Newsletter – September 2014

Newsletter – September 2014

  1. SFC commences proceedings against CITIC, its former chairman and executive directors
  2. SFC suspends Eric Shum Kam Chi for three years for sponsor failures
  3. SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters
  4. SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements
  5. Court convicts unlicensed investment portfolio manager

1.  SFC commences proceedings against CITIC, its former chairman and executive directors

On 11 September 2014, the Securities and Futures Commission (“SFC”) has instituted proceedings in both the Court of First Instance (“CFI”) and the Market Misconduct Tribunal (“MMT”) against CITIC Limited (“CITIC”), formerly known as CITIC Pacific Limited, and five of its former executive directors, namely chairman Mr Larry Yung Chi Kin, managing director Mr Henry Fan Hung Ling, deputy managing directors Mr Leslie Chang Li Hsien, Mr Peter Lee Chung Hing, and executive director Mr Chau Chi Yin (“the five directors”).

The allegations

The SFC alleged that CITIC and the five directors engaged in market misconduct involving disclosure of false or misleading information on CITIC’s financial position arising from the massive losses incurred by CITIC over its investment in leveraged foreign exchange contracts in 2008 contrary to sections 227 or 298 of the Securities and Futures Ordinance (“SFO”). Both market misconduct provisions prohibit the distribution of materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to have a price effect on the company’s securities.

According to the SFC, CITIC issued a circular on 12 September 2008 that contained a false or misleading statement about its financial position (“the Circular”). The Circular was published on the Stock Exchange of Hong Kong Limited (“SEHK”) listed company announcement system on the Hong Kong Exchanges and Clearing Limited (“HKEx”) website on 12 September after market close, and was distributed to its shareholders on 16 September 2008. It concerned an unrelated transaction and disclosed that “the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 September 2007”. However, in a market announcement on 20 October 2008, CITIC disclosed that it suffered a massive realised and mark to market loss up to that date arising from a number of leveraged foreign exchange contracts which CITIC had entered into to manage currency risk of its Australian iron ore mining project exposure (“the Profit Warning”). The SFC therefore alleges that the five directors were aware of the huge financial exposure arising from those contracts on 7 September 2008, before the Circular was issued.

The prices of CITIC shares, which were suspended from trading on 20 October 2008 before the Profit Warning, fell 55% from HK$14.52 to close at HK$6.52 on 21 October 2008 when trading resumed.

Relief sought

The SFC is seeking restoration or compensation orders under section 213 of the SFO in the Court of First Instance to compensate or restore the pre-transaction positions of up to 4,500 investors who purchased CITIC shares between the date on which the SFC alleges the false or misleading information was announced and the date on which the true financial position was disclosed. The SFC is also seeking for CITIC and the five directors to be sanctioned by the MMT.

The amount that CITIC may be required to pay will need to be the subject of assessment by the CFI if liability is established.  It may depend on variables such as the total purchases during the relevant period, the purchaser’s acquisition price, sale price, or whether the purchaser continues to hold shares.

Comment

Under the market misconduct provisions of the SFO, licensed persons are prohibited from distributing materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to materially affect the price on the relevant securities. It is therefore important that licensed individuals and ensure at all times that promulgated information is accurate.

If a licensed person is found guilty of market misconduct provisions, he may thus not be considered fit and proper to continue being licensed. Pursuant to Paragraph 7.1 of the Fit and Proper Guidelines, a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

Readers should also note that this case will be very significant in establishing precedent governing the calculation of what may be required to restore a shareholder who has traded in a market affected by false or misleading information.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR108

2.  SFC suspends Eric Shum Kam Chi for three years for sponsor failures

On 16 September 2014, the SFC suspended Mr Eric Shum Kam Chi (“Shum”) as a representative in all regulated activities and withdrawn approval for him to act as a responsible officer for three years from 15 September 2014 to 14 September 2017 for serious deficiencies in the sponsor work relating to the listing of Sino-Life Group Limited (“Sino-Life”) on the Growth Enterprise Market (“GEM”) of the SEHK. Mr Shum was previously a responsible officer and sponsor principal of Sun Hung Kai International Limited (“Sun Hung Kai International”) which acted as the sole sponsor for Sino-Life.

Background

On 27 January 2014, the Securities and Futures Appeals Tribunal (“SFAT”) affirmed the decision of the SFC to sanction Sun Hung Kai International. It took disciplinary action by reprimanding the company, fining it HK$12 million, and suspending its licence to provide advisory service on corporate finance for one year.

An SFC investigation revealed that Sun Hung Kai International had failed to conduct proper due diligence between October 2007 and September 2009 on Sino-Life’s business in relation to a number of material issues, and had placed undue reliance on the work delegated to external experts.

It was discovered that Sun Hung Kai International’s regulatory breaches were attributable to Shum who failed to discharge his duties as its senior management. The SFC found that as head of the firm’s transaction team, Shum had failed to:

  • assess the accuracy and the completeness of the information submitted by Sino-Life to demonstrate that it had satisfied the financial requirements to list on the GEM;
  • ascertain the existence of various encumbrances on the title of a major business deal of Sino-Life in Taiwan;
  • properly assess the business of Sino-Life’s wholly-owned subsidiary in Taiwan;
  • ensure true, accurate and complete disclosure was made to the SEHK and in Sino Life’s Prospectus and sponsor declaration; and
  • keep proper books and records in relation to the sponsor work conducted.

Shum originally sought to review the SFC’s decision at the SFAT, but withdrew his application before the SFAT hearing.

The Penalty

In deciding the penalty, the SFC took into account:

  • the fact that although Shum had knowledge of the fact that Sun Hung Kai International was selective in its disclosure to the SEHK during the listing process, he still signed the sponsor declaration announcing that all information submitted to the SEHK was true, accurate and complete to his knowledge; and
  • Shum’s otherwise clean disciplinary record.

Comment

In failing to discharge his duties as senior management, Shum had breached the regulatory requirements under the Code of Conduct, which requires a licensed individual to exercise due skill, care and diligence (General Principle 2), ensure the maintenance of appropriate standards of conduct and adherence to proper procedures (General Principle 9) and diligently supervise subordinates and sponsor work undertaken by the firm (Paragraph 4.2). This reflects negatively on an individual’s fitness and properness to be licensed, under Paragraph 7.1 of the Fit and Proper Guidelines and could lead to serious consequences such as fines, suspension and revocation of a SFC licence. Readers should therefore note that consistently reviewing internal controls and procedures is extremely important to maintain a high standard of diligence and integrity in order to avoid breaching regulatory requirements particularly those relating to responsible officer.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR110

3.  SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters

On 19 September 2014, the SFC published its annual review of the SEHK’s performance in its regulation of listing matters during 2013

In Government’s Consultation Conclusions on Proposals to Enhance the Regulation of Listing published in March 2004, the Government recommended that the SFC should prepare annual reports on its reviews regarding SEHK’s performance of its listing functions.

In this year’s annual report, the SFC found that the operational procedures and decision-making processes reviewed were appropriate in enabling the SEHK to discharge its statutory obligations in maintaining an orderly, informed and fair market. The SFC also identified certain areas for the SEHK to focus on in enhancing its performance.

For full report, please visit:

http://www.sfc.hk/web/files/ER/Reports/report_HKEx_%20audit_2014_EN.pdf

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR111

4.  SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements

On 25 September 2014, the SFC released consultation conclusions on the proposed amendments to the professional investor regime and launched a further consultation on client agreement requirements

Background

On 15 May 2013, the SFC issued a consultation paper on proposed amendments to the professional investor regime and the client agreement requirements. After reviewing all the comments received during the consultation, the SFC has decided to proceed with the proposal not to allow intermediaries when serving individual professional investors to be exempt from the suitability requirement and other fundamental requirements that have a significant bearing on investor protection under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code”).

The Suitability Requirement

The suitability requirement is the pillar of the Code and ensures the suitability of a recommendation or solicitation for a client is reasonable in all circumstances. The other fundamental requirements inherently linked with the suitability requirement or that have significant bearing on the Code include, among other things, the need to disclose certain transaction related information, the need to enter into a written agreement and the provision of relevant risk disclosure statements. Mr Ashley Alder, the SFC’s Chief Executive Officer, said that in arriving at a balanced outcome, the SFC considered the views of respondents carefully to ensure that individual investors who are classified as professional investors are adequately protected.

Other features

Other features of the revised professional investor regime include:

  • individual professional investors and corporate professional investors will continue to be allowed to participate in private placement activities;
  • the minimum monetary threshold for qualifying as individual professional investors and corporate professional investors will be maintained at the current levels (under the Securities and Futures (Professional Investor) Rules, the minimum portfolio threshold for individual professional investors is HK$8 million and the minimum total assets threshold for corporate professional investor is HK$40 million); and
  • a principles-based criteria that will replace the specific tests now used to assess whether exemptions to the Code requirements apply when intermediaries serve corporate professional investors. For the purposes of clarification, the SFC will publish frequently-asked-questions on the assessment criteria, which will apply to investment vehicles owned by individual professional investor and by family trusts. If investment vehicles can satisfy the assessment criteria, intermediaries serving them can be exempt from the suitability requirement.

Implementation and Further Consultation

The amendments relating to the professional investors regime will become effective on 25 March 2016, and a separate internal study of the suitability requirement, including the gathering of industry views, will be conducted in due course.

Furthermore, in response to market feedback, the SFC has modified its proposals on client agreement requirements and now seeks to further consult the public on the wording of a proposed new clause to be incorporated into all client agreement as a contractual term. The SFC will provide intermediaries with further guidance on the description of actual services in their client agreements, and proceed with the proposed Code amendments that provide that client agreements should not contain terms which are inconsistent with the obligations under the Code or mis-describe the actual services provided to the client. All proposals relating to client agreement requirements will take effect on a date specified when the further public consultation of the proposed new clause is concluded.

The SFC is inviting the public to submit their comments on or before 24 December 2014 in relation to the proposed new clause. Written comments may be sent via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2284 4460.

Comments

In preparation for the new regime, readers may submit their comments regarding both the suitability requirement and the proposed new clause. Intermediaries may find it useful to adopt the SFC’s suggestions regarding client agreements to ensure that they remain in compliance with their obligations under the Code and do not provide misleading information to the client. In particular, the revised regime’s new principle-based criteria may be particularly useful to intermediaries with investment vehicle clients, to assess whether they may be exempted from the suitability requirement.

To see the full consultation paper, please see:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=13CP1

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR113

5.  Court convicts unlicensed investment portfolio manager

On 26 September 2014, the Eastern Magistrates’ Court convicted Mr Tam Kwok Pui of providing asset management service without obtaining a licence from the SFC

Background

An investigation by the SFC found that between 1 March 2011 and 31 August 2012, Tam, whilst unlicensed, recruited a client through an investment seminar he organised and provided the client with asset management services which included managing a portfolio of securities and futures contracts for the client. The services he provided required him to satisfy the SFC that he was fit, proper and competent in asset management. He never sought SFC’s approval and was thus not authorized to provide these services.

Sanction

Tam pleaded guilty and was fined HK$10,000 for the offence. The court also ordered him to pay the SFC’s investigation costs.

Comment

Pursuant to section 114 of the SFO, it is an offence to carry on a business of providing asset management services or other regulated activities without a licence from the SFC. To obtain a Type 9 licence for asset management, an individual must prove that he is fit and proper in compliance with the Fit and Proper Guidelines, and has the requisite competence to provide the relevant regulated services. To secure SFC licences, prospective licensees may seek advice from independent compliance consultants such as CompliancePlus.

Investors may also check the SFC’s Public Register of Licensed Persons and Registered Institution on the SFC website (www.sfc.hk) to ensure that people who provide asset management services are properly licensed.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR114

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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Regulatory News (Sep 2014)

Newsletter – August 2014

Newsletter – August 2014

  1. SFC bans Manesh Vijaykumar Samtani for life
  2. SFC bans former broker Chan Yuk Hing for three years for false trading
  3. Market manipulator fined and sentenced to community service
  4. SFC suspends Chan Hung Nin for 15 months for unauthorised trading in client’s account
  5. SFC reprimands and fines Winnie Pang Wai Yan for negligence in handling client’s trade orders
  6. SFC commences Market Misconduct Tribunal proceedings against former CEO of Water Oasis Group Limited for alleged insider dealing
  7. SFC reprimands and fines Hung Lai Ping for manager and supervisory failures
  8. SFC issues first-quarter report
  9. SFC issues supplemental consultation conclusions on regulation of IPO sponsors
  10. Roger Tsui Chi Fung banned for providing false information to SFC

1. SFC bans Manesh Vijaykumar Samtani for life

On  4 August 2014, the Securities and Futures Commission (“SFC”)  banned Mr. Manesh Vijaykumar Samtani from re-entering the industry for life.

Background

Mr. Samtani was licensed as a representative to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (“SFO”) and was accredited to KGI Asia Limited from 20 March 2008 to 28 November 2012 and to KGI Futures (Hong Kong) Limited from 11 August 2008 to 28 November 2012.  Mr. Samtani is currently not a licensed person.

According to the findings of SFC, from July 2011 to November 2012, Mr. Samtani provided six clients with false screenshots of KGI’s trading platform and other false information to conceal trading losses and mislead the clients on the transactions conducted in their accounts and their actual account balances. The SFC also found that Mr. Samtani failed to follow his client’s specific instructions on the handling of their accounts and conducted transactions in their accounts contrary to their express instructions without their authorization.

Disciplinary action

Mr. Samtani provided false screenshots and other false information to the clients of his then employers, KGI, to mislead them as to the transactions in their accounts and the true net asset value of their accounts, in breach of the General Principle 1 of the Code of Conduct (honesty and fairness).

As regards conducting unauthorised transactions in the clients’ accounts, Mr. Samtani was in breach of paragraph 7.1 of the Code of Conduct (authorisation and operation of a discretionary account).

The SFC decides that Mr. Samtani is not a fit and proper person as a result of his misconducts; specifically the SFC took into account that Mr. Samtani’s conduct was dishonest, that he had abused the trust and confidence his clients and employers placed in him, and that his actions seriously jeopardised his clients’ interests and resulted in financial losses of more than HK$8 million to the clients.

Comment

Readers are once again reminded that a licensed person is under a duty to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct).  Paragraph 7.1 of the Fit and Proper Guidelines provides that a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients.  The SFC also reminds against the disclosure of passwords to the online trading accounts to anyone.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR96

2. SFC bans former broker Chan Yuk Hing for three years for false trading

On 4 August 2014, the SFC banned Mr. Chan Yuk Hing, a former broker, from re-entering the industry for three years from 1 August 2014 to 31 July 2017.

Background

On 29 June 2012, the Eastern Magistrates Court found Chan and his client, Mr. Paul Frederic Chane Yin, guilty of market manipulation in shares of Multifield International Holdings Limited (Multifield) in 2009. An SFC investigation found that through Chan, Chane purchased 50,000 Multifield shares at an average price of HK$0.2261 in the morning trading session of 23 November 2009. However, during the afternoon session, Chan asked Chane to buy Multifield shares at the best ask price which was HK$1.00 per share, four times the prevailing market price of HK$0.25, and suggested Chane to buy a single board lot of 2,000 shares. Chane agreed, and as a result, the price of Multifield shares rose four-fold to HK$1.00. Shortly before trading closed that day, Chane sold the 50,000 shares he had bought at an average price of HK$0.2261 for an average selling price of HK$0.4258.

Court Ruling

The Court held that there was no economically sensible reason for Chane to buy a single board lot at a price of four times the prevailing price. Therefore, it found that both Chan and Chane intended to create a false or misleading appearance of the price for Multifield shares to enable Chane to later sell his shares at an artificially inflated price.

On 13 July 2012, the Eastern Magistracy sentenced Chan and Chane to serve 80 hours and 100 hours of Community Service respectively. Chane was also fined HK$8,000, and both were ordered to pay investigation costs to the SFC. Subsequently, Chan and Chane’s appeals against their convictions were both dismissed in the Court of First Instance (“CFI”) on 13 January 2014.

The Ban

Consequently, the SFC has concluded that Chan has been guilty of misconduct and thus not fit and proper to be licensed. He was previously licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity, and was accredited to KGI Asia Limited between January 2008 and August 2010.

Comment

Readers should take note that a genuine buyer in a market of genuine supply and demand is one who aims to purchase shares at the lowest possible price. By doing otherwise, their conduct would constitute false trading contrary to Section 295(1)(b) of the Securities and Futures Ordinance (“SFO”). This calls his or her fitness and properness into question, and could lead to his or her license being suspended.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR95

3. Market manipulator fined and sentenced to community service

On 7 August 2014, the Eastern Magistrates’ Court sentenced Mr. Wong Pok Wang to 180 hours of community service and fined him HK$16,320 for manipulating the indicative equilibrium price (“IEP”) of derivative warrants and callable bull/bear contracts (“CBBCs”) during the Pre-opening Sessions.

Background

On 22 July 2014, the Eastern Magistrates’ Court found Wong guilty of 13 counts of false trading in eight derivative warrants and CBBCs between 15 October 2010 and 14 February 2011, following an allegation by the SFC. The SFC alleged that Wong created price ranges for the final IEP for the aforementioned derivative warrants and CBBCs by placing high priced at-auction limit buy orders of small sizes (usually a single board lot) and low priced at-auction limit sell orders (of significant sizes) during the Order Input Period. An IEP is the price during the Pre-opening Sessions at which the maximum number of shares could be traded if order matching occurred at the same time, and is calculated and determined by the orders inputted by investors during the Pre-opening Sessions. Within five seconds before the close of the Pre-order Matching Period, Wong placed at-auction buy orders (of relatively large sizes) for derivative warrants or CBBCs, pushing the final IEPs to the upper end of the price range by 9% to 39% on nine occasions. In this way, Wong sold the derivative warrants and CBBCs on a net basis at prices that were artificially high and profited from the trades. The Court held that Wong’s order placing activities made no economic sense and that he obtained illicit gains of HK$16,320 from his manipulative trades in the derivative warrants and CBBCs.

Sentencing

On 7 August 2014, the Eastern Magistrates sentenced Wong to 180 hours of community service and fined him HK$16,320. The fine imposed is equivalent to the profit made by Wong from selling the derivative warrants and CBBCs at prices artificially pushed higher by his manipulative orders.

Comment

This case illustrates the gravity of potential sentences for offences of false trading, contrary to Section 295 of the SFO. In addition to calling the individual’s fitness and properness into question, persons who commit these offences could be liable on conviction on indictment to a fine of up to HK$10,000,000 and imprisonment for up to 10 years, or on summary conviction, a fine of HK$1,000,000 and to imprisonment for up to 3 years. Furthermore, once convicted, the individual may be subject to disciplinary actions of the SFC under Section 195 of the SFO, by reason of being convicted of an offence with impugns on the fitness and properness of the licensed person to remain licensed. Readers should therefore be carefully ensure that their actions are not in breach of those provisions.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR97

4. SFC suspends Chan Hung Nin for 15 months for unauthorised trading in client’s account

The SFC suspended Mr. Chan Hung Nin for 15 months from 8 August 2014 until 7 November 2015 for breaching the Code of Conduct.

Background

Chan was licensed under the SFO to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities, and is accredited to Celestial Limited and Celestial Commodities Limited (“Celestial”).

The disciplinary action follows an investigation stemmed from a complaint by the client (“Client”), who alleged, inter alia, that Chan conducted unauthorised trades in his account (“Account”). The Account traded actively in stocks and CBBCs between 2 April 2011 and 21 August 2012 without the Client’s specific authorisation. According to Celestial’s records, the Client never signed a Power of Attorney to authorise Chan or any other third party to operate the Account.

When conducting periodic checks on trades without telephone recordings of order placing and confirmation, Celestial identified six such instances in the Account. On four instances where the Client could be reached, the Client falsely represented to Celestial that he had placed the relevant orders by calling Chan’s mobile phone. The SFC found that Chan had asked the Client to make such false representations to Celestial in order to conceal the fact that he was operating the account on a discretionary basis, and the fact that the Client did so suggests that he had impliedly authorised Chan to conduct the trades in question.

The Sanction

In deciding the sanction, the SFC took into account all the relevant circumstances including:

  • Chan’s act of coaching the client to lie is deliberate and dishonest;
  • Chan is still licensed and serving clients;
  • Chan had more than 20 years of experience in the industry at the time of his misconduct; and
  • Chan has an otherwise clean disciplinary record.

Comment

Readers should note that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”). If an individual breaches the requirements on discretionary accounts as set out in Paragraph 7.1 of the Code of Conduct, the SFC could conclude that the individual is not fit and proper to be licensed. Licensed corporations should also be aware that, pursuant to the Code of Conduct, tape records must be kept for a minimum period of at least 6 months.

The SFC’s disciplinary actions against Chan are empowered by Sections 194 to 196 of the SFO, which provides that the license of a regulated person may be suspended if he is found to be guilty of misconduct or is not fit and proper to be or to remain the same type of regulated person. As in the present case, the sanction imposed may be aggravated by the individual’s experience in the industry, since it implies that they should have been aware of the aforementioned requirements.

This may be aggravated by the individual’s experience in the industry, which implies that they should have been aware of the aforementioned requirements, thus attracting harsher sanctions.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR98

5. SFC reprimands and fines Winnie Pang Wai Yan for negligence in handling client’s trade orders

On 14 August 2014,  the Securities and Futures Commission (SFC) reported that Ms Winnie Pang Wai Yan had been publicly reprimanded and fined HK$120,000 for negligence in handling a client’s trade orders.

Background

Pang has been registered as a relevant individual with the Hong Kong Monetary Authority and engaged by UBS AG to carry on Type 1 (dealing in securities) regulated activity since 20 February 2006.

Pang was a client advisor assistant at UBS AG at the material time. In December 2009, a client at UBS AG wanted to sell his shares in a stock to an identified buyer at agreed amounts and prices through manual cross trades. Instead of placing cross trades as initially instructed by the client, Pang coordinated with the buyer to conduct a series of on-exchange matched trades between 3 and 8 December 2009.

Negligence

Under the Securities and Futures Ordinance (“SFO”), market misconduct of false trading in the form of matched orders is strictly prohibited.

The SFC found that, in handling the client’s orders, Pang did not exercise due care, skill and diligence in the best interests of the client by failure to make enquiries in relation to the relevant transactions to ascertain the client’s intention, report the matter to the Compliance Department of UBS AG, and refrain from acting on the client’s instructions before she was satisfied that the orders and their execution did not affect the best interests of the integrity of the market.  Pang thus was in breach of General Principle 2 of the Code of Conduct.

The SFC considers that Pang’s failures called into question her fitness and properness as a registered person.  In particular, the SFC took into account Pang’s financial situation, that Pang did not make any personal benefit out of the transactions in question, that there is insufficient evidence to prove to the requisite standard that the matched trades were carried out with manipulative intent, that the matched trades had minimal impact on the nominal price of the stock, that Pang co-operated with the SFC in resolving the disciplinary action and that Pang has an otherwise clean disciplinary record with the SFC.

Comment

Readers should take note that pursuant to section 274(5)(b) and section 295(5)(b) of the SFO, a person may have committed the offence of false trading or be regarded as having engaged in the market misconduct of false trading if a person offers to sell securities at a price that is substantially the same as the price at which he has made or proposes to make, or he knows an associate of his has made or proposes to make, an offer to buy substantially the same number of securities, unless the transaction in question is an off-market transaction. This type of trading is commonly known as matched orders.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR101

6. SFC commences Market Misconduct Tribunal proceedings against former CEO of Water Oasis Group Limited for alleged insider dealing

On 14 August 2014, the Securities and Futures Commission (SFC) reported that proceedings had been commenced in the Market Misconduct Tribunal (MW) against Ms Salina Yu  Lai Si, the former Chief Executive Officer of Water Oasis Group Limited (Water Oasis), for alleged insider dealing in Water Oasis shares.

Background

Water Oasis was listed on the Stock Exchange of Hong Kong Limited in March 2002, which principally distributes skincare products in Hong Kong, Macau, Taiwan, Singapore and the Mainland and operates beauty salons, spas and medical beauty centres in Hong Kong and the Mainland.  At the material time, Ms Yu was the Chief Executive Officer, a substantial shareholder and an executive director of Water Oasis.  Ms Yu resigned as Water Oasis’ Chief Executive Officer and executive director on 6 July 2012.

SFC’s allegation

The SFC alleges that on 20 January 2012 at around 10 am, H2O Plus LLC (H2o) informed Ms Yu that it would terminate Water Oasis’ exclusive distributorship in H2O’s products in the Mainland and Taiwan with immediate effect and shortly after being notified by H2O, Ms Yu proceeded to sell all her Water Oasis shares in one of her securities trading accounts on the same day prior to an announcement by Water Oasis, and avoided a loss of around of around HK$281,346. Subsequently on 20 January 2012 at 10:13 pm, Water Oasis issued an announcement about the termination of the exclusive distribution rights in H2O products.

The SFC also alleges that both the news about the termination of the exclusive distribution rights and the significance of the contribution of H2O’s operations in the Mainland and Taiwan to the net profit of Water Oasis were not publicly known and were material to Water Oasis’s share price. This allegation is backed up by the fact that on 26 January 2012, the first trading day after Water Oasis made the announcement on 20 January 2012, its share price dropped by 14.08% to close at HK$1.22 and on the same day, the Hang Send Index rose 329 points or 1.64% to the level of 20,439.

Comment

Readers, especially for those that are privy  to secret price-sensitive information,  are reminded that information of this sort must be handled with utmost care.  Acquisition of or disposal of relevant securities immediately after obtaining such information should be avoided.  In case of doubt, readers should readily seek professional advice on regulatory and legal compliance.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR100

7. SFC reprimands and fines Hung Lai Ping for manager and supervisory failures

The Securities and Futures Commission (SFC) has issued a reprimand to Ms Hung Lai Ping, a former responsible officer of Delta Asia Securities Limited (Delta Asia), and fined her HK$150,000 for managerial and supervisory failures.

Background

Delta Asia is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 3 (leveraged foreign exchange trading) and Type 4 (advising on securities) regulated activities.  Hung is licensed under the SFO to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. During the period from April 2007 to June 2012, Hung was accredited to Delta Asia and approved to act as its responsible officer.

Findings of the SFC

The SFC found that during the period from January 2010 to February 2013, Delta Asia used shares belonging to clients and held in segregated client accounts at the Central Clearing and Settlement System (CCASS) to settle transactions for its other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date.  This was done without the consent or authorisation of the clients whose shares were used for settlement in contravention of the Securities and Futures (Client Securities) Rules on 36 occasions during the period.  Sections 6 and 10 of the Securities and Futures (Client Securities) Rules respectively specifies the circumstances in which intermediaries may withdraw or otherwise deal with client securities received or held on behalf of clients and requires intermediaries to take reasonable steps to ensure that client securities are not deposited, transferred, etc, except in the manner specified in the rules.

In addition the SFC found that on two occasions during the period, Delta Asia had transferred shares belonging to clients and held in the CCASS segregated client accounts to its CCASS clearing account, with a view to settling the transactions for Delta Asia’s other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. However, the transferred shares were eventually not sent to the Hong Kong Securities Clearing Company Limited for settlement purpose as a result of the netting of Delta Asia’s positions in the same security on the same day. This occurred without the consent or authorization of the clients whose shares were transferred and were in breach of the Securities and Futures (Client Securities) Rules notwithstanding that the transferred shares were eventually not used for settlement purpose.

The SFC also found that Delta Asia failed to implement proper controls to safeguard client securities and to supervise the staff of Delta Asia in discharging its settlement function, thus allowing the unauthorized transfers of client securities from Delta Asia’s CCASS segregated client accounts to its CCASS clearing account to have gone unchecked for more than three years.

Ms Hung’s negligence

The SFC is of the view that Delta Asia’s settlement malpractice and failures were attributable to negligence on the part of Hung.

Hung was responsible for overseeing the compliance function and all front and back office operations of Delta Asia, including its settlement functions. In her capacity as a responsible officer and a member of senior management, Hung bore primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by Delta Asia, for properly managing the risks associated with the business of Delta Asia, and for supervising diligently persons employed or appointed by Delta Asia to conduct business on its behalf.

Hung has failed to fulfil such responsibility and her failure has manifested itself in the failures that Delta Asia, under her management, has displayed. As a result, the SFC held that Hung had breached General Principles 2, 9 and paragraphs 4.2 and 14.1 of the Code of Conduct. In deciding the sanctions, the SFC took into account that Hung has accepted the SFC’s findings.

Comment

The SFC stresses once again that safe custody of client assets is a fundamental obligation of licensed corporations. Any transgression of this obligation, even if the relevant clients are made whole again, cannot be tolerated.

The SFC has also taken disciplinary action against Delta Asia as a result of the same investigation. This illustrates that the relevant institution alongside the responsible officers/individuals will be penalised for the failure to put sufficient internal control in place.  To preserve the public image of the institution, readers should be noted that it is not sufficient that institutions solely rely on the ethics of employees, and a system of internal control is of equal importance.  If necessary, professional advice on compliance issues should be sought without delay.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR102

 

8. SFC issues first-quarter report

On 20 August 2014, the SFC published its Quarterly Report summarising key developments from April to June 2014.

Regulatory update

Of particular significance are the Securities and Futures (Amendment) Ordinance 2014, gazetted in April, which established a framework for the regulation of the over-the-counter derivatives market, and a circular issued by the SFC which set out a guidance on robust internal product approval and design processes for investment products. To encourage more meaningful disclosure, the SFC also requested listed companies to provide specific numbers in their profit alerts and warnings wherever possible.

Shanghai-Hong Kong Stock Connect Pilot Scheme

On 10 April 2014, the China Securities Regulatory Commission and the SFC approved the development of a pilot programme (the “Scheme”) for establishing mutual stock market access between Mainland China and Hong Kong. When launched, the Scheme will operate between the Shanghai Stock Exchange (“SSE”), China Securities Depository and Clearing Corporation Limited (“ChinaClear”), Hong Kong Securities Clearing Company Limited (“HKSCC”).

Enforcement

In the first quarter, the SFC successfully prosecuted 10 individuals or corporations for market misconduct and disciplined 17 licensees, with fines totalling over HK$39 million.

The SFC also reprimanded ICBC International Capital Limited (ICBCI) and fined them a total of HK$25 million regarding their role in an initial public offering.  ICBCI failed, inter alia, to conduct customer due diligence and perform ongoing scrutiny of accounts of certain placees referred by Powerlong (Placees) to ensure that the transactions being conducted were consistent with its knowledge of the Placees, taking into account their source of funds, and turned a blind eye to the lack of independence of Placees for the subscription of Powerlong’s shares allotted through its listing on the Stock Exchange of Hong Kong Limited.

The SFC also obtained a judgment which ordered Ernst & Young Hong Kong to produce to the SFC specified accounting record relating to its work as the reporting accountant and auditor for Standard Water Limited.

For further details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR103

For full report please see: http://www.sfc.hk/web/files/ER/Reports/QR/201404-06/Eng/00_Eng%20Full.pdf

 

9. SFC issues supplemental consultation conclusions on regulation of IPO sponsors

On 22 August 2014, the Securities and Futures Commission (SFC) released supplemental consultation conclusions on prospectus liability, reaffirming that IPO sponsors are subject to existing statutory civil and criminal liability for defective prospectuses.

Initial consultation conclusions

On 9 May 2012, the SFC issued a Consultation Paper on the Regulation of Sponsors, which contained a number of proposals designed to enhance Hong Kong’s sponsor regulatory regime and consolidate all key sponsor obligations in the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”). The Paper invited comments on two broad areas: (i) the regulatory regime for sponsors conduct; and (ii) legislative amendments to clarify sponsors’ civil and criminal liability under existing legislation concerning misstatements in prospectuses. The consultation period ended on 31 July 2012 and 71 responses were received. The SFC released Consultation Conclusions on the Regulation of IPO Sponsors on 12 December 2012. The Conclusions were made in response to concerns expressed in the Consultation Paper that standards of sponsor work have fallen short of expectations. For that reason, the SFC consulted the market on proposals aimed at improving market confidence and the overall quality of sponsor work.

In relation to prospectus liability of sponsors, the SFC concluded in its initial consultation that although there was a strong argument that sponsors were already covered by the relevant legislation, given the lack of relevant case law and varying views expressed by sponsors and others, it may be helpful to specify sponsors in the Companies (Winding Up and Miscellaneous Provisions) Ordinance) (“CWUMPO”) as a category of persons who authorise the issue of prospectuses. Amending Sections 40 and 342F of CWUMPO would make it explicitly clear to all market participants that sponsors are potentially liable under the Ordinance.

However, it remained unclear whether or not such an amendment was necessary, since sponsors were already persons who authorise the issue of a prospectus within the meaning of the CWUMPO (Sections 40(1)(d), 40A(1) and 342F(1)), and are therefore potentially liable.

Supplemental consultation conclusions

Since the release of the Consultation Conclusions, the SFC has engaged with industry participants and other interested parties in further consultations on the proposed legislative amendments. The supplemental consultation conclusions sets out the SFC’s position on the need for further legislative amendments following these consultations and further analysis.

In this subsequent conclusion, the SFC reaffirmed its view that its original position in the Consultation Paper, namely that sponsors are already covered under the existing law, is correct. Thus, sponsors are among those persons who have potential statutory criminal and civil liability under the CWUMPO for untrue statements (including material omissions) in a prospectus. As such, the proposed legislative amendments in the initial consultation conclusions and Consultation Paper will not be pursued as they serve no purpose.

For further details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR104

For full report please see:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openConclusionAppendix?refNo=12CP1&appendix=0

10. Roger Tsui Chi Fung banned for providing false information to SFC

The SFC has banned Mr. Roger Tsui Chi Fung, a former licensed representative, from re-entering the industry for nine months from 15 August 2014 to 14 May 2015.

Background

Tsui was licensed under the Securities and Futures Ordinance (“SFO”) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities and was accredited to various licensed corporations between 2000 and 2011. He is currently not accredited to any licensed corporation.

Providing false or misleading information

On 15 Jan 2014, the Eastern Magistrates’ Court convicted Tsui after he pleaded guilty to two counts of providing false or misleading information to the SFC in his capacity as a SFC license holder. He was fined HK$8,000 and ordered to pay the SFC’s investigation costs.

The court heard that, on or around 29 January and 24 August 2009 respectively, Tsui had on each of the dates submitted to the SFC an annual licensing return. In each return, Tsui declared that during the relevant reporting periods, there was no change in the information about him that had been provided to the SFC, including information about his disciplinary record.

The declarations in the two annual returns were false or misleading as the SFC’s investigation revealed that the Financial Industry Regulatory Authority of the United States (“FINRA”) had disciplined Tsui and the sanction imposed on Tsui during the reporting periods was covered by both annual returns.

The sanction

As mentioned above, Sections 194 to 196 empower the SFC to suspend the license of a regulated person if he is found to be guilty of misconduct or not fit and proper to remain the same type of regulated person. The SFC has found that by providing false information regarding his disciplinary record, Tsui is not fit and proper to remain licensed. As such, he has been banned from re-entering the industry for nine months.

Comment

Under Section 384 of the SFO, it is a criminal offence to provide to a specified recipient (including the SFC) any information which is false or misleading in a material particular. This includes but is not limited to information regarding a licensee’s disciplinary record, and the annual return that the licensee is required to submit under Section 138(4) of the SFO. It is therefore important for licensed individuals to ensure that they provide accurate information to the SFC at all times, and failure to do so could result in the suspension or revocation of an SFC license.

For further details please see: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR106

The article is for general information purpose only and is not intended to constitute legal or other professional advice.

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