Archive for year: 2015

1. SFC reprimands and fines Nomura International (Hong Kong) Limited HK$4.5 million for regulatory breach
2. SFC fines BNP Paribus Securities (Asia) Limited HK$15 million for dark liquidity pool-related failures
3. SFAT affirms SFC decision to revoke approval of Miranda Sham Sze Wai as responsible officer over internal control failures
4. SFC issues first quarterly report
5. SFC recovers HK$23 million for investors from restoration orders against insider dealer Du Jun

1. SFC reprimands and fines Nomura International (Hong Kong) Limited HK$4.5 million for regulatory breach
On 30 July 2015, the Securities and Futures Commission (“SFC”) publicly reprimanded and fined Nomura International (Hong Kong) Limited (“Nomura Hong Kong”) HK$4.5 million for failing to report significant misconduct by a former trader in a timely manner.

Background

On 11 June 2013, Nomura Hong Kong made a report to the SFC (“11 June Report”) that Mr. X, a trader on secondment from Nomura Securities Co., Ltd in Japan (“Nomura Japan”), had incurred a US$3.3 million trading loss and had been repatriated to Japan on 5 June 2013. Nomura Hong Kong informed the SFC that a review of Mr. X’s trades was being undertaken, and it would report to the SFC should any issues be identified.

In fact, at the time of the 11 June Report, Mr. X had already admitted to making false entries in Nomura Hong Kong’s risk management system and to providing false information to Nomura Hong Kong. None of these matters were promptly disclosed to the SFC, as required under the Code of Conduct for Persons Licensed by and Registered with the SFC (“Code of Conduct”).

The SFC also found that by the time Mr. X left Hong Kong following the termination of his secondment, Nomura Hong Kong had already noticed some apparent discrepancies between his actual trading activities and the information he had provided to management. Mr. X was sent back to Nomura Japan before the SFC had been properly alerted and before Nomura Hong Kong had completed its internal investigation into his conduct.

Nomura Hong Kong also failed to provide its draft preliminary report of its investigation in to Mr. X’s activities (the “Draft Report”), or the information contained therein, until one month after the Draft Report was completed and after the SFC had made further enquiries. The Draft Report set out a number of preliminary findings, including that Mr X had made certain misrepresentations to management concerning his trading activities, and had made manual adjustments to Nomura Hong Kong’s risk management system with no legitimate reason. It was eventually provided to the SFC on 19 July 2013, despite being completed on 19 June 2013.

Disciplinary Action

Under the circumstances, the SFC was of the view that Nomura Hong Kong omitted highly relevant information from the 11 June Report and had to be chased to report properly. As a result, Nomura Hong Kong’s fitness and properness to be a licensed person was called in to question. Nomura Hong Kong’s explanation that it needed to conclude its investigation in to Mr. X’s conduct in order to finalize the report and determine whether the matter was reportable to the SFC was rejected as being contrary to the duty to report misconduct or suspected conduct immediately. This principle is entrenched in paragraph 12.5 of the Code of Conduct.

In arriving at its decision, the SFC took into account the SFC’s previous statements emphasizing that intermediaries have an obligation to report misconduct to the SFC immediately, as well as Nomura Hong Kong’s co-operation with the SFC’s investigation.

Mr Mark Steward, the SFC’s Executive Director of Enforcement, commented: “There can be no excuses for such delays in reporting matters requiring our immediate attention. Delays, like these, contribute to misconduct and prejudice investigations. Intermediaries must report problems to us immediately – not after internal investigation, not after legal advice has been obtained but straightaway, without leaving out any important information.”

Comment

Under Section 194 of the Securities and Futures Ordinance (SFO), the SFC is empowered to discipline regulated persons (including licensed persons and any other person involved in the management of the business of a licensed corporation) for misconduct or for failing to be fit and proper persons. Such disciplinary action may involve fines of up to HK$10 million or three times the relevant profit gained or loss avoided (whichever is the greater).

Paragraph 12.5 of the Code of Conduct provides that a licensed or registered person is required to notify the SFC immediately on the happening of any material breach, infringement, non-compliance with any rules, laws, regulations and codes administered or issued by the SFC, or where it suspects any such breach, infringement or non-compliance by itself or persons it employs or appoints to conduct business with clients.

Section 129 of the SFO further provides that, in considering whether a person is fit and proper, the SFC may consider, in addition to other relevant matters, the person’s ability to carry on the regulated activity competently, honestly and fairly.

This enforcement action highlights the importance of reporting misconduct or suspected misconduct to the SFC without delay. Licensed corporations, in particular intermediaries, are reminded that failure to comply with such obligations may result in heavy fines and reputational damage.

For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR80

2. SFC fines BNP Paribus Securities (Asia) Limited HK$15 million for dark liquidity pool-related failures

On 3 August 2015, the SFC fined BNP Paribus Securities (Asia) Limited (“BNPP Securities Asia”) HK$15 million over its failures in relation to its dark liquidity pool trading services.

Background

The disciplinary action follows an SFC investigation into BNPP Securities Asia’s dark liquidity pool services, known as BNP Internal Exchange (“BIX”). It was taken according to an agreement pursuant to section 201 of the SFO, which allows the SFC to resolve disciplinary cases without completing the formal hearing process set out in the SFO if the other party agrees.

Failure to ensure BIX operated as intended

BNPP Securities Asia stated in its business plan of its license application to the SFC for Type 7 regulated activities (“Business Plan”) that orders in the BIX would be matched and executed in accordance with order price priority. For example, a buy order with a higher price would have priority over a buy order with a lower price. The same representation was also made to its clients.

In reality, BIX failed to give priority to higher priced orders and treated all orders as having equal priority with allocations on a pro rata basis between November 2009 and April 2011. This potentially affected all BIX auctions with two or more orders at different order prices and did affect some BIX actions.

Under General Principle (“GP”) 2 of the Code of Conduct, BNPP Securities Asia was required to act with due skill, care and diligence in conducting its business activities and act in the best of its clients. This obligation was breached by BNPP Securities Asia’s failure to operate as represented in materials provided to clients. In particular, clients who placed higher priced orders into BIX, believing their orders would receive execution priority were adversely affected.

Failure to report a disruption in BIX services

In April 2011, BNPP Securities Asia suspended BIX services upon discovery that order matching was not conducted in accordance with order price priority. BIX services were not fully restored until seven months later, and the SFC was not informed until 21 months later in January 2013

Among the licensing conditions imposed on its Type 7 regulated activities, BNPP Securities Asia was required to notify the SFC about incidents of material service breakdown or disruption of the operations of the BIX affecting its users. The failure to report the disruption constituted a breach of BNPP Securities Asia’s licensing condition.

Failure to notify the SFC of a significant change in its Business Plan

The Business Plan stipulated that client consent would be obtained before their orders were placed in to BIX for matching. However, client orders intended for execution on the Stock Exchange of Hong Kong were automatically enabled on the BIX without BNPP Securities Asia seeking positive client consent. The SFC was not notified of this change of BNPP Securities Asia’s Business Plan.

According to GP 7 and paragraph 12.1 of the Code of Conduct, BNPP Securities Asia is obliged to comply with all applicable laws and regulations. Section 4 of the Securities and Futures (Licensing and Registration)(Information) Rules (“Licensing Information Rules”) requires a licensed corporation to give written notice to the SFC where there is a significant change in its Business Plan within 7 business days of the change. BNPP Securities Asia’s failure to notify the SFC within the prescribed time period constituted a breach of the Licensing Information Rules and the Code of Conduct.

Failure to maintain sufficient records relating to BIX and document the BIX

As a result of the failure to maintain sufficient trade records and coherently document the matching logic of BIX, the SFC was unable to calculate the precise impact of BNPP Securities Asia’s failure to implement the intended match logic.

The SFC considers coherent documentation of the matching logic of BIX essential to the transparency of the operations of BIX. Clients are entitled to understand how the BIX operates in order to make an informed decision as to whether or not to use the services.

Mitigating factors

In determining the disciplinary action, the SFC took into account the following considerations:

1. BNPP Securities Asia had co-operated with the SFC.
2. Since 2012, BNPP Securities Asia has obtained consent from clients before allowing their orders to be matched in the BIX
3. BNPP Securities Asia had taken steps to rectify the matching logic in the BIX in 2011
4. BNPP Securities Asia had agreed to engage an independent reviewer for the future operation of the BIX
5. BNPP Securities Asia had an otherwise clean disciplinary record in relation to its Type 7 regulated activities.

Comment

The use of dark liquidity pools (also known as “alternative liquidity pools” or “ALPs”) for trading has been on the rise in recent years. Providers and operators of ALP trading services must ensure that its users are provided with sufficient information to enable them to understand how their orders are executed. They “must have clear rules and procedures in place for operating dark pools, and equally important, they should operate consistently with representations to clients,” as stated by Mr. Mark Steward, SFC’s Executive Director of Enforcement at the conclusion of the case.

The SFC announced earlier this year that an enhanced regulatory regime on ALPs would come into force on 1 December 2015. Among other changes, individual investors (including individual professional investors and their wholly-owned investment holding corporations) will not be allowed to participate in ALPs under the new regime.

SFC licenses applicants must ensure the information they provide in the business plan submitted to the SFC may be true and accurate. Section 383(1) of the Securities and Futures Ordinance (“the Ordinance”) states: “A person commits an offence if –  (a) he, in support of any application made to the Commission under or pursuant to any provision of this Ordinance, whether for himself or for another person, makes a representation, whether in writing, orally or otherwise, that is false or misleading in a material particular; and (b) he knows that, or is reckless as to whether, the representation is false or misleading in a material particular.” The punishment for this offence is a fine of up to HK $1 million and imprisonment for up to 2 years.

For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR82

3.  SFAT affirms SFC decision to revoke approval of Miranda Sham Sze Wai as responsible officer over internal control failures

On 13 August 2015, the Securities and Futures Appeals Tribunal (“SFAT”) affirmed the decision of the SFC to revoke the approval of Ms. Miranda Sham Sze Wai (“Sham”) to act as a responsible officer (“RO”) over findings that she was involved in serious internal control deficiencies at Ping An of China Securities (Hong Kong) Company Limited (“Ping An”) between August 2010 and April 2011.

Background

Sham oversaw Ping An’s compliance function and was one of two ROs between August 2010 and April 2011 (“the Relevant Period”). In a Decision Notice issued on 27 January 2015, the SFC alleged that Sham had failed to identify and follow up on suspicious transactions between the CEO of Ping An’s parent company and three of Ping An’s clients. She also failed to establish anti-money laundering (“AML”) internal policies for Ping An and to provide AML training to Ping An’s staff.

Upon investigation, the SFC found that Sham had failed to follow appropriate procedures in relation to third party payments (3PPs). Additionally, she failed to communicate and enforce Ping An’s internal polices relating to employee dealing and account opening procedures. Sham’s awareness of the importance of compliance appeared to be low, and there was a general lack of compliance function during the Relevant Period.

Due to the above internal deficiencies, the SFC revoked the approval given to Sham to act as RO. In her application for review by the SFAT, Sham did not challenge the findings of culpability and liability made by the SFC. Instead the appeal was limited to the appropriateness of the penalty.

SFAT Determination

The SFAT noted that Sham’s failings as RO, taken as a whole, were serious and systematic. In the present case, a major concern of the SFC related to the lack of AML policies within Ping An during the Relevant Period. The SFAT recognized that money laundering is an enormous area of concern to national governments, banks and financial institutions worldwide.

The SFAT emphasized that the RO of licensed corporations bears primary responsibility for compliance with all applicable regulatory standards. In the present case, the extent of Sham’s culpability in establishing and implementing effective internal controls was serious. Her failings threatened the integrity and reputation of the financial market in Hong Kong. Furthermore, the absence of losses to clients and absence of breaches of fiduciary duty counted for very little by way of mitigation.

The SFAT was of the view that the order for revocation of approval given to Sham to act as RO was appropriate and proportionate. The revocation was directed only at Sham’s status as RO. Thus, she may continue to assume less critical positions in the financial industry as a licensed representative under section 120 of the SFO.

Comment

The present case brings in to focus what the proper role and responsibilities of ROs are within the regulatory scheme. Of importance in the present case are GPs 2 and 9 of the Code. GP 2 provides that a licensed person should act with due skill, care and diligence, in the best interest of its clients and the integrity of the market. GP 9 provides that senior management should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct in the firm.

In considering the conduct of representatives, the SFC will consider their levels of responsibility within the firm, as provided in paragraph 1.3 of the Code. Paragraph 4.2 states that a licensed person must supervise diligently persons employed or appointed by it to conduct business on its behalf. Senior management of licensed firms is required to perform periodic valuations of its risk management processes under Paragraph 14.1 of the Code.

Licensed corporations are reminded to maintain proper systems and controls for the identification and reporting of suspicious transactions. The first and foremost step is to gain sufficient knowledge about a customer’s business and financial circumstances (through customer due diligence and ongoing monitoring) to recognize that a transaction, or a series of transactions, is unusual. There should also be procedures in place for reporting internally, and the officer responsible for compliance should act as a central reference point to facilitate onward reporting to the Joint Financial Intelligence Unit (“JFIU”). Paragraph 7.21 of the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (“AML Guideline”), expressly provides that compliance officers are required to play an active role in the reporting of suspicious transactions.

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=15PR84

4.  SFC issues first quarterly report

On 17 August 2015, the SFC published its quarterly report summarizing key developments from April to June 2015.

Among the regulatory highlights featured in the report, the SFC concluded a consultation on proposals to enhance and standardize the regulatory obligations of ALP operators and a consultation on proposed amendments to the SFO for the SFC to provide supervisory assistance to regulators outside Hong Kong in certain situations. The revised Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules has also been gazetted in May 2015 for the implementation of the new over-the-counter derivatives regime.

Additionally, the SFC entered into a memorandum of regulatory cooperation with the China Securities Regulatory Commission as part of preparations for the launch of the Mutual Recognition of Funds scheme, which allows qualified funds in the Mainland and Hong Kong to be sold directly into the other market.

On enforcement, the SFC prosecuted two corporations and seven individuals for market misconduct and disciplined eight licensees. Proceedings against the Descartes Athena Fund SPC were also resolved to recover HK$191 million of a collapsed private hedge fund’s assets for about 340 overseas investors.

The SFC reported that it received 1,805 license applications this quarter, up from 15.1% year on year.

The full report is available on the SFC website at http://www.sfc.hk/web/EN/files/ER/Reports/QR/201504-06/Eng/00_final.pdf.

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR83

5.  SFC recovers HK$23 million for investors from restoration orders against insider dealer Du Jun

Court appointed administrators, Mr John Lees and Mr Mat Ng of JLA Asia Limited, have completed distributions of restoration payments to all but 3 of the 297 counterparties to the insider dealing of Mr Du Jun (“Du Jun”).

Background

Du Jun, a former managing director of Morgan Stanley Asia Limited, was previously convicted for insider dealing in shares of CITIC Resources Holdings Limited (“CITIC Resources”). By a restoration order made by the Hong Kong Court of First Instance, Du Jun was required to pay HK$ 23.9 million to 297 investors.

As of 18 August 2015, a total of HK$23,086,314 has been paid out of the restoration fund. The SFC and the administrators have taken all possible steps to contact the 3 remaining investors with no success. The remaining sum of HK$813,686 due to the remaining 3 investors has been returned to Du Jun after approval from the court.

The China Securities Regulatory Commission, the US Securities and Exchange Commission, the Thailand Securities and Exchange Commission and the administrators provided assistance to the SFC in locating overseas investors.

Comment

The purpose of restoration orders, which are not compensation orders, is to make insider traders financially accountable to those with whom they trade. The amount payable to investors is intended to restore those counterparties to the same position, in financial terms, as they were in before the insider dealing. It represents the difference between the actual price at which the affected investors sold the CITIC Resources shares to Du Jun, and the price at which the investors could have sold the shares had the price sensitive information concerning CITIC Resources been made known to the market at the time.

SFC has stated clearly and publicly of their enforcement philosophy on insider dealing: “Insider dealing destroys fairness and orderliness of the market and undermines market confidence. We use all remedies available to attack insider dealing by prosecuting insiders and referring cases to the Market Misconduct Tribunal for imposition of criminal or civil penalties. Through the court, we also seek orders to freeze insider-dealing gains and to remediate damages caused by the misconduct.”

For further details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR85

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

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1. Takeovers Panel sanctions Chow Yei Ching, Oscar Chow Vee Tsung and Joseph Leung Wing Kong for breach of Takeovers Code
2. SFAT affirms SFC decision to reprimand and fine The Pride Fund Management Limited for failing to enter into mediation managed by the Financial Dispute Resolution Centre
3. SFC suspends Tai Nga Chun for operating secret account
4. SFC bans Laura Kiang Mang Yi for three years for misconduct
5. SFC proposes changes to financial resources rules
6. Fund management business reached record high in 2014
7. EY’s appeal over audit working papers discontinued
8. SFC commences MMT proceedings against AcrossAsia Limited, its Chairman and CEO for late disclosure of inside information

1. Takeovers Panel sanctions Chow Yei Ching, Oscar Chow Vee Tsung and Joseph Leung Wing Kong for breach of Takeovers Code

On 2 July 2015, The Takeovers and Mergers Panel (“Takeovers Panel”) imposed Cold Shoulder Orders against Mr Chow Yei Ching (“Mr Chow Y.C.”), Mr Oscar Chow Vee Tsung (“Mr Oscar Chow”) and Mr Joseph Leung Wing Kong (“Mr Leung”) and publicly censured them for breach of the Code on Takeovers and Mergers and Share Repurchases (“Takeovers Code”).

Background

On 20 November 2013, the Securities and Futures Commission (“SFC”) Takeovers Executive commenced disciplinary proceedings before the Takeovers Panel against Mr Chow Y.C., Mr Oscar Chow and Mr Leung over a serious breach of the Takeovers Code. The SFC’s allegations were that the three actively co-operated to assist the late Ms Nina Kung (“Ms Kung”) to obtain or consolidate control of ENM Holdings Limited (“ENM”) and avoid the triggering of a mandatory general offer under the Takeovers Code. At the relevant time, Ms Kung was the largest shareholder of ENM. She was also the chairwoman and the sole beneficial owner of the Chinachem Group.

Between 2000 and 2002, Mr Chow Y.C. acquired a total of 160 million shares of ENM (approximately 9.69% of ENM’s issued share capital) on Ms Kung’s behalf and at her request. Mr Chow Y.C. paid for the purchase of the ENM shares and was subsequently reimbursed by Ms Kung. The reimbursement was handled by Mr Oscar Chow and Mr Leung. Mr Chow Y.C. held the ENM shares under four British Virgin Island (“BVI”) companies he owned through the issuance of bearer shares until December 2009. To comply with the changes to BVI law requiring greater transparency in the ownership of bearer shares, Mr Chow Y.C. arranged for the ownership of the 160 million ENM shares to be split equally between one of his daughters and Mr Oscar Chow in December 2009.

The Takeovers Code treats persons acting in concert as being the equivalent of a single person and aggregates their shareholdings. Therefore, Mr Chow Y.C.’s acquisitions increased the collective shareholding of the concert group in ENM from 34.64% to 44.33%, thus triggering a mandatory general offer obligation under the Takeovers Code. However, none of the share acquisitions in ENM by Mr Chow Y.C. on Ms Kung’s behalf were publicly disclosed and remained undisclosed for a protracted period. This “warehousing” arrangement enabled Ms Kung to secretly hold the ENM shares and avoid an obligation under the Takeovers Code to make a general offer. As a result, ENM shareholders were deprived of their fundamental right to receive a general offer to buy their shares. Mr Chow Y.C. brought the matter to the SFC’s attention after receiving a letter in late April 2012 from the joint administrators of Ms Kung’s estate making enquiries about shares of ENM that belonged to the estate.

The Cold Shoulder Order

The Cold Shoulder Order against Mr Chow Y.C. denies him direct or indirect access to the securities markets for 10 years from 2 July 2015 to 1 July 2025. Mr Oscar Chow and Mr Leung are denied direct or indirect access to the securities markets for two years from 2 July 2015 to 1 July 2017. The Takeovers Panel published its written decision on 16 April 2015 setting out the reasons for finding them in breach of the abovementioned mandatory offer requirement under the Takeovers Code when they acted in concert with Ms Kung to obtain and consolidate control over ENM Holdings Ltd through the acquisition of voting rights and failed to make the required general offer.

Comment

Rule 26 is the overriding rule in the Takeovers Code and provides the circumstances in which a mandatory general offer must be made. This reflects General Principle 1 of the Takeovers Code and underpins the requirement for equal treatment of shareholders. Failure to make an offer that is required to be made under Rule 26.1 constitutes a serious breach of the Takeovers Code.

Pursuant to Rule 26.1, which came into force in December 2000, a mandatory general offer is required to be made for all the shares in the company if a person or group of persons acting in concert acquired shares resulting in either:

1. the person or concert group collectively holding 35% or more of the voting rights (known as the “trigger”). The trigger threshold was reduced to 30% on 19 October 2001; or
2. the person or concert group collectively holding between 35% and 50% of the shares and then going on to acquire, either individually or as a group, more than 5% in any 12 month period (known as the “creeper”). The creeper threshold was reduced to 2% on 19 October 2001.

In particular, the Takeovers Code defines persons acting in concert as comprising persons who, pursuant to an agreement or understanding, actively co-operate to obtain or consolidate control of a company through the acquisition by them of voting rights of the company.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR70

2. SFAT affirms SFC decision to reprimand and fine The Pride Fund Management Limited for failing to enter into mediation managed by the Financial Dispute Resolution Centre

On 2 July 2015, the SFC reprimanded and fined The Pride Fund Management Limited (“Pride Fund Management”) HK$400,000 over its failure to enter into mediation with an eligible claimant under the Financial Dispute Resolution Scheme (“FDRS”) administered by the Financial Dispute Resolution Centre (“FDRC”). 

Background

The above disciplinary action follows a review of the SFC’s decision to sanction Pride Fund Management by the Securities and Futures Appeals Tribunal (“SFAT”). This is the first time the SFC has enforced obligations of intermediaries to comply with the FDRS under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”).

The FDRS, which is administered by the FDRC, is an important part of Hong Kong’s regulatory framework under which banks and brokers are obliged to enter into mediation and potentially arbitration proceedings to resolve certain financial disputes with clients or persons who have been provided with financial services. The SFC states that Pride Fund Management refused to mediate a dispute with an eligible claimant despite requests by FDRC staff, even after FDRC issued a Notice of Non-Compliance to Pride Fund Management in June 2013. It was only after the SFC commenced disciplinary proceedings against Pride Fund Management that it eventually agreed to enter into mediation with the claimant.

Pride Fund Management claimed it had not understood that it was required to comply with the FDRS. However, the Hon Mr Justice Hartmann NPJ, Chairman of the SFAT, who upheld the SFC’s decision but varied the fine from HK$700,000 to HK$400,000, found that Pride Fund Management’s non-compliance was deliberate and that although the obligations under the FDRS may not be generally understood, after consideration of the SFAT’s reasons in this case and public reprimand, there can be no further excuse “on the part of members of the financial industry for a lack of understanding, at least, of the scheme’s basic architecture”. The Hon Mr Justice Hartmann also warned that “sterner penalties can be expected in the future”.

Comment

The FDRC was set up in November 2011 to administer the FDRS, an independent financial dispute resolution scheme which requires financial institutions who are its members to resolve monetary disputes with their customers through mediation and, failing which, arbitration. Other than firms which carry on Type 10 (providing credit rating services) regulated activity under the SFO, financial institutions or financial service providers authorized by the Hong Kong Monetary Authority or licensed by the SFC are to be members of the FDRS.  In particular, the FDRC facilitates the resolution of monetary disputes between individual customers and financial institutions in Hong Kong.

The SFC takes non-compliance with the FDRS seriously and has stated that it will continue to take action against SFC-licensed intermediaries who fail to comply with the scheme. Specifically, paragraph 12A of the Code of Conduct requires a licensed person to comply with the FDRS for managing and resolving disputes administered by the FDRC in full and be bound by the dispute resolution processes provided for under the FDRS. Paragraph 12.6 of the Code of Conduct further requires a licensed person to render all reasonable assistance to the FDRS.

For further information, please refer to the Reasons of Determination issued by the SFAT:

http://www.sfat.gov.hk/english/determination/AN-2-2015-Determination.pdf

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR71

3.  SFC suspends Tai Nga Chun for operating secret account

On 13 July 2015, the SFC suspended Ms Tai Nga Chun (“Ms Tai”) for eight months from 10 July 2015 to 9 March 2016.

Background

The disciplinary action follows an SFC investigation which found that from January to June 2013, Ms Tai operated a secret account and conducted 85 personal trading activities through the account, in breach of her employer’s internal control policies with regard to employee dealings. At the time, Ms Tai was employed by Kingston Corporate Finance Limited.

The SFC considers Ms Tai’s conduct was dishonest and made it impossible for her employer to identify and monitor her trading activities, without which licensed corporations would not be able to detect potential malpractices arising from staff trading.

The SFC looked into the trading in Ms Tai’s account and found no sign of any other misconduct. The SFC has therefore reduced the period of suspension taking into account that Tai has expressed remorse for her misconduct.

Licensed persons are required to follow the employee dealing procedures implemented by their employers in accordance with the Code of Conduct, because such controls are not purely internal to their employers but constitute an integral part of the regulatory system, as they seek to ensure integrity in the manner in which employees conduct personal trading.

Comment

Pursuant to Paragraph 12.2 of the Code of Conduct, a licensed or registered person must have a written policy issued to employees specifying whether or not they can deal or trade for their own accounts in securities or futures contracts. If employees are permitted to deal or trade, the policy should specify the following matters:

1. the conditions on which employees may do so;
2. that employees should identify all related accounts and report them to senior management (“related accounts” refers to accounts of minor children and all accounts in which employees have a beneficial interest.);
3. that employees should generally be required to deal through the licensed or registered person or its affiliates;
4. that if employees are allowed to deal in securities and/or futures contracts on a recognized stock or futures market respectively or in their derivatives, through other licensed or registered persons, the licensed or registered person (principal) and the employees should arrange for duplicate trade confirmations and statements of account to be provided to the senior management of the licensed or registered person (principal);
5. that any transactions covered by this section should be separately recorded and identified in the licensed or registered person’s records;
6. that transactions on employees’ and related accounts should be reported to and actively monitored by senior management, who should ensure that there are no irregularities and that the transactions are not prejudicial to the interests of clients; and
7. that a licensed or registered person should not knowingly have another licensed or registered person’s employee as a client without the written consent of that employee’s principal.

If the employee breaches his/her employer’s policies issued under Paragraph 12.2 of the Code of Conduct, this may reflect negatively on his/her fitness and properness to remain licensed. This could lead to suspensions or revocations of licenses.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR74

4.  SFC bans Laura Kiang Mang Yi for three years for misconduct

On 13 July 2015, the SFC banned Ms Laura Kiang Mang Yi (“Ms Kiang”) from re-entering the industry for three years from 13 July 2015 to 12 July 2018.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR75

5.  SFC proposes changes to financial resources rules

In summary, the consultation paper’s proposals cover seven key areas:

1. minimum capital requirements for licensed corporations engaging in over-the-counter derivatives activity;
2. capital treatments for market risks of over-the-counter derivatives and other proprietary trading positions;
3. capital treatments for counterparty credit risks arising from over-the-counter derivatives transactions;
4. introduction of an internal models approach to calculate the capital requirements for market risk for proprietary investments and counterparty credit risk arising from over-the-counter derivatives transactions;
5. measures to address operational risks of licensed corporations engaging in certain types of regulated over-the-counter derivatives activities or opting into certain capital approaches;
6. notification and reporting requirements related to over-the-counter derivatives activity; and
7. miscellaneous technical changes to other areas of the FRR.

Following the consultation, the SFC plans to further consult the public on subsidiary legislation which sets out the proposed changes. The public is invited to submit their comments to the SFC by 16 October 2015. Written comments may be sent online via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2523 4598.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR76

6. Fund management business reached record high in 2014

All market players recorded strong performance during 2014.

1. The aggregate business of licensed asset management and fund advisory corporations amounted to HK$12,920 billion at the end of the year, up 9.6% and once again representing the largest proportion of the combined asset management business.
2. Registered institutions recorded an 11.6% increase in their aggregate asset management and other private banking businesses, which reached HK$4,104 billion.
3. Insurance companies reported a 24.2% increase in their assets under management to HK$452 billion.

Some other findings of the survey are set out below:

1. Non-REIT (real estate investment trust) asset management business increased by 11.9% to HK$12,770 billion, of which HK$6,856 billion (or 53.7%) was managed in Hong Kong.
2. 72.5% of the assets managed in Hong Kong were invested in Asia.
3. Other private banking business increased by 12.5% to HK$3,095 billion.
4. Fund advisory business decreased by 3% to HK$1,611 billion.
5. The market capitalisation of SFC-authorized REITs increased by approximately 16.4% to HK$206 billion.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR77

7. EY’s appeal over audit working papers discontinued

On 23 July 2015, EY has discontinued its appeal against court orders compelling production to the SFC of specified accounting records in its possession.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR79

8. SFC commences MMT proceedings against AcrossAsia Limited, its Chairman and CEO for late disclosure of inside information

The SFC has commenced proceedings in the Market Misconduct Tribunal (“MMT”) against AcrossAsia Limited (“AcrossAsia”) for failing to disclose highly sensitive inside information as soon as reasonably practicable.

Background

The SFC has also commenced proceedings in the MMT against Mr Albert Saychuan Cheok (“Mr Cheok”), the Chairman of AcrossAsia, and Mr Vicente Binalhay Ang (“Mr Ang”), the Chief Executive Officer of AcrossAsia, for their reckless or negligent conduct causing the alleged breach by the company of the provisions of the statutory corporate disclosure regime.

This is the first set of proceedings in the MMT brought by the SFC in relation to the disclosure obligations imposed on listed companies under the Securities and Futures Ordinance since they became effective on 1 January 2013.

The SFC’s allegations arise from the litigation in Indonesia between AcrossAsia and its subsidiary, PT First Media Tbk (“PT First Media”). At dispute was the failure of AcrossAsia to repay the money owed to PT First Media. The litigation led to enforcement proceedings by PT First Media against AcrossAsia, including insolvency-related proceedings in Indonesia against AcrossAsia by way of a petition dated 20 December 2012 and a summons dated 28 December 2012. These proceedings sought, among other things, to suspend AcrossAsia’s obligation for payment of debts temporarily to enable a composition plan to be presented to PT First Media and to appoint an Indonesian judge and administrators to manage AcrossAsia’s assets.

Copies of the court documents, which were in Bahasa Indonesian, were received by AcrossAsia’s Hong Kong office on 2 January 2013, and their English translations were circulated to Mr Cheok and Mr Ang on 4 January 2013. However, AcrossAsia did not disclose such information to the public until 17 January 2013 after the Indonesian court made these insolvency-related orders against AcrossAsia on 15 January 2013. AcrossAsia sought a suspension of trading on 15 January 2013 and when trading resumed on 22 February 2013, the share price fell by 22.5%.

The SFC alleges that the issue of the insolvency-related proceedings in Indonesia together with their contents were specific information regarding AcrossAsia, highly price sensitive and not generally known to the public at the material time because these proceedings threatened AcrossAsia with loss of control of its major asset, including its stake in PT First Media in Indonesia, and could lead to AcrossAsia being put into liquidation.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=15PR78

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

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