Securities & Future Bill Draft Client Money Rules & Client Securities Rules

 



Securities and Futures Bill

Draft Client Money Rules & Client Securities Rules

The Bar Council have reviewed the Draft Securities
and Futures (Client Money) Rules and (Client Securities) Rules to
be made by the SFC under the Securities and Futures Bill if enacted.
Our comments are as follows: -



General

The general tenor of the proposed Rules is to tighten
regulation of clients’ money or securities received or held by the
brokers and as such is to be supported.



Client Money Rules

By virtue of Clause 3(2) of the Client Money Rules,
the Rules only apply to client money received or held in Hong Kong.
There is no such restriction at present in the application of section
84 of the Securities Ordinance (Cap. 333). One of the reasons given
for the change, namely, that there may be no trust law or no office
of any authorised financial institution in overseas countries, does
not justify the change. The idea of rationalising the requirements
on brokers which operate branches outside Hong Kong is understandable
but the change may create loopholes for circumventing the Rules by
ensuring that client money is received or held outside Hong Kong.

We would support the move (in Clause 3(2)(a)(ii)
and Clause 3(3)) to shorten the period of time after which client
money has to be paid in accordance with the Client Money Rules, even
though the existing 4 day limit is not inconsistent with the existence
of a trust over client money: Re CA Pacific Finance Ltd [1999]
2 HKC 632, 639-641. The shorter the period of time, the less the exposure
of client money.

Clause 3(5)(b) allows payment of an amount that is
not client money but aggregated with client money to be paid into
a trust account. That is not the position at present under s.84(5)
of the Securities Ordinance, which allows only client money to be
paid into a trust account. We would query whether this is a desirable
change. The mixing of trust money and the trustee’s money has been
known to give rise to numerous intractable problems. The Client Money
Rules should aim at avoiding such problems by preventing rather than
allowing mixing.



Client Securities Rules

As to the limitation of the Rules to securities "received
or held in Hong Kong", see the comments above.

The definition of "client’s authority" in
Clause 2 provides for the authority to pledge securities to be renewable
in writing or otherwise. This is a change from the present
law, which requires by section 81(7)(b) of the Securities Ordinance
(Cap. 333) that the authority be renewed in writing to be effective.
Allowing such authority to be renewed otherwise than in writing will
be likely to give rise to disputes between the brokers and the clients
as to the fact or precise extent of the renewal of authority.

With regard to Clauses 8 and 9, the use of client
securities as collateral has given rise to tracing difficulties in
the liquidations of both CA Pacific Securities Ltd and Forluxe Securities
Ltd. Requirements as to the keeping of records should be imposed in
respect of the use of client securities as collateral so that it is
clear whose securities are being used at any particular time.

As to Part III of the Rules, it is as a matter of
general principle not desirable that the criminal offences and penalties
should be created by rules themselves which are made by the SFC and
only subject to negative vetting. It is also unclear what the status
of the Rules is, for example, as regards the legal effect of any pledge
or deposit of client securities as collateral in breach of the Rules.

Dated 26 June 2001

Hong Kong Bar Association