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HKSI LE Paper 3 study materials
HKSI LE Paper 3 study resources

HKSI LE Paper 3: Regulatory Framework and the SFC

HKSI LE Paper 3 · Work through your exam, one topic at a time.

All guide sections

Regulatory Framework and the SFC

This domain tests the statutory architecture of the Securities and Futures Ordinance (Cap. 571), how regulatory power is divided between the SFC, the Hong Kong Monetary Authority, the exchange companies and other bodies, and what legal effect each type of SFC instrument carries. Questions ask who may act, under which power, and with what consequence.

The statutory anchor

  • The SFO commenced on 1 April 2003 and consolidated the Securities Ordinance, the Commodities Trading Ordinance, the Leveraged Foreign Exchange Trading Ordinance and the Securities and Futures (Clearing Houses) Ordinance. It was later extended by Part XIVA (disclosure of inside information, 2013) and the OTC derivatives regime (from 2014).
  • The SFC is a body corporate established by s.3. It is not a government department: members are appointed by the Chief Executive, it is funded mainly by the transaction levy and fees, and it reports to the Financial Secretary.
  • Section 5 functions include maintaining and promoting the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industries, and supervising and monitoring those industries.

Who regulates what

  • SFC: licensed corporations and licensed individuals, market misconduct, prospectus authorisation, the Takeovers Codes and listed-company disclosure. Investigatory powers sit in s.182 (investigation) and s.183 (production of records and documents).
  • HKMA: frontline supervision of authorized institutions that are registered institutions, and approval of their relevant individuals. The SFC retains responsibility for the conduct rules applying to their securities business.
  • SEHK, HKFE and the clearing houses are the frontline market operators; listing rule administration is overseen by the SFC through dual filing.
  • Appeals against SFC decisions go to the Securities and Futures Appeals Tribunal.

Legal effect of instruments

  • Rules made under the SFO are subsidiary legislation; breach is an offence.
  • The Code of Conduct, Fund Manager Code, Corporate Finance Adviser Code and Takeovers Codes are not subsidiary legislation. Breach is not in itself an offence, but it is admissible and directly relevant to fitness and properness and to disciplinary action.

Worked example

A bank that is a registered institution employs a dealer whose conduct breaches the Code of Conduct. The HKMA supervises that institution and its relevant individuals day to day, and the SFC may still take disciplinary action against the institution for the breach, ordinarily after consulting the HKMA. If the same conduct occurred at a licensed corporation, the SFC would act alone. The distinguishing fact is the status of the entity, not the nature of the conduct.

Traps

  • Treating a Code breach as automatically criminal.
  • Assuming the SFC approves individual bank staff; they are relevant individuals approved by the HKMA.
  • Confusing the SFAT (appeals) with the Market Misconduct Tribunal (findings of market misconduct).