- Hong Kong
- United States
- Malaysia
- Guidelines for trustees of debenture holders
- Shorter white knights - SC relaxes listing, fund raising and restructuring rules
- Singapore
- New Zealand
- China
Hong Kong
New rules for contract notes
The Securities and Futures Commission of Hong Kong (SFC) recently released a draft Rules on contract notes. The Rules are expected to come into effect when the Securities and Futures Bill (Bill) is enacted. The Bill does not set out the detailed requirements in relation to the issuance of contract notes, statements of account or receipts. SFC has been entrusted with this responsibility under the Bill.
The aim of the Rules is to ensure that clients obtain timely and meaningful information about transactions conducted on their behalf. Under the Rules:
- all intermediaries will now be required to issue contract notes whenever they enter into a contract or provide financial accommodation in the course of a regulated activity;
- introducing brokers and asset managers will not be required to issue contract notes where an execution broker has already issued such notes to the client;
- the requirement to issue contract notes applies across all types of securities and futures contracts including options trading and securities borrowing or lending;
- intermediaries may issue contract notes that quote average price of dealings in securities or futures contracts if requested by clients;
- an intermediary may issue a consolidated contract note for all regulated activities entered into on the same business day; and
- contract notes may be transmitted via electronic means.
(Source: SFC Press Releases, 28/09/01.)
Corporate finance adviser code of conduct
After extensive public consultation, the SFC has formulated its Corporate Finance Adviser Code of Conduct which sets out guidelines for the persons and corporations giving advice on compliance with the Listing Rules, Takeovers Code, Share Repurchase Code and any offer to buy or sell securities from or to the public. The Code does not apply to solicitors, accountants, the media and various other entities exempted by the relevant securities regulations. Although the Code does not have the force of law, nevertheless it will be used by the SFC as a benchmark to judge whether a Corporate Finance Adviser is a fit and proper person.
The Code sets out what is proper conduct in 7 areas. They are:
- conduct of business. A Corporate Finance Adviser (Adviser) should ensure that there are proper financial and operational controls, there is adequate expertise and supervision of staff and that an effective compliance system is in place which should be independent of the other business functions and report directly to senior management;
- competence. the Adviser should act with high standard of integrity and fair dealing;
- conflicts of interest. A Corporate Finance Adviser should take all reasonable steps to avoid conflicts of interest. Where the Adviser undertakes other activities or is part of a group of companies that undertake other activities, there should be an effective Chinese wall system in place with physical barriers to prevent the flow of price sensitive and confidential information;
- standard of work. the Adviser must act with due skill, care and diligence and observe proper standards of market conduct;
- duties to client. the Adviser must act in the best interests of its clients at all times. In addition, they are required to understand the business of the clients including the investment and corporate objectives in relation to the particular transaction and when acting for a client, ensure that it has made adequate disclosure of all relevant and material information;
- communication with regulators. the Adviser must deal with the regulators in an open and co-operative manner; and
- personal account dealings. All personal account dealings should be properly conducted. There should be a system of restricted list where dealings in securities in that list are prohibited. Further, all personal account dealings should be separately recorded and clearly identified in the accounting records of the Adviser if the transactions were made via the Adviser.
(Source: SFC Press Release, 1/11/01.)
United States
A blueprint for responsible change
The development of electronic communications network and alternative trading systems and global competition among exchanges have led to numerous changes in the trading of securities. An efficient and orderly market is underpinned by the public availability of market information. Recognising the significance of timely and accurate market information, the Advisory Committee on Market Information (the Committee) was asked by the US Securities and Exchange Commission (SEC) to evaluate issues relating to public availability of market information in equity and options markets and make recommendations on the best model for collecting, distributing and pricing market information. (Eds: the United Kingdom recently concluded a similar study and the results of that study can be found in ITM No. 5)
The Committee in its Report reaffirmed the importance of price transparency and recommended that:
- the SEC continue to require that certain market information (such as best quote and last sale data) be provided to market participants in a consolidated format (ie, information on quotes, trade prices and volumes to be collected and consolidated from the various stock and option exchanges, and from the NASD for Nasdaq stocks);
- competition should be encouraged and permitted for the distribution of market information by allowing each market to sell its market information data to any other competing information consolidator (under the current model, there is only 1 consolidator); and
- a consolidated market information (consisting of best bid and offer, size and market identifier) for options in the options market be instituted once effective linkage has been established among the option exchanges.
(Source: SEC, Report of the Advisory Committee On Market Information: A Blueprint For Responsible Change, 14/09/01. For more, see the Report)
Actively managed ETFs - a chance to comment
The SEC is seeking public comments via a concept release on actively managed exchange-traded funds (ETFs). Unlike index based ETFs, actively managed ETFs would not track the return of a particular index but will instead select securities that are consistent with the investment objectives and policies of the fund without reference to the composition of the index. As such, actively managed ETFs may have greater turnover in its portfolio securities, which could result in higher expenses (in the form of transaction fees) and less tax efficiency (in the form of capital gains) than index based ETFs. According to the SEC, actively managed ETFs do not currently exist in the US. Comments are sought on:
- the potential structure and operation of such funds;
- the benefit and uses of such products; and
- potential regulatory issues.
(Source: SEC Press Release, 2001-133, 7/11/01. For more, see the press release)
Malaysia
Guidelines for trustees of debenture holders
The Securities Commission of Malaysia (SC) issued its guidelines on when it will approve the appointment of a trustee to act for debenture holders in a situation of conflict of interests as defined under s69(2) of the Securities Commission Act 1993 (the SCA).
Section 69(2) prohibits the appointment of a person who is under a conflict of interest from being a trustee for debenture holders unless the SC has approved the appointment. 'Conflict of interest' is defined under s69(2) of the SCA as a situation where the person is a shareholder of the borrower, is owed money by the borrower, has entered into a guarantee in relation to the amount payable or is a related corporation of the borrower. Under the Guidelines, blanket approval will be given to a person to act as trustee if:
- at least 1/3 of the board of the trustee consist of independent directors (with express provision in the Articles of Association to that effect);
- the officers carrying out the functions of trustee must be subject only to the direction of its management and directors; and
- any provision of non-financial resources to the trustee by any member of the borrower's group must be on an arms length basis or on normal commercial terms.
(Source: SC Press Release, 17/09/01.
'Shorter white knights'- SC relaxes listing, fundraising and restructuring rules
Amid weak economic conditions, the SC has decided to relax some of the rules relating to fundraising, listing and restructuring of companies in Malaysia. The relaxation of the rules will, according to the chairman of the SC, 'lower the height of the [white knight... but would still ensure that the white knight will be] able to carry the fair damsel away from the dragon.'
The relaxation applies to the following situations:
- in the case of IPOs:
- companies seeking listing on the Kuala Lumpur Stock Exchange (KLSE) will no longer be required to offer at least 15% of the issued and paid-up capital of a company seeking listing to the public;
- the restriction on the placement of securities for companies with issued and paid-up capital of less than RM100 million has been removed;
- companies can now issue and list any type of securities including preference shares, options and convertible securities provided that (i) the public shareholding spread of 25% is maintained when the options or convertibles issued are converted; (ii) the exercise/conversion price of the options or convertibles should be set at a price not lower than the public offer price of the ordinary shares of the company; and (iii) there is full disclosure in the prospectus of the effect of conversion/ exercise on the earnings per share and net tangible asset per share of the company, how the proceeds will be utilised and the rights attaching to the securities; and
- for the purposes of determining the shareholding spread, statutory institutions and collective investment schemes holding up to 15% of the issued and paid-up capital of the company will meet the requirements of the shareholding spread and be treated as being the public.
- in the case of restructuring of distressed companies:
- a reduction in the pro forma net tangible asset position of distressed listed companies undertaking restructuring schemes from at least 50% of the par value of their ordinary shares to 33% of the par value of their ordinary shares; and
- the removal of the restriction on the issue of convertible securities with nominal values of less than RM1.00. Previously, only companies placed under the purview of Danaharta Nasional Bhd or the Corporate Debt Restructuring Committee (CDRC) were permitted to issue such securities. (Eds: Danaharta Nasional Bhd is a statutory corporation set up by the Malaysian government to assist in debt restructuring. It is empowered to take over the defaulting debt from a lender. The CDRC is a non statutory body under the purview of Bank Negara, Malaysia's central bank, that assists in debt restructuring. Unlike Danaharta, CDRC mediates by getting parties to agree on the debt restructuring plan and does not have legislative authority to take over bad debts. Both bodies were set up as a result of the 1997 financial crisis.)
(Source: SC Press Release, 3/09/01.
Singapore
Comprehensive rulebook for capital markets
The Government of Singapore has placed before its Parliament 3 bills that will update and consolidate the disparate legislations that govern Singapore's capital markets, financial advisory and insurance activities. These Bills were first released for public consultation and the comments from industry groups have been incorporated into the Bills. (Eds: the terms of the consultation on the draft Bills were reported in ITM 4)
The 3 Bills which are referred to as Acts are:
- The Securities and Futures Act 2001 (SFA);
- The Financial Advisers Act 2001 (FAA); and
- The Insurance (Amendment) Act 2001.
We will concentrate only on the first 2 Bills.
SFA
The SFA will consolidate all legislation dealing with capital markets into a single piece of legislation. The changes that will be introduced by the SFA include:
- updating the definition of markets and regulated activities to include electronic trading systems and overseas stock exchanges that target Singaporeans;
- the introduction of a single licensing framework with a tiered level of capital and compliance requirements depending on the risk exposure of that particular licensed activity. Market participants will be required to hold only 1 licence instead of multiple licences;
- all collective investment schemes offered to the public must be approved by the Monetary Authority of Singapore (MAS) and permission may be granted for foreign funds to be offered directly to Singaporeans;
- migrating the fund raising provisions in the Companies Act and enhancing the disclosure based approach to regulating capital markets. These include introducing a requirement that prospectuses are to be exposed to the public for 2 weeks before they are registered with the MAS;
- making the requirement to make continuous disclosure by listed companies a statutory requirement instead of a requirement imposed under the Singapore Exchange's Listing Manual; and
- all clearing and settlement institutions shall be subject to the regulatory control of MAS and exceptions will be made to the insolvency laws of Singapore to prevent the disruption to clearing and settlement trades in the event of insolvency of a clearing house.
FAA
Financial advisory activities in respect of investment products, distribution and marketing of investment products will now be regulated by the FAA. The changes introduced by the FAA include:
- the requirement that a financial adviser (anyone advising others concerning investment products, the issue of analyses or reports concerning investment products, the marketing of collective investment schemes and arranging contract of insurance in respect of life policies) be licensed;
- the maintenance by licensed financial advisers of prudential requirements such as minimum paid-up capital and financial resource requirements;
- giving MAS the power to issue prohibition orders forbidding a person from providing financial advisory services permanently or for a specified period; and
- giving MAS the power to inspect licensed financial advisers or persons suspected of carrying on a business of providing financial advisory services.
(Source: Monetary Authority of Singapore Press Release, 25/09/01. For more, see the press release)
New Zealand
2 become 1- reforming the law on investment advisers
In a move to strengthen the existing legislation dealing with investment advisers, the Securities Commission of New Zealand (SC) has canvassed a proposal (through its discussion paper) to improve the contents of the disclosure statements made by investment advisers and the abolition of the two-tier disclosure model currently in place in New Zealand.
Currently, investment advisers are not required to be licensed to practice as investment advisers. They are however subject to certain disclosure requirements under the New Zealand Investment Advisers (Disclosure) Act 1996 (the Act). The system of disclosure is described as being a two-tier system. Under this system, an investment adviser must disclose information concerning any conviction of an offence under the Act or any crime involving dishonesty, any prohibition from taking part in the management of any company or business and whether they have been adjudicated as a bankrupt. This type of information is mandatory and must be given irrespective of any request from a customer.
The second level of information that must be disclosed by an investment adviser is information regarding their qualifications and experience and whether the investment adviser stands to receive an interest in giving the advice or recommendation. This information is only provided if it is requested by a customer. According to the SC, such a situation is unsatisfactory as many investors are unaware of their right to request the disclosure of the second level of information.
The SC therefore has recommended that such information be provided by investment advisers before investment advice is given. In addition, the SC has also put forth the following proposals:
- that the categories of information required to be disclosed under the Act be extended to cover the disclosure of all material benefits received by the investment adviser in giving that advice;
- making it an offence for anyone to recommend or assist a client to acquire securities knowing that the offer of the securities are not in compliance with the Securities Act 1978. The aim is to cover scams originating outside of New Zealand; and
- giving the SC the power to prohibit any person from giving investment advice and to take enforcement action on behalf of investors.
(Source: SC Discussion Documents, 'Law Reform: Investment Advisers: A Discussion Paper', 27/08/01)
China
In at last - China becomes a member of the WTO
China is set to become the newest member of the World Trade Organisation (WTO) on 11 December 2001. The entry into WTO will open the doors of one of the world's biggest markets to foreign investors. This article by AAR's Kate Axup examines the implications of WTO membership for foreign investors in the banking and insurance sectors in China. For more, see AAR's Focus: China.
