequence of such a motion, or resigns from or otherwise ceases to hold office as auditor, the financier must, within 1 business day after the relevant event, inform the Commission in writing that the notice has been given or that the auditor has ceased to be an auditor of the financier.

(2) A registered financier who fails to comply with subsection (1) commits an offence and is liable on conviction to a fine at level 4.

121AV. Auditor of registered financier to notify Commission of resignation or
removal from office

An auditor of a registered financier who---

(a) resigns or is removed from office; or

(b) is not reappointed at the end of the auditor's term of office,

is required to give to the Commission written notice of the resignation, removal or non-reappointment within 1 business day after the resignation, removal or non-reappointment occurs.

121AW. Auditor to report to Commission on certain matters

(1) If an auditor, in the course of performing duties as auditor of a registered financier, becomes aware of a reportable matter, the auditor is required, as soon as practicable after becoming aware of the matter, to lodge with the Commission a written report on the matter and send a copy of the report to the financier.

(2) In this section, "reportable matter" (須予報告的事項) means---

(a) a matter that, in the opinion of the auditor---

(i) adversely affects the financier's financial position to a material extent; or

(ii) constitutes a contravention by the financier of section 121AA or 121AI, Division 6 or the financial resources rules; or

(b) any qualification or adverse statement that the auditor has included or intends to include in the auditor's report on the financier's annual financial statements.

121AX. Protection for auditor

(1) An auditor of a registered financier does not contravene a duty owed by the auditor in law only because the auditor has given to the Commission in good faith information, an opinion or a document concerning a matter if---

(a) the auditor became aware of the matter in the auditor's capacity as such; and

(b) the matter is relevant to a function of the Commission under this Ordinance or the Securities and Futures Commission Ordinance (Cap. 24).

(2) Subsection (1) has effect with respect to information, an opinion or a document given to the Commission whether or not it is given in response to a request of the Commission.

(3) Subsection (1) also applies---

(a) to a person whose appointment or engagement as an auditor has ceased; and

(b) to an auditor who was appointed by a registered financier whose registration has been revoked or suspended.

Division 8---Audits by auditors appointed by Commission

121AY. Commission may appoint auditor

(1) The Commission may appoint an auditor to audit and report on the accounting and other records of, and securities held by, a registered financier if---

(a) the financier has failed to comply with section 121AK; or

(b) the Commission has received a report under section 121AW in relation to the financier; or

(2) If the Commission is of the opinion that the whole or any part of the expenses of an auditor appointed under this section should be borne by the registered financier concerned, it may, by order in writing, direct the financier to pay a specified amount, being the whole or part of those expenses, within the period and in the manner specified.

(3) If a registered financier fails within the permitted period to comply with an order made under this section, the Commission may, by proceedings brought in any court of competent jurisdiction, recover as a debt the amount specified in the order.

121AZ. Commission may appoint auditor on application
of client of registered financier

(1) On receiving an application from a client of a registered financier who alleges that the financier has failed to account to the client for money or securities received for the client by the financier, the Commission may appoint an auditor to audit and report on the accounting and other records of, and securities held by, the financier. The appointment must be in writing.

(2) The application must be in writing and must specify---

(a) the circumstances under which the financier received the money or securities in respect of which the financier is alleged to have failed to account; and

(b) particulars of that money or those securities, and of related transactions between the applicant and the financier; and

(3) The applicant must verify by statutory declaration all statements made in the application.

(4) A statement made in the application has qualified privilege if made in good faith and without malice.

(5) The Commission may appoint an auditor under subsection (1) only if---

(a) it has given the registered financier an opportunity to give an explanation for the alleged failure; and

(b) it is satisfied that the applicant has good reason for making the application; and

(c) it is satisfied that it is in the interests of the financier or the applicant or the public generally that the accounting and other records of, and securities held by, the financier should be audited, and reported on.

121BA. Auditor to report to Commission

An auditor appointed under this Division is required to provide the Commission, as soon as practicable after completing the audit in respect of which the auditor was appointed, with a written report of the audit.

121BB. Special powers of auditor appointed by Commission

(1) An auditor appointed under this Division to audit the accounting and other records kept, and securities held, by a registered financier may, for the purpose of carrying out the audit---

(a) examine on oath the financier, any of the financier's officers, employees or agents, and any other auditor appointed under this Part in relation to the financier's business; and

(b) employ such persons as the auditor considers necessary for the conduct of the audit.

(2) The auditor may authorize in writing any of the auditor's employees to do, in relation to the audit, anything that the auditor is permitted or required to be done under this Division, except to examine a person on oath or to exercise the power conferred by this subsection.

121BC. Auditor and auditor's employees
not to disclose certain matters

(1) This section applies to an auditor appointed under this Division and all employees of the auditor.

(2) A person to whom this section applies must not disclose any information which may come to the person's knowledge in the course of performing duties relating to the conduct of an audit under this Division, to any person other than---

(a) the Commission; and

(b) if the person is an employee, the auditor by whom the employee is employed.

(3) Subsection (2) does not prevent the disclosure of information for the purpose of giving effect to this Ordinance, or for the purposes of any criminal or civil proceedings.

(4) A person who, without lawful authority, contravenes subsection (2) commits an offence and is liable on conviction to a fine at level 6 and to imprisonment for 6 months.

121BD. Accounting and other records
to be produced on request

(1) On being requested to do so by an auditor appointed under this Division or a person authorized under section 121BB(2), a registered financier, or any of its officers, employees and agents, must produce for inspection all accounting and other records, and any securities held by the financier, that relate to the financier's business.

(2) On being requested to do so by an auditor appointed under this Division or a person authorized under section 121BB(2), an auditor appointed by a registered financier must produce for inspection all accounting and other records held by the auditor relating to the financier's business.

(3) If an auditor appointed under this Division, or a person authorized under section 121BB(2), puts to a registered financier, or any of its officers, employees and agents, or any auditor appointed by the financier, a question that is relevant to the audit, the financier, officer, employee, agent or auditor must answer the question.

(4) A person to whom a question is put under subsection (3) is not excused from answering the question on the ground that the answer to the question might incriminate the person, but neither the question nor the answer is admissible in evidence in criminal proceedings brought against the person, other than criminal proceedings for giving an answer that is false or misleading.

(5) A person who, without reasonable excuse, fails to comply with any request made to the person under subsection (1) or (2) commits an offence.

(6) A person referred to in subsection (3) who---

(a) without reasonable excuse, fails to answer a question put to the person under that subsection; or

(b) gives an answer that is, to the person's knowledge, materially false or misleading, commits an offence.

(7) A person who commits an offence against subsection (5) or (6) is liable on conviction to a fine at level 5 and to imprisonment for 2 years.

(8) A person authorized under section 121BB(2) may exercise a power conferred by subsections (1) or (2) or the power to put a question for the purposes of subsection (3) only after producing the person's written authorization.

Division 9---Supplementary provisions relating to auditing

121BE. Offence to destroy, conceal or alter records or send records or other property outside Hong Kong

Any person who, with intent to prevent, delay or obstruct the conduct of an audit under Division 7 or 8---

(a) destroys, conceals or alters an accounting or other record relating to the business of a registered financier; or

(b) sends or attempts to send, or conspires with any other person to send, out of Hong Kong any such record, or any property belonging to or under the control of a registered financier, commits an offence and is liable on conviction to a fine at level 5 and to imprisonment for 2 years.

121BF. Obstruction of audit

Any person who, with intent to prevent, delay or obstruct the conduct of an audit under Division 7 or 8, leaves or attempts to leave Hong Kong commits an offence and is liable on conviction to a fine at level 5 and to imprisonment for 2 years.

Division 10---Miscellaneous provisions

121BG. Commission may waive or modify
requirements imposed by this Part

(1) A person who is a registered financier or an applicant for registration as a securities margin financier may apply in writing to the Commission to waive or modify a requirement of a prescribed provision in its application to the person.

(2) On considering an application made under subsection (1), the Commission may waive or modify the requirement specified in the application in its application to the applicant, either unconditionally or subject to conditions or may refuse the application.

(3) In deciding whether or not to grant an application made under subsection (1), the Commission must have regard to the circumstances applicable to the applicant and to the particular kind of business carried on or to be carried on by the applicant. The Commission must have particular regard as to---

(a) whether compliance with the requirement in question would be unduly burdensome for the applicant; and

(b) whether the exercise of the power in the particular case would result in undue risk to the investing public.

(4) On granting or refusing an application made under this section, the Commission must give written notification of its decision to the applicant.

(5) A waiver or modification granted under this section remains in force---

(a) for such period as is specified in the notification; or

(b) if no such period is specified, until revoked by the Commission.

(6) This section does not limit the powers conferred on the Commission by section 55A of the Securities and Futures Commission Ordinance (Cap. 24).

(7) For the purpose of this section, the prescribed provisions are---

(a) sections 121C, 121I, 121Y, 121Z, 121AA, 121AB, 121AI, 121AJ, 121AK, 121AL, 121AM, 121AO, 121AR, 121AT and 121AU; and

(b) any provision of the Commission rules that is applicable to registered financiers or applicants for registration as securities margin financiers.

121BH. Certain unregistered persons to be permitted to
carry on business or to act pending registration

(1) If a person who is, immediately before the commencement of this Part, carrying on a business of securities margin financing applies to the Commission to be registered as a securities margin financier within 30 days after that commencement, the person does not contravene section 121C---

(a) pending the determination of the application by the Commission; or

(b) if the Commission subsequently refuses the application, until---

(i) the expiry of 14 days immediately after the Commission has notified the refusal to the applicant; or

(ii) the expiry of such further period as the Commission notifies to the applicant in writing.

(2) If a person who is, immediately before the commencement of this Part, acting for a person carrying on a business of securities margin financing applies to the Commission to be registered as a securities margin financier's representative within 30 days after that commencement, the person does not contravene section 121D---

(a) pending the determination of the application by the Commission; or

(b) if the Commission subsequently refuses the application, until---

(i) the expiry of 14 days immediately after the Commission has notified the refusal to the applicant; or

(ii) the expiry of such further period as the Commission notifies to the applicant in writing.

(3) The Commission may, by order served on an applicant referred to in subsection (1), require the applicant to do all or any of the following---

(a) to carry on the business of securities margin financing in a specified manner; or

(b) not to carry on such a business in a manner so specified; or

(c) to deal in a specified manner with assets (whether located in Hong Kong or elsewhere) that are under the applicant's control; or

(d) not to deal with any such assets in a specified manner; or

(e) to keep in Hong Kong such assets, or such assets of a specified kind, as will, in the opinion of the Commission, ensure that the applicant will be able to meet the applicant's liabilities in relation to the business of securities margin financing carried on by the applicant.

(4) A person who, without reasonable excuse, fails to comply with an order served on the person under subsection (3) commits an offence and is liable on conviction to a fine at level 6.".

4. Consequential amendment of Securities Ordinance

The Securities Ordinance (Cap. 333) is further amended as indicated in Schedule 1.

5. Consequential amendment of Securities and Futures Commission Ordinance

The Securities and Futures Commission Ordinance (Cap. 24) is amended as indicated in Schedule 2.

6. Consequential amendment of other Ordinances

The Ordinances specified in column 2 of Schedule 3 are amended as indicated in column 3 of that Schedule.

7. Savings and transitional provisions

The savings and transitional provisions set out in Schedule 4 have effect.

SCHEDULE 1 [s. 4]

Consequential Amendment of Securities Ordinance

Item Provision affected Amendment

1. Section 2 (1) (a) In the definition of "certificate of registration", add "or XA" after "Part VI".

(b) In paragraph (e) of the definition of "corporation", repeal "by regulations" and substitute ", by Commission rules,".

"(d) a registered financier if the only dealings in securities entered into by the financier are disposals of securities collateral held for a client---

(i) in settlement of the client's obligation to maintain an agreed level of margin; or

(ii) in settlement of the client's liabilities to repay or discharge financial accommodation provided by the financier;".

(d) In the definition of "financial year", add---

"(aa) in the case of a registered financier, the period notified by the financier under section

121AJ or approved by the Commission under that section; or".

(e) In the definition of "registered", repeal

"or investment representative" and substitute

", investment representative, securities margin financier or securities margin financier's representative".

(f) In the definition of "representative", repeal " or an investment representative" and substitute ", an investment representative or a securities margin financier's representative".

(g) In paragraph (ii) of the definition of "securities", repeal "regulations" and substitute "Commission rules".

(h) Repeal the definition of "trust account" and substitute---

""trust account" (信託帳戶)---

(a) in relation to a dealer, means a trust account required to be kept under section 84; and

(b) in relation to a registered financier, means a trust account required to be kept under section 121AL;".

(i) Add---

""authorized financial institution" (認可財務機構) means an authorized institution within the meaning of section 2 of the Banking Ordinance (Cap. 155);

"Commission rules" (監察委員會規則) means rules made under section 146;

"financial resources rules" (財政資源規則) means rules made under section 28 of the Securities and Futures Commission Ordinance (Cap. 24);".

2. Section 5(7)(d) Repeal "regulations" and substitute "Commission rules".

3. Section 27(1) and (3) Repeal "bank trading days" and substitute "business days".

4. Section 52 (a) In subsections (1) and (1A), repeal "in regulations" and substitute "by Commission rules".

(b) In subsection (2)(c), repeal "director or".

(d) In subsection (6)(d), repeal "regulations" and substitute "Commission rules".

(e) In subsection (7), repeal "to enable liabilities under subsection (2), or such other liabilities as may be prescribed by regulations, to be satisfied" and substitute "to ensure that liabilities under subsection (2), and any other liabilities of a kind prescribed by Commission rules, are satisfied".

5. Section 55 (a) In subsection (2)(b)(viii)---

(i) repeal "a director, secretary, or other person concerned in the management" and substitute "an officer";

(ii) repeal "a director, secretary, or other person" and substitute "an officer".

(b) In subsection (2A), repeal "section 65B" and substitute "the financial resources rules".

"(5) In this section, "registered person" (註冊人) does not include a securities margin financier or securities margin financier's representative registered under Part XA.".

6. Section 56 (a) In subsection (2)(c), repeal "any director, secretary or person concerned in its management" and substitute "any officer of the corporation".

(b) In subsection (3), repeal "and, in the case of a registered person that is a corporation, any director, secretary or person concerned in its management," and substitute "and, if that person is a corporation, any officer of the corporation referred to in that subsection,".

"(4) In this section, "registered person" (註冊人) does not include a securities margin financier or securities margin financier's representative registered under Part XA.".

7. Section 57 (a) In subsection (3), add "or (3)" after "(b)(iii)".

(b) Add---

"(5) Except as provided by section 21 of the Securities and Futures Commission Ordinance (Cap. 24) (procedure for appeals), a decision of the Commission under section 55 or 56 takes effect on the date on which the decision is notified under subsection (4) or such later date as is specified in the decision or notice.".

8. Section 60(4)(c) Repeal "in regulations" and substitute "by Commission rules".

9. Section 63 (a) In subsection (1)(b), repeal "regulations" and substitute "Commission rules".

(b) Add---

"(6) In this section, "registered person" (註冊人) does not include a securities margin financier or securities margin financier's representative registered under Part XA.".

10. Section 64 (a) In subsection (2), repeal "and on payment of any fee prescribed by regulations".

(b) Add---

"(4) In this section, "prescribed" (訂明) means prescribed by Commission rules.".

11. Section 65A(1)(c), Repeal "section 65B" and substitute "the financial (3)(c) and (4) resources rules".

12. Section 65C(1) and (2) Repeal "section 65B" and substitute "the financial resources rules".

13. Section 65D(1) Repeal "section 65B" and substitute "the financial resources rules".

14. Section 66(1)(b) Repeal "in regulations" and substitute "by Commission rules".

15. Section 67(3) Repeal "regulations" and substitute "Commission rules".

16. Section 68(4) and (5) Repeal "in the form prescribed by regulations" and substitute "on a form provided or approved by the Commission".

17. Section 72(5)(c)(iii) Repeal "in regulations" and substitute "by Commission rules".

18. Section 73(3)(c)(iii) Repeal "in regulations" and substitute "by Commission rules".

19. Section 74(2)(b) Repeal "in regulations" and substitute "by Commission rules".

20. New Add---

"75A. Dealer to provide client with
statement of account

(1) This section applies to the following kinds of transactions entered into between a dealer and a client of the dealer---

(a) a deposit of securities collateral or money by or on behalf of the client;

(b) a withdrawal of securities collateral or money by or on behalf of the client;

(d) an adjustment of the terms on which financial accommodation is provided to the client, whether by extension, reduction, credit or debit;

(e) a crediting of income to, or a deduction of charges from, the client's account.

(2) A dealer who provides financial accommodation to a client to facilitate the acquisition and, where applicable, the continued holding of securities must prepare and give to the client, no later than the end of the next business day after the entering into of any transaction to which this section applies, a statement of account that complies with subsection (3).

(3) The statement referred to in subsection (2) must include the following information---

(a) the name under which the dealer carries on business and the address of the principal place in Hong Kong at which the business is carried on;

(b) the name, address and account number of the client to whom the dealer is required to give the statement of account;

(c) the outstanding balance of the account of the client at the beginning and at the end of each day on which a transaction involving the client takes place and details of all changes in the balance of that account during that day;

(d) details of all financial accommodation provided to the client during that day, including the nature, limit and expiry date of the accommodation;

(e) the quantity of each description of securities collateral held for the account of the client at the beginning of that day;

(f) the quantity, market price, market value, margin ratio and margin value of each description of securities collateral held for that account at the end of that day;

(g) the quantity of each description of securities collateral deposited to or withdrawn from that account during that day;

(h) all disposals by the dealer of securities collateral held for that account during that day and what happened to the proceeds of those disposals;

(i) a breakdown of the income credited, and the interest and other charges debited, to that account on that day.

(4) A dealer must, within 7 business days after the end of each calendar month, prepare and give to each client to whom the dealer has, during the month, provided financial accommodation to facilitate the acquisition of securities and, where applicable, the continued holding of those securities a statement of account that complies with subsection (5).

(5) The statement referred to in subsection (4) must include the following information---

(a) the name under which the dealer carries on business and the address of the principal place in Hong Kong at which the business is carried on;

(b) the name, address and account number of the client to whom the dealer is required to give the statement of account;

(c) the outstanding balance of the account of the client at the beginning and at the end of that month and details of all changes in the balance of that account during that month;

(d) details of all financial accommodation provided to the client during that month, including the nature, limit and expiry date of the accommodation;

(e) the quantity of each description of securities collateral held for the account of the client at the beginning of that month;

(f) the quantity, market price, market value, margin ratio and margin value of each description of securities collateral held for that account at the end of that month;

(g) the quantity of each description of securities collateral deposited to or withdrawn from that account during that month;

(h) all disposals by the dealer of securities collateral held for that account during that month and what happened to the proceeds of those disposals;

(i) a breakdown of the income credited, and the interest and other charges debited, to that account during that month.

(6) A dealer who, without reasonable excuse, fails to comply with a requirement of this section commits an offence and is liable on conviction to a fine at level 4.".

21. Section 76(1) Repeal "in regulations" and substitute "by Commission rules".

22. Section 77 Repeal and substitute---

"77. Duties of dealer with respect
to clients' accounts

(1) In this section, a reference to a dealer includes a reference to an exempt dealer (except in relation to a statement of account prepared under section 75A).

(2) As soon as practicable after a client of a dealer requests the dealer to provide the client with a copy of---

(a) any specified contract note relating to the client; or

(b) any specified account kept by the dealer in respect of the client; or

the dealer must comply with the request.

(3) If the Commission, on an application made by a client of a dealer, so directs, the dealer must make available for inspection by the client during the dealer's ordinary hours of business---

(a) any specified contract note relating to the client; or

(b) any specified account kept by the dealer in respect of the client; or

(4) This section does not require a dealer---

(a) to provide, or make available for inspection, a copy of---

(i) a contract note; or

(ii) a statement of account referred to in section 75A(2),

that relates to a dealing transacted more than 2 years before the date of the relevant request; or

(b) to provide, or make available for inspection, a copy of---

(i) an account; or

(ii) a statement of account referred to in section 75A(4),

that relates to a dealing transacted more than 6 years before the date of the relevant request.

(5) A dealer may impose a charge not exceeding an amount prescribed by Commission rules for a copy of a document provided under subsection (2).

(6) A dealer who, without reasonable excuse, fails to comply with subsection (2) or (3) commits an offence and is liable on conviction to a fine at level 4.".

23. Section 79 (a) In subsection (6), repeal "regulations" and substitute "Commission rules".

(b) In subsection (9), repeal "Without prejudice to the power to make regulations under section 146, regulations may be made under that section---" and substitute "Rules may be made under section

146---".

24. Section 80(4)(d) Repeal "regulations" and substitute "Commission rules".

25. Section 81 Repeal and substitute---

"81. Restrictions on disposition of
securities by dealer

(1) In this section, a reference to a dealer includes a reference to an exempt dealer.

(2) If securities for which a dealer, or a nominee controlled by the dealer, is accountable to a client of the dealer are held for safe custody in Hong Kong, the dealer must ensure that the securities are either---

(a) registered in the name of the client or in the name of the nominee; or

(b) deposited in safe custody in a designated account with an authorized financial institution or some other institution approved by the Commission for the purposes of this section.

(3) The Commission may, by written notice given to the institution concerned, approve an institution for the purposes of subsection (2)(b) only if it is satisfied that the institution provides satisfactory facilities for the safe custody of documents.

(4) A dealer to whom subsection (2) applies must ensure that the securities referred to in that subsection are not deposited, transferred, lent, pledged, repledged or otherwise dealt with except as provided by that subsection or as permitted by Commission rules. This subsection has effect even if the client of the dealer purports to have authorized (whether in writing or not) the dealer or nominee to enter into the transaction.

(5) A dealer who, without reasonable excuse, contravenes subsection (2) commits an offence and is liable on conviction to a fine at level 3.

(6) A dealer who, without reasonable excuse, contravenes subsection (4) commits an offence and is liable---

(a) on conviction on indictment, to a fine of $200,000 and to imprisonment for 2 years; or

(b) on summary conviction, to a fine at level 5.

(7) This section does not apply to securities collateral deposited---

(a) with a dealer; or

(b) with another person to facilitate

the provision of financial accommodation by the dealer,

by or on behalf of a client of the dealer.

81A. Restrictions on disposition of securities collateral by dealer

(1) In this section, a reference to a dealer includes a reference to an exempt dealer.

(2) As soon as practicable after securities collateral is deposited with a dealer, or with another person to facilitate the provision of financial accommodation by the dealer, by or on behalf of a client of the dealer, the dealer must ensure that the relevant securities are either---

(a) registered in the name of the client; or

(b) deposited in safe custody in a designated account with an authorized financial institution or some other institution approved by the Commission for the purposes of this section.

(4) If securities collateral is deposited with a dealer, or with another person to facilitate the provision of financial accommodation by the dealer, by or on behalf of a client of the dealer, the dealer must ensure that the relevant securities are not deposited, transferred, lent, pledged, repledged or otherwise dealt with except as provided by subsections (2) and (5). This subsection has effect even if the client of the dealer purports to have authorized (whether in writing or not) the dealer or other person to enter into the transaction.

(5) If securities collateral is deposited with a dealer, or with another person to facilitate the provision of financial accommodation by the dealer, by or on behalf of a client of the dealer, the dealer may---

(a) deposit the relevant securities with an authorized financial institution as collateral for financial accommodation provided to the dealer; or

(b) dispose of those securities in settlement of the client's obligation to maintain an agreed level of margin; or

(c) dispose of those securities in settlement of any liability of the client to repay or discharge the financial accommodation provided by the dealer; or

(d) lend or deposit the securities to---

(i) a person in accordance with the rules and regulations of the Unified Exchange; or

(ii) a person in accordance with the rules and regulations of the Hong Kong Securities Clearing Company Limited; or

(iii) a person of a class specified in Commission rules for the purposes of this section; or

(e) deposit the securities with the Hong Kong Securities Clearing Company Limited as collateral for the discharge and satisfaction of the dealer's clearing obligations and liabilities; or

(f) deposit the securities with the SEHK Options Clearing House Limited as collateral in respect of the dealer's transactions in or relating to options contracts,

but only with the written authority of the client or as permitted by Commission rules.

(6) An authority referred to in sub-

section (5)---

(a) is effective only if it specifies the period for which it is current; and

(b) remains in force for the period so specified or 12 months, whichever is the shorter; and

(7) A dealer who, without reasonable excuse, fails to comply with subsection (2) commits an offence and is liable on conviction to a fine at level 3.

(8) A dealer who, without reasonable excuse, contravenes subsection (4) commits an offence and is liable---

(a) on conviction on indictment, to a fine of $200,000 and to imprisonment for 2 years; or

(b) on summary conviction, to a fine at level 5.

81B. Claims and liens over securities
not affected

Nothing in section 81 or 81A affects any lawful claim or lien that a person has in respect of---

(a) any securities deposited for safe custody with a dealer or a nominee controlled by a dealer; or

(b) securities collateral deposited with a dealer or another person to facilitate the provision of financial accommodation by the dealer.".

26. Section 82(2) Repeal "books, accounts," where it twice appears and substitute "accounting and other".

27. Section 83 (a) In subsection (3)(a)(vi)---

(i) repeal "or any related corporation";

(ii) repeal "and" at the end.

(b) In subsection (3)(a), add---

"(viii) all financial accommodation provided by the dealer to clients to facilitate the acquisition and, where applicable, the continued holding of securities and all payments received from clients; and".

"(4A) Without limiting subsections (1) and (3) but subject to Commission rules, the dealer shall keep records that are sufficient to enable it be readily established whether or not the financial resources rules have been complied with.".

(d) In subsection (5)(a), add "and a copy of each statement of account referred to in section 121Y(4)" after "subsection (1)".

(e) In subsection (5)(b)(ii), repeal the full stop and substitute "; and" .

(f) In subsection (5)(b), add---

"(iii) a copy of each statement of account referred to in section 75A(2).".

28. Section 84 (a) In subsection (1)(a) and (b), repeal "bank trading days" and substitute "business days".

(b) In subsection (1)(b), repeal "and" at the end.

"(ba) all amounts that are received from or on account of a client to whom the dealer provides financial accommodation to facilitate the acquisition and, where applicable, the continued holding of securities, except those amounts that are---

(i) used to reduce the amount owed by the client to the dealer; or

(ii) paid to the client, or paid in accordance with the client's directions, within 4 business days after receipt; and".

(d) In subsection (1)(c), repeal "or (b)" and substitute ", (b) or (ba)".

(e) In subsection (3), repeal "bank trading days" and substitute "business days".

(f) In subsection (6)(c), repeal "regulations" and substitute "Commission rules".

29. Section 87(2)(d) Repeal "in regulations" and substitute "by Commission rules".

30. Section 88(1) Repeal "regulations" and substitute "Commission rules".

31. Section 89(1)(b) (a) Repeal "65B,".

(b) Add "or the financial resources rules" after "or 84".

32. Section 90(1) (a) In paragraph (c), repeal "section 65B" and substitute "the financial resources rules".

(b) Repeal "examine, audit, and" and substitute "audit and".

33. Section 91 (a) In subsection (1), repeal "examine, audit, and" and substitute "audit and".

(b) In subsections (1) and (4)(b), repeal "books, accounts, and" and substitute "accounting and other".

(d) In subsection (4)(b), repeal "examined, audited," and substitute "audited".

34. Section 92 Repeal "examination and".

35. Section 93 (a) Repeal "examine and".

(b) Repeal "books, accounts, and" and substitute "accounting and other".

(d) In paragraph (a), repeal "books, account," and substitute "accounting and other".

36. Section 94 (a) Renumber it as section 94(1).

(b) Add---

"(2) A person who, without lawful authority, contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 6 and to imprisonment for 6 months.".

37. Section 95 (a) In subsection (1), repeal "books, accounts, and" where it twice appears and substitute "accounting and other".

(b) In subsection (2), repeal "examination and".

"(3) A person to whom a question is put under subsection (2) is not excused from answering the question on the ground that the answer to the question might incriminate the person, but neither the question nor the answer is admissible in evidence in criminal proceedings brought against the person, other than criminal proceedings for giving an answer that is false or misleading.

(4) A person referred to in subsection (1) who, without reasonable excuse, fails to comply with a request made to the person under that subsection commits an offence.

(5) A person referred to in subsection (2) who---

(a) without reasonable excuse, fails to answer a question put to the person under that subsection; or

(b) gives an answer that is, to the person's knowledge, materially false or misleading, commits an offence.

(6) A person who commits an offence against subsection (4) or (5) is liable on conviction to a fine at level 5 and to imprisonment for 2 years.".

38. Section 96 (a) Repeal "examination and" wherever it appears.

(b) In subsection (1)(a), repeal "book, account, record or document" and substitute "accounting or other record".

(c) In subsections (1)(b) and (2), repeal "book, account, record, or document" wherever it appears and substitute "accounting or other record".

39. Section 97(c) Repeal "accounts, books, and" and substitute "accounting and other".

40. Section 127 (a) In subsection (1)(b), repeal "advice," and substitute "advice; or".

(b) In subsection (1), add---

"(c) any matter concerning securities margin financing,".

(i) repeal "by notice in the form prescribed by regulations given in the manner as prescribed";

(ii) add at the end---

"A requirement under this subsection must be in a form provided or approved by the Commission and be given in the manner prescribed by Commission rules.".

(d) In subsection (10), repeal "regulations" and substitute "Commission rules".

41. Section 137 Repeal "regulations" and substitute "Commission rules".

42. Section 144(1) (a) Add "or to securities margin financing" after "dealing in securities".

(b) Add---

"(aa) an order restraining a person who is not registered as a securities margin financier from engaging in securities margin financing;".

"(ba) in relation to a registered financier, an order appointing a person to administer the property of the financier;".

(d) In paragraph (c), add "or securities margin financing" after "relating to securities".

43. Section 146 Repeal and substitute---

"146. Commission rules

(1) The Commission may make rules for all or any of the following purposes---

(a) prescribing the class of persons in relation to whom, and the manner and circumstances in which, registered dealers, registered dealing partnerships and registered dealers' representatives may deal in securities;

(b) prescribing the class of persons in relation to whom, and the manner and circumstances in which, registered investment advisers, registered investment advisers' partnerships and registered investment representatives may carry on business as investment advisers or as investment representatives;

(c) prescribing the class of persons in relation to whom, and the manner and circumstances in which, registered financiers may carry on the business of securities margin financing;

(d) prescribing the class of persons in relation to whom, and the manner and circumstances in which, registered financiers' representatives may act for registered financiers;

(e) requiring registered dealers, registered dealing partnerships, registered investment advisers, registered investment advisers' partnerships, registered financiers and registered financiers' representatives to exhibit their certificates of registration at their places of business;

(f) prescribing requirements with respect to the conduct of business by registered dealers, registered investment advisers, registered dealing partnerships, registered investment advisers' partnerships, registered financiers, registered dealers' representatives, registered investment representatives and registered financiers' representatives;

(g) providing for matters incidental to the registration of dealers, investment advisers, dealing partnerships, investment advisers' partnerships, securities margin financiers, dealers' representatives, investment representatives and securities margin financiers' representatives under this Ordinance;

(h) enabling the Commission to correct any errors in any register kept under this Ordinance;

(i) enabling the Commission, on payment of the fee (if any) prescribed by Commission rules, to issue a duplicate certificate of registration if the original certificate or any duplicate certificate is lost or destroyed;

(j) prescribing forms for the purposes of this Ordinance or enabling the Commission to specify, or to provide or approve, forms for those purposes;

(k) prescribing the manner in which applications are to be made for registration under Part VI or XA;

(l) prescribing the particulars to be recorded in relation to trust accounts;

(m) prescribing the particulars to be recorded in relation to the profit and loss account and balance sheet required to be prepared by a dealer or registered financier;

(n) prescribing the procedure for holding investigations under Part XI, and providing for the reception of evidence, whether written or oral, and for the summoning and examination of witnesses, during the course of such an investigation;

(o) requiring a person of a specified description, when selling securities at or through the Unified Exchange and when the person's right to vest the securities in the purchaser (or, if acting as agent, the principal's right to do so) is derived from an arrangement of a specified kind, to notify the stockbroker through whom the sale is being effected, of the fact that the right to vest the securities in the purchaser is derived from such an arrangement;

(p) prescribing limits on, or conditions to be complied with in respect of, the number of options contracts which may be held or controlled, directly or indirectly, by any person where those contracts are traded through the facilities of the Unified Exchange;

(q) prescribing or providing for any matter that is required or permitted by this Ordinance to be prescribed by Commission rules.

(2) Except as otherwise provided in this Ordinance, a rule made under this section may do all or any of the following---

(a) apply generally or be limited in its application by reference to specified exceptions or factors;

(b) apply differently according to different factors of a specified kind;

(3) A rule made under this section may provide that, subject to such terms and conditions as may be prescribed, the provisions of Parts VI to IX and XA, or such of them as are specified---

(a) do not have effect in relation to any specified person or to any person who is a member of a specified class of persons---

(i) who is or may be a dealer, investment adviser or securities margin financier only because the person does anything that is incidental to another business; or

(ii) who does not deal in securities for or on behalf of any other person; or

(iii) who is a dealer, investment adviser or securities margin financier only because the person has entered into a specified transaction or class of transactions; or

(b) do not have effect in relation to a representative of any such person, or a member of any such class of persons, as is referred to in paragraph (a); or

(c) has effect in relation to any such person or member, or a representative of any such person or member, to such extent as is prescribed in the rule; or

(d) do not have effect in relation to a specified transaction or class of transactions entered into by a specified person or class of persons.".

44. Section 146A Repeal and substitute---

"146A. Regulations

The Chief Executive in Council may make regulations providing that a contravention of any specified provision of Commission rules is an offence and may prescribe penalties for the offence not exceeding a fine at level 1 and imprisonment for 3 months.".

45. Section 147(1) Repeal and substitute---

"(1) If an offence against this Ordinance committed by a corporation is proved---

(a) to have been committed with the consent or connivance of; or

(b) to be attributable to neglect by,

an officer of the corporation, or any person who purported to act as such an officer, the officer or person also commits the offence and is liable to be proceeded against and punished in the same way as the corporation." .

SCHEDULE 2 [s. 5 ]

Consequential Amendment of Securities
and Futures Commission Ordinance

Item Provision affected Amendment

1. Section 2(1) In the definition of "registered person", repeal "investment representative or a commodity trading advisers' representative" and substitute "securities margin financier, investment representative, commodity trading adviser's representative or securities margin financier's representative".

2. Section 4 (a) In subsection (1)(a) and (b), repeal "futures contracts and property investment arrangements" wherever it appears and substitute "futures contracts, property investment arrangements and securities margin financing".

(b) In subsection (1)(e), add "or securities margin financing transactions" after "property investment arrangements".

(c) In subsection (1)(g), add "or securities margin financing transactions" after "entering into property investment arrangements".

(d) In subsection (1)(g) and (i), repeal "and property investment arrangements" and substitute ", property investment arrangements and securities margin financing".

3. Section 19 (a) In subsection (1)(e), add "(2) or (2A)" after "section 55".

(b) Add---

"(1A) Where---

(a) an application of a person for registration under Part XA of the Securities Ordinance (Cap. 333) is refused; or

(b) an application for registration under that Part is granted subject to a condition (not being a condition prescribed by that Part or by Commission rules) or a restriction with which the applicant is dissatisfied; or

(c) a condition or restriction of registration of a securities margin financier or a securities margin financier's representative is varied under that Part and the financier or representative is dissatisfied with the variation of the condition or restriction; or

(d) the registration of a securities margin financier or a securities margin financier's representative is revoked or suspended under section 121R(2), 121S, 121T(2) or 121U of the Securities Ordinance (Cap. 333),

the applicant, financier or representative may, subject to section 21, appeal to the Panel against the refusal, the imposition or variation of the condition or restriction, revocation or suspension.

(1B) Where the Commission---

(a) refuses to approve a director of a registered securities margin financier under section 121I of the Securities Ordinance (Cap. 333); or

(b) cancels the approval of such a director under section 121V of that Ordinance,

the director may, subject to section 21, appeal to the Panel against the refusal or cancellation.".

(d) In subsection (4), add ", (1A)(c)" after "(1)(d)".

4. Section 21(4) Add ", (1A)(b) or (c)" after "19(1)(b) or (d)".

5. Section 27 (a) In subsection (10)(a)---

(i) repeal "trading adviser." and substitute "trading adviser; or";

(ii) add---

"(iii) a securities margin financier.".

(b) In subsection (10)(b), add---

""securities margin financier" (證券保證金融資人) has the meaning assigned to it by section 2(1) of the Securities Ordinance (Cap. 333).".

6. Section 28 (a) In subsection (2)(d), repeal "rules." and substitute "rules;".

(b) In subsection (2), add---

"(e) empower the Commission to grant approvals for such purposes as are specified in the rules and to amend or revoke those approvals, and require the Commission to publish those approvals and any amendment or revocation of them in a manner so specified.".

7. New Add after section 29 in Part IV---

"29AA. Commission may exempt persons from operation of financial resources rules

(1) The Commission may, by notice published in the Gazette, exempt a specified person, or persons of a specified class, from the operation of the financial resources rules or of any specified provision of the rules.

(2) An exemption under this section may be granted unconditionally or subject to conditions.

(3) Subject to subsection (5), an exemption granted under this section remains in force---

(a) if a period is specified in the exemption, until the end of the period; or

(b) if no such period is specified, until revoked by the Commission.

(4) The Commission may not grant an exemption under this section unless it is satisfied that---

(a) compliance with the financial resources rules or the specified provision of those rules would be unduly burdensome for the person or persons concerned as compared with the benefit that compliance would confer on the investing public; and

(b) the exemption would not, if granted in the particular case, result in any undue risk to the investing public.

(5) The Commission may, by notice published in the Gazette, amend or revoke an exemption granted under this section. Such an exemption may be revoked even though a period specified in the exemption has not yet expired.".

8. Section 31(2) Repeal "or commodity trading adviser" and substitute ", commodity trading adviser, securities margin financier".

9. Section 33 (a) In subsection (1)(b)---

(i) in subparagraphs (i) and (ii), add "or" at the end;

(ii) add---

"(v) in relation to any transaction involving securities margin financing; or".

(b) Repeal subsection (1)(d) and substitute---

"(d) the Commission has reason to believe that the manner in which a person is engaging or has engaged in---

(i) dealing in securities or trading in futures contracts; or

(ii) managing investment in securities or futures contracts; or

(iii) making property investment arrangements; or

(iv) giving advice of the kind referred to in paragraph (b)(iv); or

(v) entering into transactions involving securities margin financing, is not in the interest of the investing public or the public interest; or".

10. Section 38 (a) In subsection (2), repeal "55 or 56" and substitute "55,
56, 121R or 121S".

(b) In subsection (4)---

(i) repeal "adviser or a partner in an investment advisers' partnership" and substitute "adviser, a partner in an investment advisers' partnership or securities margin financier";

(ii) repeal "and "investment advisers' partnership" (投資顧問合夥商行)" and substitute ",
"investment advisers' partnership" (投資顧問合夥商行) and "securities margin financier"
(證券保證金融資人)".

11. Section 55 Repeal subsection (1) and substitute---

"(1) If, on the application of the Commission, the Court of First Instance is satisfied that a person has contravened or is contravening, or that there is a reasonable likelihood that a person will contravene a prescribed provision, the Court may---

(a) grant an injunction restraining the person from repeating or continuing, or from committing, the contravention; and

(b) if in the opinion of the Court it is desirable to do so, make an order requiring the person to take any specified action.

(1A) The following provisions are prescribed for the purposes of subsection (1)---

(a) a rule made under section 28;

(b) a direction given under section 29;

(d) a requirement imposed by or under Part XA of the Securities Ordinance (Cap. 333).".

12. Section 55A(1)(b) Repeal "81(1)" and substitute "81(2) and (4), 81A(2) and (4)".

SCHEDULE 3 [s. 6]

Consequential Amendment of Other Ordinances

Item Provision affected Amendment

1. Money Lenders Ordinance In Part 1 of Schedule 1, add---

(Cap. 163) "10. A securities margin financier registered under the Securities Ordinance (Cap. 333).

11. A dealer registered under the Securities Ordinance (Cap. 333) who, in the course of carrying on a business of dealing in securities, engages in securities margin financing as defined in that Ordinance.".

2. Commodities Trading

(a) In section 35, add---

Ordinance (Cap. 250) "(6) Except as provided by section 21 of the Securities and Futures Commission Ordinance (Cap. 24)(procedure for appeals), a decision of the Commission under this section takes effect on the date on which the decision is notified under subsection (5) or such later date as is specified in the decision or notice.".

(b) In section 36, add---

"(7) Except as provided by section 21 of the Securities and Futures Commission Ordinance (Cap. 24)(procedure for appeals), a decision of the Commission under this section takes effect on the date on which the decision is notified under subsection (4) or such later date as is specified in the decision or notice.".

(d) Renumber section 57 as section 57(1).

(e) In section 57, add---

"(2) A person who, without lawful authority, contravenes subsection (1) commits an offence and is liable on conviction to a fine at level 6 and to imprisonment for 6 months.".

3. Stock Exchanges Unification

(a) Repeal section 15(1) and substitute---

Ordinance (Cap. 361) "(1) It is the duty of the Exchange Company to ensure---

(a) that its members comply with the financial resources rules in so far as those rules apply to them; and

(b) where those rules apply to a member subject to a condition or other modification, that the member complies with those rules in accordance with the condition or modification.".

(b) In section 15(2), repeal "section 65B and".

"(b) to ensure that its members comply with the financial resources rules for the better fulfilment by the Exchange Company of the duty imposed on it by section 15; and".

(d) In section 34, add---

"(1A) Rules made for the purpose of subsection (1)(b) may provide for all or any of the following---

(a) the returns to be made by members, the form of, and the kinds of information to be included in those returns and the manner in which the information must be verified;

(b) the manner in which assets are to be valued and the payment by members of the costs of valuation;

(c) the manner in which members are required to keep records of assets that may be taken into account for the purposes of the financial resources rules and the places at which the records must be maintained;

(d) the inspection of records by officers of the Exchange Company authorized by it.".

------------------------------

SCHEDULE 4 [s. 7]

Savings and Transitional Provisions

1. Chief Executive in Council may make savings and transitional regulation

(1) The Chief Executive in Council may make regulations containing provisions of a savings or transitional nature consequent on the enactment of this Ordinance.

(2) A provision referred to in subsection (1) may, if the regulation so provides, take effect from the date on which the enactment of this Ordinance is notified in the Gazette or a later date.

(3) To the extent to which a provision referred to in subsection (1) takes effect from a date that is earlier than the date of its publication in the Gazette, the provision does not operate so as---

(a) to affect, in a manner prejudicial to any person (other than the Government or a public body), the rights of that person existing before the date of its publication; or

(b) to impose liabilities on any person (other than the Government or a public body) in respect of anything done, or omitted to be done, before the date of its publication.

2. Prescribed forms

If a form is, in accordance with a provision of the Securities Ordinance (Cap. 333), prescribed by rules in force under that Ordinance immediately before the commencement of item 43 of Schedule 1 and the provision is amended by this Ordinance to enable forms required or permitted for the purposes of the provision to be specified, or to be provided or approved, by the Securities and Futures Commission, the prescribed form is taken to have been specified, or provided or approved, by the Commission until it specifies, or provides or approves, a new form for the purposes of that provision.

3. Restrictions on disposition of securities by dealer

Section 81 of the Securities Ordinance (Cap. 333) (as substituted by item 25 of Schedule 1) applies to securities held for safe custody by a dealer or a nominee controlled by the dealer, for the account of a client of the dealer immediately before the commencement of that item.

4. Saving for rules

A rule in force under section 146 or 146A of the Securities Ordinance (Cap. 333) immediately before the commencement of item 43 of Schedule 1 continues in force as a Commission rule made under section 146 of that Ordinance, as in force after that commencement.

5. Saving for certain regulations

A regulation in force under section 146(2) of the Securities Ordinance (Cap. 333) immediately before the commencement of item 44 of Schedule 1 continues in force as a regulation made under section 146A of that Ordinance, as in force after that commencement.

Explanatory Memorandum

The main purpose of this Bill is to amend the Securities Ordinance (Cap. 333) to provide a measure of protection to investors in securities by regulating the activities of those persons who carry on securities margin financing businesses.

2. The Bill contains the following provisions---

(a) Clause 1 specifies the short title of the Bill and provides for its commencement.

(b) Clause 2 adds new definitions to section 2(1) of the Securities Ordinance (Cap. 333) (including definitions of "financial accommodation", "registered financier", "registered financier's representative", "securities collateral", "securities margin financier", "securities margin financier's representative" and "securities margin financing"). Securities margin financing is engaged in when financial accommodation (such as a loan) is provided in order to facilitate the acquisition of securities listed on a stock exchange (and, where applicable, the continued holding of those securities). It is immaterial that those or other securities are pledged as security for the financial accommodation.

‧ Division 1 provides that the new Part will apply only to businesses of securities margin financing conducted in Hong Kong. The new Part will not apply to securities margin financing engaged in by certain classes of persons, such as registered and exempt dealers and mutual fund corporations.

‧ Division 2 contains a provision which will make it an offence for persons to carry on businesses of securities margin financing unless they are registered under the new Part as securities margin financiers. Another provision will make it an offence for persons to act for securities margin financiers unless they are registered under the new Part as securities margin financiers' representatives. Other provisions specify which persons are eligible for registration under the new Part, prescribe requirements for applications for registration and provide for the granting or refusal of applications. Registration will be subject to certain conditions and restrictions and the Securities and Futures Commission will be empowered to impose conditions or restrictions on financiers and representatives registered under the new Part. A registered financier will not be able to carry on a business of securities margin financing unless at least one of the financier's directors is approved by the Commission as a responsible director. Further provisions will require the Commission to issue certificates of registration to applicants whose applications are granted and require registered financiers to provide information and statements about their businesses on being directed to do so by the Commission. The Commission will be required to keep Registers of Securities Margin Financiers and Securities Margin Financiers' Representatives and to publish the names of those financiers and representatives in the Government Gazette. Registered financiers and registered financiers' representatives will be required to notify the Commission of changes in certain particulars that relate to them. The Commission will be empowered to revoke or suspend the registration of a registered financier or registered financier's representative in certain specified circumstances, such as if the financier or representative has committed some act of misconduct. The Commission will also be empowered to reprimand a registered financier, registered financier's representative or an officer of a registered financier who is found to have committed misconduct. Decisions of the Commission revoking or suspending registration will be required to be notified to the persons affected and to specify the grounds on which they were based. Persons whose registration is revoked will not normally be able to apply for re-registration until after 12 months from the revocation.

‧ Division 3 contains provisions relating to the conduct of securities margin financing businesses. Among those provisions is a provision requiring a registered financier to provide its clients with statements of account. Another provision sets out the duties of a registered financier with respect to clients accounts. Further provisions will impose restrictions on the disposition by registered financiers of securities collateral (i.e. the security given by clients for margin finance) and will require registered financiers to notify the Commission if at any time they are unable to comply with the financial resources rules (which are made under section 28 of the Securities and Futures Commission Ordinance (Cap. 24)).

‧ Division 4 provides that, if an unregistered securities margin financier enters into a contract with a client that relates to securities margin financing, the client will have a right to rescind the contract, unless the rescission of the contract would prejudice a right, or an interest in property, acquired by a third party where that right or interest has been acquired in good faith, for valuable consideration and without notice of the facts entitling the client to rescind the contract.

‧ Division 5 deals with the accounting and other records of registered financiers. Among those provisions is a provision requiring a registered financier to keep proper accounting records of all transactions entered into in connection with the financier's securities margin financing business so as to enable true and fair profit and loss accounts and balance sheets to be prepared. A registered financier will be required to notify the Commission of its financial year and prepare an annual statement of accounts comprising a profit and loss account and balance sheet.

‧ Division 6 will require each registered financier to establish and maintain one or more trust accounts. Except in certain specified cases, a registered financier will be required to pay all clients' money into a trust account. Money held in a trust account will not be available for meeting the debts of a registered financier.

‧ Division 7 will require a registered financier to appoint an auditor to audit the financier's accounting and other records and annual statement of accounts. Certain persons, such as employees of a registered financier, will not be eligible for appointment as auditors. An auditor who resigns or is removed from office or whose appointment as auditor is not renewed will be required to notify the Commission. An auditor who becomes aware of a "reportable matter" will have a duty to notify the matter to the Commission. ("Reportable matter" includes one that, in the auditor's opinion, has adversely affected the financier's financial position.)

‧ Division 8 will empower the Commission to appoint an auditor to audit and report on the accounting and other records of a registered financier in certain circumstances, such as when the Commission has received a report from the financier's auditor under Division 7. The Commission will also be empowered to appoint an auditor on the application of a client of a registered financier. An auditor appointed under this Division will be required to report the auditor's findings to the Commission. Such an auditor will be empowered to examine on oath the financier and its officers, employees and agents. Auditors appointed to carry out an audit under this Division and their staff will, except in certain limited circumstances, be prohibited from disclosing to persons other than the Commission information that comes to their knowledge while carrying out the audit. A registered financier and its officers, employees and agents will, on request, be required to produce its accounting and other records to an auditor appointed under this Division to audit those records.

‧ Division 9 will make it an offence to destroy, conceal or alter the accounting and other records relating to a securities margin financier's business, or to send out of Hong Kong those records or other property of or under the control of the financier. It will also be an offence for a person, with intent to prevent, delay or obstruct the conduct of an audit under Division 7 or 8, to leave or attempt to leave Hong Kong.

‧ Division 10 contains miscellaneous provisions. One provision will empower the Commission to waive requirements of certain provisions of the new Part or of Commission rules in their application to particular registered financiers or applicants for registration as securities margin financiers. The other provision contains transitional provisions designed to facilitate the phasing in of the new Part.

(d) Clause 4 gives effect to Schedule 1, which contains consequential amendments to the Securities Ordinance (Cap. 333). Among the amendments are amendments adding new sections 75A and 81A and substituting new sections for sections 77 and 81 of that Ordinance. The new sections correspond to similar provisions contained in Division 3 of the new Part.

(e) Clause 5 gives effect to Schedule 2, which contains consequential amendments to the Securities and Futures Commission Ordinance (Cap. 24).

(f) Clause 6 gives effect to Schedule 3, which contains consequential amendments to the Money Lenders Ordinance (Cap. 163) and the Commodities Trading Ordinance (Cap. 250).

(g) Clause 7 gives effect to Schedule 4, which contains certain savings and transitional provisions.