ENG-2004 — Page 118

88 Financial and Monetary Affairs

The SFC published in July 2003 a Code on Real Estate Investment Trusts (REITs) following market consultation. In 2004, based on recommendations of the Taskforce on Overseas Real Estate Investment by REITs, the SFC worked on proposed benchmarks for overseas investments by REITS for public consultation in the first quarter of 2005.

To give greater investment flexibility to funds authorised under the Code on Unit Trusts and Mutual Funds, the SFC relaxed in November the prohibition on investment in real estate after consulting the Committee on Unit Trusts. REITs that are authorised by the SFC are permissible investments following the relaxation.

By the end of 2004, the SFC had authorised 13 retail hedge funds with assets under management of US$1.13 billion. The SFC will review the Guidelines on Hedge Funds within this financial year to strengthen the disclosure standards and provide more flexibility in administering the Guidelines, such as accepting a wider range of experience as qualifying experience in respect of management companies of retail hedge funds.

To facilitate an orderly migration of European funds in Hong Kong to the Undertakings for Collective Investment in Transferable Securities III (UCITS) regime, the SFC proposed to adopt an interim approach to process UCITS III fund applications, provided that investors were fully informed of the new features and risks of UCITS III funds. The SFC will continue to work closely with the fund industry. Extensive investor education and market consultation on UCITS III funds will also be conducted.

In November, the SFC published the consultation conclusions on proposed measures to address analyst conflicts of interest and the final guidelines, having regard to comments made by the industry. The market in general supports the issuance of clearer and specific guidelines, which are scheduled to become effective on April 1, 2005 so that the industry has sufficient time to establish the necessary compliance systems.

In September, the SFC released a consultation paper on proposed measures to strengthen the regulatory framework for licensed firms involved in securities margin financing (SMF). To reduce the risks arising from excessive pooling and re-pledging of margin clients' collateral and aggressive lending by SMF providers, the SFC proposed to introduce a per-firm re-pledging limit and to adjust the haircut percentages under the Financial Resources Rules. Supplementary measures were also proposed. Respondents to the public consultation, which ended in October, generally accepted that the proposed reform was to enhance investor protection. The SFC will continue its dialogue with the industry to identify suitable measures to minimise the risks and allow an appropriate transitional period.

In 2004, the SFC also completed a theme inspection of investment advisers who market financial products to the public. Structural and conduct issues of Hong Kong's financial advisory services sector have been identified and the SFC aims to publish its views in early 2005.