LegCo Panel on Financial Affairs
Meeting on 27 January 1997

Consultation Paper on Management, Supervision and Internal Control
Guidelines for Persons Registered with or Licensed
by the Securities and Futures Commission

In 1994, the Securities and Futures Commission (SFC) issued a Code of Conduct to all registered persons. Under the Code, persons registered with the SFC are required to ensure that they have satisfactory internal control procedures and financial and operational capabilities to protect their operations, their clients and other registered persons from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions. The Conduct of Business Guidelines for Licence Holders under the Leveraged Foreign Exchange Trading Ordinance also contains a requirement for licensed traders to maintain satisfactory internal control systems.

2. In recent years, there were a number of brokerage firms collapses and misfeasance or market malpractices by employees of brokerage firms, such as misappropriation of securities, illegal shortselling, rat trading or improper allocation of trades, which have highlighted the problem of inadequate internal control systems in some brokerage firms. The SFC therefore has prepared the proposed Guidelines on management, supervision and internal control (the proposed Guidelines) to give guidance to the brokerage firms on what constitutes a satisfactory internal control system.

3. A consultation document on the proposed Guidelines was issued by the SFC on 28 November 1996 and the consultation period will end on 31 January 1997. Copies of the consultation document were sent to Members of the Financial Affairs Panel on 28 November 1996.

4. Since the publication of the proposed Guidelines, the SFC has conducted a number of seminars for industry practitioners. The SFC is satisfied that there has been good response to the proposed Guidelines, including support from the two exchange companies.

5. The SFC’s staff hopes to have the Commission’s endorsement of the proposed Guidelines in April 1997.

Financial Services Branch
Government Secretariat
20 January 1997

Last Updated on 18 August 1998