Newsletter – January 2015

Contents:

  1. SFC commences proceedings in Market Misconduct Tribunal over alleged false research report
  2. SFC issues Restriction Notice on Goodcape Securities Limited
  3. Court grants orders to restrain suspected boiler rooms
  4. SFC bans Jagjit Singh Dhillon from re-entering the industry for life over improper activities
  5. Unlicensed dealing prosecution transferred to District Court
  6. SFC obtains court orders against current and former directors of First China to compensate the company RMB18.69 million
  7. SFC signs MoU with ESMA on cooperation arrangements for Hong Kong-established central counterparties
  8. SFC unveils report on asset management

1.  SFC commences proceedings in Market Misconduct Tribunal over alleged false research report

On 22 December 2014, the Securities and Futures Commission (“SFC”) commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Mr. Andrew Left of Citron Research, alleging market misconduct involving the publication of a research report on Evergrande Real Estate Group Limited (“Evergrande”) in June 2012.

Background

Mr. Left resides in the United States and is the head of Citron Research, a US-based publisher of research reports on listed companies. The SFC alleges that on 21 June 2012, Mr. Left published a report on Citron Research’s website (www.citronresearch.com) that contained false and misleading information about Evergrande. The report stated, among other things, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public.

On 21 June 2012, the day of the publication of the report, the share price of Evergrande fell sharply. In the morning, the share price of Evergrande reached a day high of HK$4.52 in the morning but then declined sharply to a day low of HK$3.6, down 19.6% from the previous day’s close of HK$4.48. The stock closed at HK$3.97, which was 11.4% down from the previous day’s closing price. By comparison, the Hang Seng Index declined 1.3% on the same day.

The SFC also alleges that shortly before publishing the report, Mr. Left sold 4.1 million shares of Evergrade which he subsequently brought back, making a nominal profit of over HK$2.8 million. Mr. Left made a total realised profit of approximately HK$1.7 million.

Comment

Readers should note that insider dealing is a criminal offence under section 270 of the Securities and Futures Ordinance (“SFO”). This includes the situation where a person connected with the corporation and having information which he knows is inside information in relation to the corporation either (i) deals in the listed securities of the corporation of their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives; or (ii) counsels or procures another person to deal in such listed securities or derivatives, knowing or having reasonable cause to believe the other person will deal in them.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR147

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2.  SFC issues Restriction Notice on Goodcape Securities Limited

On 2 January 2015, the SFC issued a Restriction Notice on Goodcape Securities Limited (“GSL”) prohibiting the firm from carrying on all regulated activities under the SFO.

Background

GSL is a corporation licensed under the SFO to carry on Type 1 regulated activity (dealing in securities) and operates as an introducing broker that communicates client orders or introduces clients to other licensed securities dealers. It is subject to the licensing conditions, among others, that GSL shall not conduct business other than (a) communicating offers to effect dealings in securities to Paul Securities Limited, in the names of the persons from whom those offers are received; and (b) introducing persons to Paul Securities Limited and Lamtex Securities Limited, in order that they may – (i) effect dealings in securities; or (ii) make offers to deal in securities. At present, GSL has about 60 active clients.

The purpose of the Restriction Notice is to preserve the assets of GSL and its clients, and to protect the interests of these clients and the investing public.

The SFC action follows a complaint to the SFC against GSL in relation to failing to return client securities to the complainant. An initial investigation indicates that GSL would not have sufficient resources to return these securities to the complainant. This calls into serious doubt the integrity of GSL and its fitness and properness to remain licensed, and therefore, the SFC considers that the issue of a Restriction Notice against GSL is desirable in the interest of the investing public or in the public interest. As a result, the SFC will continue its investigation and will make further announcements on this matter when appropriate.

Comment

The Restriction Notice is issued pursuant to sections 204 and 205 of the SFO. The notice in the present case prohibits GSL from carrying on all activities for which it is licensed, disposing of or dealing with any assets held by it or held on behalf of its clients, and assisting, counselling or procuring another person to dispose of or deal with any such property without the SFC’s prior written consent.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR1

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3.  Court grants orders to restrain suspected boiler rooms

On 7 January 2015, the SFC obtained orders from the Court of First Instance (“CFI”) to restrain the following entities from carrying on unlicensed activities and suspending their websites: 

The SFC alleges the abovementioned entities are engaged in fraudulent boiler room activities and received monies from investors.

Background

On 19 December 2014, the SFC obtained interim injunctions in the CFI to freeze approximately HK$4.3 million in the bank accounts held by six entities, namely Timeprime Limited; Lynwin Limited; Resmart Limited; Fieldmark Corporation Limited; DH Corporation Limited and SMD Partnership Limited. The interim orders will remain in force until the hearing of the SFC’s application for final orders against all the parties, the date of which has yet to be fixed.

The proceedings were brought under section 213 of the SFO, and the SFC is also seeking final orders against Broadspan, Shepherds Hill and Rich Futures including permanent injunctions and other orders to provide relief to any victims. The SFC’s investigation is continuing.

Comment

Boiler rooms usually claim to be licensed for regulated securities or futures business and issue related advertisements when they are not licensed or actually in that jurisdiction. Under section 114(1)(b) of the SFO, it is an offence for a person to hold himself out as carrying on a business in a regulated activity without a license. Under section 109 of the SFO, it is an offence to issue a related advertisement.

The usual way a boiler room works is that they call investors claiming to be in Place A but are actually in Place B. They ask the investors to invest in a financial product in Place C and to send money to an account in Place D. Often a boiler room will transfer money received from the investors from an account in one place to an account in another place almost as soon as it has been received. By the time the fraud has been discovered, the money has disappeared or been transferred out of reach. There is an Alert List on the SFC website which lists firms which are unlicensed in Hong Kong and are suspected to be targeting Hong Kong investors or claim to have an association with Hong Kong.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR3

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4.  SFC bans Jagjit Singh Dhillon from re-entering the industry for life over improper activities

On 12 January 2015, the SFC has banned Mr. Jagjit Singh Dhillon, a former trader at Credit Suisse Securities (Hong Kong) Limited and Credit Suisse (Hong Kong) Limited (collectively “Credit Suisse”), from re-entering the industry for life over improper activities in two principal trading books for which he had responsibility.

Background

Mr. Dhillon was licensed under the SFO to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 7 (providing automated trading services) regulated activities.  His license was revoked when he left Credit Suisse on 9 June 2012.  He is currently not licensed by the SFC.

The disciplinary action follows an SFC investigation which found that Mr. Dhillon, who was responsible for trading equity derivatives (including listed futures and both listed and OTC options relating to the Hang Seng Index, the Hang Seng China Enterprises Index, and the Korea Composite Stock Price Index in two principal trading books held in Credit Suisse International), took various steps to cover up the losses and the real level of risk exposure in his trading books between 8 and 17 May 2012, including booking fictitious trades and entering incorrect market data in the trading books. For example, on one occasion, Mr. Dhillon booked a sell trade for a listed index future in one of his trading books against an internal counterparty code. That was a fictitious transaction that was never settled. The next day, Mr. Dhillon cancelled the trade.

However, in the meantime, the fictitious trade created a positive P&L impact on Mr. Dhillon’s trading book overnight, as the listed index future in question closed at a price lower than the price at which Mr. Dhillon booked his fictitious sell trade. In addition, the fictitious trade dampened the equity market risk exposure of Mr. Dhillon’s trading book overnight, as such trading book was long equity exposure at the time the fictitious trade was booked. The effect of those trades was, therefore, that a profit was created in Mr. Dhillon’s trading book and a loss was created in the other trader’s trading book, because the price at which Mr. Dhillon’s trading book was sold, and the other trader’s trading book bought, the listed index future in question was higher than the closing price for that listed index future on that day.

The SFC referred the matter to the police in June 2012, and Mr. Dhillon was arrested by the police and holding charges were laid against him. The holding charges were withdrawn in May 2013 due to lack of co-operation from key witnesses and Mr. Dhillon left Hong Kong immediately.

Mr. Dhillon’s conduct led to an overstatement in the level of profits and an understatement in the level of risk exposure in his trading books, resulting in Credit Suisse having to make negative adjustments of US$5.4 million to the cumulative monthly profit and loss figures for its trading books on 18 May 2012, and recalculate the level of risk exposure recorded in its risk management systems. Mr. Dhillon also provided his supervisors with false information when they first became suspicious of the activities in his trading books.

In deciding the disciplinary action, the SFC has taken into account all relevant circumstances including that Mr. Dhillon’s conduct was intentional, dishonest and serious. The dishonest nature of his conduct demonstrates that he presents a serious risk to confidence in the financial market.

Comment

Section 129 of the SFO provides that, in considering whether a person is fit and proper, the SFC may consider, in addition to any other matter that the SFC may consider relevant, the person’s ability to carry on the regulated activity competently, honestly and fairly, and the reputation, character, reliability and financial integrity of the person. Mr. Dhillon’s dishonesty throughout the course of his conduct shows a lack of integrity on his part and presents a serious risk to confidence in the financial market. This is because confidence in the financial market relies, in part, on the trustworthiness of licensed persons. Readers should therefore be aware that conduct illustrating dishonesty would adversely reflect on his or her fitness and properness to remain licensed, and could lead to suspension or revocation of his or her license to carry out regulated activities.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR2

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5.  Unlicensed dealing prosecution transferred to District Court

On 13 January 2015, the Eastern Magistrates’ Court granted an application by the Department of Justice (“DOJ”) to transfer to the District Court the first prosecution of a case for unlicensed dealings involving collective investment schemes (“CIS”).

Background

On 31 May 2014, the SFC commenced the criminal proceedings at the Eastern Magistrates’ Court against IPFUND Asset Management Limited (“IPFUND”) and its sole director and shareholder Mr. Ronald Sin Chung Yin for carrying on a business, or holding out as carrying on a business, in a regulated activity in dealing in securities without a license in contravention of section 114 of the SFO. The securities in question are CIS. Both pleaded not guilty to four summonses on 3 July 2014.

The SFC alleged that between February 2011 and December 2011, IPFUND and Mr. Sin, both of whom have never been licensed by the SFC, offered and disposed of interests in 16 CIS to investors. IPFUND and Mr. Sin managed and controlled those CIS which were not authorized by the SFC.

The funds contributed by the investors were allegedly pooled for use in purchasing commercial properties in Hong Kong; upon the sale of those properties, part of the profit earned would be distributed among the investors in proportion to their contribution towards the purchase price, and IPFUND received consultancy fees based on profits earned from the trading of these commercial properties.

On 4 September 2014, the Eastern Magistrates’ Court gave directions to the SFC to consider whether it would be appropriate for the summonses to be tried in the District Court given the complexity of the subject matter, the number of witnesses and the estimated length of the trial. Further, on 24 October 2014, the case was adjourned for four weeks to enable an application to be made by the DOJ to transfer the case to the District Court. The case was further adjourned on 20 November 2014 to 13 January 2015.

Comment

Pursuant to section 114(3) of the SFO, no person shall perform any regulated function in relation to a regulated activity carried on as a business or hold himself out as performing any regulated function, unless such person carries on for a registered institution a regulated activity for which the registered institution is registered and his name is entered in the register maintained under section 20 of the Banking Ordinance. It is a criminal offence to contravene section 114(3) of the SFO without reasonable excuse, the maximum penalties of which are a fine of HK$1,000,000 and imprisonment for two years, and in the case of a continuing offence, a further fine for every day during which the offence continues.

Further, it is important for readers to note that a person who knowingly allows or facilitates an individual who is not a relevant individual to engage in any regulated function in relation to a regulated activity for a registered institution may be regarded as aiding and abetting a breach of section 114(3) of the SFO, and his fitness and properness for being a relevant individual may be called into question. Additionally, a registered institution and its staff members supervising the relevant lines of business may be subject to disciplinary action for inadequate controls and lack of supervision of staff to ensure compliance with section 114(3) of the SFO. It may therefore be beneficial for readers to seek the assistance of external compliance firms to ensure robust controls and supervisory systems are in place.

Moreover, under section 390 of the SFO, where the commission of an offence under the SFO by a corporation is proved to have been aided, abetted, counseled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR5

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6.  SFC obtains court orders against current and former directors of First China to compensate the company RMB18.69 million

On 19 January 2015, the CFI ordered three current and former directors of First China Financial Network Holdings Ltd (First China), to pay a total sum of RMB18,692,000 with interest as compensation to First China following findings of misconduct.

Background

First China was listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited (“SEHK”) on 11 January 2002 (stock code 8123). The group provides financial services, such as stock brokerage, information and research, securities and futures trading, corporate finance and wealth management services. The three relevant directors are First China’s current chairman, Mr. Wang Wenming, its current chief executive officer Mr. Lee Yiu Sun and former chairman Mr. Richard Yin Yingneng.

Following a contested trial, the court found that Mr. Wang, Mr. Lee and Mr. Yin breached their duties to First China when they agreed to pay RMB18,692,000 special dividend to Fame Treasure Ltd. First China had earlier purchased GoHi Holdings Ltd (GoHi) and issued an announcement to the market on 16 December 2008 stating that the payment was part of a mutual understanding and agreement with Fame Treasure Ltd at the time of the acquisition of GoHi. The SFC argued and the court found that this was not the case and there had never been any such mutual understanding or arrangement. Details regarding these transactions are set out in the SFC’s petition attached to the press release dated 12 November 2012.

(http://www.sfc.hk/web/files/ER/PDF/12PR120_summary.pdf)

The court found that Mr. Wang, Mr. Lee and Mr. Yin caused First China to make a payment that First China was not required to make at all and ordered them to repay this amount to First China, and a further hearing will be rescheduled to determine whether disqualification orders should be made against Mr. Wang, Mr. Lee and Mr. Yin.

Findings

During the trial, it was revealed that a written resolution was recently passed by a non-executive director and four independent non-executive directors of First China to provide an indemnity to Mr. Wang and Mr. Lee for all professional and legal fees incurred by them concerning the defence of the SFC’s petition and all legal costs claimed by the SFC as a result.

The court found the indemnity was plainly inappropriate and a poor reflection on the company’s corporate governance. Consequently, Mr. Wang and Mr. Lee have either repaid or are in the course of repaying the legal costs First China paid on their behalf.

The SFC’s Executive Director of Enforcement, Mr. Mark Steward, said, “Listed company directors have a duty to safeguard shareholders’ funds. This means they should only be used for proper company purposes and the payment to Fame Treasure Ltd was clearly not for a proper purpose”, and “the SFC will continue to hold listed company directors to account and seek orders to remediate corporate losses where appropriate.”

Comment

Under section 214 of the SFO, the court may make orders disqualifying a person from being a company director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having being conducted in a manner involving defalcation, fraud or other misconduct. Readers should note that under the SFO, market misconduct includes:

  • Insider trading;
  • False trading;
  • Price rigging;
  • Stock market manipulation;
  • Disclosure of information about prohibited transactions;
  • Disclosure of false information or misleading information inducing transactions; and
  • Fraud and deception.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR7

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7.  SFC signs MoU with ESMA on cooperation arrangements for Hong Kong-established central counterparties

On 16 January 2015, the SFC and the European Securities and Markets Authority (“ESMA”) have entered into a Memorandum of Understanding (“MoU”) on cooperation arrangements in connection with Hong Kong-established central counterparties (“CCPs”) which have applied for recognition by ESMA.

Background

The CCPs established in Hong Kong which have applied for recognition by ESMA are:

  • Hong Kong Securities Clearing Company Limited;
  • HKFE Clearing Corporation Limited;
  • The SEHK Options Clearing House Limited; and
  • OTC Clearing Hong Kong Limited.

The establishment of cooperation arrangements fulfils a precondition under European Market Infrastructure Regulation (“EMIR”) for ESMA to recognise these CCPs as eligible to provide services to clearing members or trading venues established in the European Union.

Comment

EMIR refers to Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, CCPs and trade repositories. EMIR provides for cooperation arrangements to be established between ESMA and non-European Union authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR6

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8.  SFC unveils report on asset management

On 21 January 2015, the SFC published a second report in its risk-focused industry meeting series entitled “Asset Management: Looking Forward”.

Background

The report follows a series of meetings conducted by the Risk and Strategy unit (“R&S”) from March to November 2014 with senior executives in the asset management industry. The first report in the series was entitled “Risk-focused Industry Meeting Series: G-SIFI Trends in Risk and Risk Mitigation” published on 18 December 2013. These meetings were non-supervisory in nature and the attending senior executives included business leaders, heads of risk and heads of compliance. In order to obtain a broad perspective, R&S engaged with global, local and China asset managers. The business mix of the asset managers included active, passive and alternatives. R&S also engaged with global regulatory counterparts, industry associations, consultants, stock exchanges, prime brokers, pension funds, sovereign wealth funds, family offices and individual investors.

The report highlights:

  • Solid growth in asset management, with Asia (excluding Japan and Australia) recording the most rapid global growth in assets under management over the past five years;
  • Importance of scale for asset managers, which in the case of Hong Kong can be achieved through greater connectivity with mainland China;
  • Increased demand for complex asset management products with high-yield, multi-asset, unconstrained and alternative strategies;
  • Increased investor focus on fees, contributing to growth in low cost and indexed products such as exchange-traded funds and passive funds;
  • Distribution of retail funds moving online, with indications that online platforms are introducing competition on fees;
  • Evolving international regulation, including focus on risk governance and risk culture of asset managers;
  • Varying viewpoints on systemic risk in asset management, including risks resulting from interconnectedness of the financial system and the importance of robust liquidity risk management; and
  • An emerging trend towards integration of environmental, social and corporate governance factors in investment risk assessment.

Mr. Ashley Alder, the SFC’s Chief Executive Officer, said, “As described in the report, the asset management industry is large and diverse. It is also fast evolving. The SFC will consider the topics discussed in this meeting series as part of its policy and strategic priority-setting.”

Comment

After the occurrence of the global financial crisis, it became evident that regulators and market participants need to have an active and open dialogue on the evolution of risk and risk mitigation to serve the common goal of promoting safer, fairer and more efficient markets. The abovementioned series of risk-focused industry meetings were designed to address this concern.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR9

 

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Regulatory News (Jan 2015)

Newsletter – December 2014

Contents:

  1. SFC publicly criticised Wen Yibo for breach of Takeovers Code
  2. SFC suspended former responsible officer of ICBCI Securities for eight months for failures related to IPO shares subscription
  3. SFC banned Lee Wai Keung for 12 months for breach of conflict of interest rules
  4. SFC adopted proposals to allow greater flexibility for authorised funds in dissemination of prices and net asset values
  5. New SFC survey of licensed corporations selling investment products
  6. Second SFC mystery shopping programme identified deficiencies in selling practices
  7. SFC launched consultation on supervisory assistance to overseas regulators
  8. Court froze bank accounts of suspected boiler rooms

1.  SFC publicly criticised Wen Yibo for breach of Takeovers Code

On 4 December 2014, the Securities and Futures Commission (“SFC”) publicly criticised Wen Yibo (“Wen”) for acquiring shares in Sound Global Limited within 6 months after the close of an offer at above the offer price in contravention of Rule 31.3 of the Takeovers Code.

Background

Sound Global Limited’s shares are currently listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”). The shares were also listed on the Official List of the Singapore Exchange Securities Trading Limited (“SGX”) until 27 January 2014. Sound Global is principally engaged in providing turnkey water and wastewater treatment solutions, management of water treatment plants and investments in build, operate and transfer projects, mainly in the PRC. Sound Global and Sound (HK) Limited is wholly owned by Sound Group Limited. Sound Group Limited is beneficially owned as to 99.83% by Wen and his wife, Zhang Huiming.

On 10 September 2013, Sound Global and Sound (HK) Limited issued a joint announcement about the voluntary delisting of Sound Global from the Official List of the SGX. In order to facilitate the delisting, Sound (HK) Limited made a conditional cash offer for all the shares in Sound Global at an offer price of HK$4.37 (SG$0.7) per share. The offer closed on 17 January 2014. Between 28 March 2014 and 9 May 2014 Wen and Sound Water (BVI) Limited, which is beneficially owned as to 90% by Wen and 10% by his wife, Zhang Hui Ming, acquired a total of 5,600,000 Sound Global shares at prices ranging from HK$5.94 to HK$7.55 per share in a series of on-market purchases.

Breach of the Takeovers Code

Wen accepted that he has breached Rule 31.3 of the Takeovers Code, and admitted that the breaches were due to his inadvertent oversight and that he was not aware of the prohibition under Rule 31.3. He has agreed to the disciplinary action against him under section 12.3 of the Introduction to the Takeovers Code.

“Rule 31.3 is a fundamental provision of the Takeovers Code which provides shareholders with certainty that the offeror will not pay a price higher than the offer price for the shares in the offeree company in the 6-month period after the close of the offer. This is to ensure that all shareholders of the offeree company are treated even-handedly in accordance with General Principle 1,” the SFC’s Executive Director of Corporate Finance, Mr Brian Ho said.

Comment

Rule 31.3 of the Takeovers Code prohibits an offeror and its concert parties from making a second offer or acquiring offeree company shares at a higher price than the previous offer price in the six-month period after the close of a successful offer. More specifically, the Rule provides that “except with the consent of the Executive, if a person, together with any person acting in concert with him, holds more than 50% of the voting rights of a company, neither that person nor any person acting in concert with him may, within 6 months after the end of the offer period of any previous offer made by him to the shareholders of that company which became or was declared unconditional, make a second offer to, or acquire any shares from, any shareholder in that company at a higher price than that made available under the previous offer. For this purpose the value of a securities exchange offer shall be calculated as at the day the offer became, or was declared, unconditional.”

The Rule is a fundamental provision of the Takeovers Code which is designed to protect the investing public by ensuring equality of treatment of shareholders by preventing a successful offeror from acquiring shares from the remaining minority shareholders or making a further offer to acquire shares from them at a higher price than the previous offer.

Further, the SFC has stated that Rule 31.3 is an extension of Rule 31.1 of the Takeovers Code which, among other things, aims to encourage an offeror to put its best offer forward within a limited and specified time period. After that period, if the offer fails, the offeror is prohibited from making a new offer for the same company for a restricted period. Thus, Rule 31.3 provides assurance to an offeree shareholder in reaching a decision of whether or not to accept an offer that the offeror will not be offering a higher price shortly after the offer closes.

Readers should also note that Rule 31.3 applies equally to offers that are unconditional at the outset. Given the primary purpose of the Codes is to afford fair treatment for shareholders who are affected by takeovers, mergers and share buy-backs, the Executive of the SFC has stated in Practice Note 18 to the Takeovers Code that no distinction should be made between offers that commence as unconditional offers and those that become or are declared unconditional subsequently. Breaches of the Takeovers Code may result in the SFC initiating disciplinary proceedings.

For a copy of the Executive Statement, please visit:

http://www.sfc.hk/web/EN/files/CF/pdf/Notice%20of%20Criticism/Notice_of_Criticism_E_20141204.pdf

For further details on the relevant Takeovers Code provisions, please refer to:

http://www.sfc.hk/web/EN/regulatory-functions/listings-and-takeovers/takeovers-and-mergers/decisions-and-statements/executive.html

For details, please refer to: http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR140

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2.  SFC suspended former responsible officer of ICBCI Securities for eight months for failures related to IPO shares subscription

On 10 December 2014, the SFC has suspended the licence of Mr Dick Ma Tor Fuk for eight months from 5 December 2014 to 4 August 2015 for failures in relation to his role in the initial public offering (“IPO”) of Powerlong Real Estate Holdings Limited (“Powerlong”) in 2009.

Background

Powerlong was listed company on the Main Board of SEHK in 2009, and Ma was accredited to ICBC International Securities Limited (“ICBCI Securities”) between November 2008 and February 2011 and was licensed under the Securities and Futures Ordinance (“SFO”) to carry on Type 1 (dealing in securities) regulated activity. Ma was formerly a responsible officer of ICBC Securities which acted as one of the joint lead managers in the listing of Powerlong.

The SFC’s findings

An SFC investigation found that Ma, at the material time, had failed to:

  • ensure that all placees, meaning investors who subscribed for the offer shares via the international tranche, referred by Powerlong for the subscription of its shares allotted through its listing (“the Offer Shares”) were independent from Powerlong before making a declaration to SEHK on behalf of ICBCI Securities to that effect, pursuant to paragraph 5.4 of the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”);
  • conduct customer due diligence on the placees and satisfy himself on reasonable grounds that the subscriptions originated from them, in compliance with paragraph 5.1 of the Code of Conduct;
  • diligently supervise his subordinate in conducting customer due diligence and be satisfied on reasonable grounds that the subscriptions originated from the placees in accordance to paragraph 4.2 of the Code of Conduct; and
  • ensure that all the placees were independent from Powerlong before submitting a Marketing Statement (“Form D”) on behalf of ICBCI Securities to the SEHK declaring that none of the shares of Powerlong had been placed with its directors, their associates, any existing shareholders or nominees of any of the foregoing in accordance with rule 5 in Appendix 6 of the Rules Governing the Listing of Securities on the SEHK (“Listing Rules”), in breach of General Principle 2 and paragraph 12.1 of the Code of Conduct.

The SFC found that the placees were referred by Powerlong to ICBC International Capital Limited (“ICBCI Capital”), one of the joint sponsors and bookrunners in the IPO of Powerlong in 2009, which in turn referred them to its affiliate ICBCI Securities to open accounts for the placees’ subscription of the Offer Shares. Ma accepted the subscriptions without conducting or causing know-your-client (“KYC”) due diligence as required under the Code of Conduct, failing to find out their financial situation or confirm their independence from Powerlong. However, ICBCI Securities and ICBCI Capital were reprimanded and fined in a separate disciplinary action. Please see the SFC’s press release dated 21 May 2014.

Ma also failed to perform ongoing scrutiny to ensure that the subscriptions were consistent with his knowledge of the placees’ financial situation.

In addition, the SFC found that Ma signed a confirmation that the placees were all independent – as required by the SEHK under the Listing Rules – despite knowing that he did not have sufficient evidence to make the confirmation.

Comment

This case relates to a variety of different compliance requirements that readers should be aware of.

Firstly, readers should note that licensed individuals and corporations and supervising subordinates must conduct customer due diligence and perform ongoing scrutiny. Specifically, paragraph 5.1 of the Code of Conduct provides that licensed person should take all reasonable steps to seek information and establish from its clients their financial situation, investment experience and investment objectives. Further, paragraph 4.2 of the Code of Conduct states that a licensed person should ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf. To avoid breaching these provisions, the relevant individuals should ensure that they are aware of the regulatory requirements set out in their Compliance Manuals and conduct KYC checks or ascertain clients’ financial situation.

Secondly, licensed individuals should satisfy themselves on reasonable grounds that places were ultimately responsible for originating the instructions in relation to their subscriptions, and supervising subordinate to do the same. Paragraph 5.4 of the Code of Conduct provides that a licensed person should satisfy himself on reasonable grounds about the identity of the placees referred by an issuer as to whether they were ultimately responsible for originating the instructions.

Thirdly, licensed individuals are required to ensure that placees are independent before submitting Form D to the SEHK. Rule 9.11(35) of the Listing Rules requires the lead broker to file Form D and a place list with the SEHK, confirming, among other things, the number of placees, the number of shares placed and the independence of the placees. This requirement is bolstered by paragraph 12.1 of the Code of Conduct, which provides that a licensed or registered person should comply with, implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered or issued by the SFC, the rules of any exchange or clearing house of which it is a member or participant, and the requirements of any regulatory authority which apply to the licensed or registered person. Further, disclosure of information must, pursuant to General Principle 2, be complete, accurate and fair, and be written and presented in a clear, concise and effective and in such manner as to be readily understood by the investing public. Readers should also note that information provided must not be false or misleading nor be presented in a deceptive or unfair manner and that where ongoing disclosure is required, the relevant information shall be disseminated in a timely and efficient manner.

Given the complexity and extensiveness of the requirements under the Takeovers Code, Listing Rules and the Code of Conduct, individuals may find it useful to seek assistance from their compliance consultants.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR143

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3.  SFC banned Lee Wai Keung for 12 months for breach of conflict of interest rules

On 11 December 2014, the SFC banned Mr Lee Wai Keung from re-entering the industry for 12 months from 10 December 2014 to 9 December 2015.

Background

Lee was licensed under the SFO to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 3 (leveraged foreign exchange trading) regulated activities and was accredited to, and approved to act as a responsible officer of Glory Sky Global Markets Limited until 26 June 2013.  Lee is currently not a licensed person.

The disciplinary action follows a SFC investigation which found that between October 2007 and June 2013, Lee operated a secret account under the name of his sister-in-law and conducted personal trading activities through the secret account. In doing so, he concealed his beneficial interests in the secret account and his personal trading activities through the account from his then employer.

In particular, Lee conducted trading in futures contracts for himself in the Account and provided all the trading funds in the Account. Lee’s sister-in-law provided him with the password for her bank account for settlement of the transactions he conducted through the Account. Glory Sky had no knowledge of Lee’s interest and personal trading in the Account. There were transactions in various Hang Seng Index (“HSI”) futures contracts in the Account almost on a daily basis between January and June 2013. Specifically, on 26 June 2013, there were several hundred transactions in HSI futures contracts for the month of June in the Account which resulted in a loss of more than HK$2,000,000. Glory Sky made margin calls for the Account on 26 and 27 June 2013 and Lee settled the trading loss on 18 July 2013.

Further, the employee dealing policy of Glory Sky requires employees to open an employee account for personal trading through Glory Sky, with approval from the Compliance Officer. All transactions for employees’ personal accounts are separately recorded and identified in the records of Glory Sky. The policy also requires employees to declare, upon joining Glory Sky and on an annual basis, their employee accounts maintained with Glory Sky (including any account in which an employee has a beneficial interest) and accounts maintained with other licensed corporations. However, Lee did not open an employee account with Glory Sky to conduct his personal trades and used the Account instead because he did not want Glory Sky to know about his personal trades.

SFC findings and sanction

The SFC considers Lee’s conduct plainly dishonest. His conduct also made it impossible for his former employer to actively identify and monitor his trading activities, and to detect any potential conflict of interest situations and/or other malpractices arising from such activities. Lee’s conduct was therefore found to be in breach of General Principle 1 and paragraph 12.2 of the Code of Conduct.

In deciding the penalty, the SFC has taken into consideration all the relevant circumstances, including the following factors:

  • Lee’s concealment of his trading activities from his then employer was deliberate and dishonest;
  • Lee’s wilful disregard for the employee dealing policy of Glory Sky and frustrated its ability to monitor employee trading;
  • Lee’s concealment of the Account lasted over six years; and
  • Lee has no previous disciplinary record.

Comment

Readers should note that pursuant to General Principle 1 of the Code of Conduct, licensed individuals are required to act honestly, fairly, and in the best interests of their clients and the integrity of the market when conducting their business activities. Additionally, readers should ensure that as licensed corporations, they have implemented procedures and policies on employee trading and to actively monitor the trading activities in their employee’s accounts in accordance with paragraph 12.2 of the Code of Conduct.

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR132

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4.  SFC adopted proposals to allow greater flexibility for authorised funds in dissemination of prices and net asset values

On 11 December 2014, the SFC released Consultation Conclusions on proposals to amend the Code on Unit Trusts and Mutual Funds (“the Code”) to give public funds greater flexibility in determining the means for making public their offer and redemption prices, net asset values (“NAVs”) and notices of dealing suspension. The proposals also required more frequent dissemination of prices and NAVs.

Background

The Consultation Conclusions relate to the Consultation Paper issued by the SFC on 24 June 2014 on the proposals to amend publication requirements relating to the offer and redemption prices or NAV, and notices of dealing suspension under the Code. One of the main changes is to remove the existing mandatory requirement to use newspaper to publish fund prices or NAVs. The proposal allows fund managers to use appropriate means to make public their fund prices or NAVs such as using internet. The amendments relates to paragraphs 10.7 (operational matters) and 11.7 (documentation and reporting) of the Code. The consultation period ended on 23 July 2014. The respondents, one of which was CompliancePlus Consulting Limited, supported the proposals. Consequently, the SFC will adopt them in full.

Mr Ashley Alder, the SFC’s Chief Executive Officer, commented that “the proposals are in line with our commitment to continually update our standards and practices”.

Readers should be aware that, subject to a six-month transitional period for existing public funds, the amendments will become effective once they are gazetted.

For a copy of the abovementioned Consultation Conclusions, please visit:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=14CP5

For details please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR133

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5.  New SFC survey of licensed corporations selling investment products

On 12 December 2014, the SFC released a new Survey on the Sale of Non-exchange Traded Investment Products based on responses to a questionnaire sent to 1,465 licensed corporations. The survey, which had a response rate of 98%, showed that 213 licensed corporations engaged in the sale of investment products with an aggregate transaction amount (namely the amount paid or payable by investors for investment products) of HK$468 billion during the 12-month period ended 31 March 2014.

Background

The SFC conducted the survey to understand the overall market structure and to obtain an overview of the types and value of investment products sold by the corporations it licenses. This information helps the SFC supervise the selling practices of licensed corporations.

The survey results showed that the top 10 firms in terms of transaction amount accounted for 79% of total sales and they also acted as major product issuers. One financial conglomerate, which only served non-retail clients, accounted for a major share of the aggregate transaction amount. Compared with the SFC’s previous survey conducted in 2012, the aggregate transaction amount reported in this year’s survey declined about 8%, from HK$510 billion to HK$468 billion. This was mainly due to two international financial conglomerates switching sales of investment products from licensed corporations to banking entities.

This year’s findings also showed an upward trend in the sale of non-investment grade corporate bonds, which suggested that individual investors were looking for higher returns in a low interest rate environment.

For a copy of the Survey on the Sale of Non-exchange Traded Investment Products, please refer to:

http://www.sfc.hk/web/files/ER/PDF/non-exchange_traded_investment_products_2014.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR145

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6.  Second SFC mystery shopping programme identified deficiencies in selling practices

On 18 December 2014, the SFC released the findings of its second mystery shopping programme. The findings demonstrate that licensed corporations must do more to improve compliance with the selling practices requirements as set out under the Code of Conduct. A total of 150 samples were conducted in relation to 10 licensed corporations, including fund management, investment advisory and brokerage firms.

Background

The SFC introduced the mystery shopping programme in 2010. The exercise is an important tool for assessing compliance with selling practices requirements by licensed corporations for unlisted securities and futures investment products (“Investment Products”). Between April and September 2014, the SFC engaged the Hong Kong Productivity Council to carry out a second mystery shopping exercise. About 150 samples were conducted by “shoppers” on 10 selected licensed corporations, which included two fund management firms, three investment advisory firms and five brokerage firms. The exercise primarily focused on three key areas, namely KYC, explanation of product features and disclosure of risks, and suitability assessment, including the enhanced requirements under the Code of Conduct which became effective subsequent to the first mystery shopping exercise. The exercise also revealed deficiencies in the KYC process and information disclosure, which included encouraging shoppers to change risk tolerance levels in risk assessment questionnaires and failing to disclose product features and major risk factors of recommended products. It was also noted that certain sales staff who are both SFC-licensed representatives and registered insurance agents tended to promote Investment-Linked Assurance Schemes (“ILAS”) to the shoppers ahead of other products.

Findings

Some deficiencies noted in our previous mystery shopping programme in 2010 were still found to be present this year. These included failures to consider the clients’ relevant circumstances in full when making a suitability assessment or to properly explain why recommended products are suitable.

In addition, the 2014 programme identified the following major deficiencies in selling practices:

  • inadequate or inaccurate explanation of the features of, or disclosure of the risks of, high-yield bonds and derivative products;
  • failure to assess clients’ knowledge of derivatives; and
  • failure to provide relevant and material information about the recommended products to clients, e.g., product key facts statements (“KFS”).

“Licensed firms must enhance their systems and controls to ensure full compliance with the selling practices requirements,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “Management are responsible for maintaining an adequate corporate governance structure and proper oversight of sales activity.”

The SFC will require relevant licensed corporations to take remedial action to address major deficiencies. In addition, the SFC will continue to assist the industry to comply with the selling practices requirements.

Comment

Licensed entities, particularly Independent Financial Advisors and retail Fund Managers should regularly review internal policies and procedures to ensure good practice and compliance with the extensive requirements regarding KYC procedures, explanation of product features and disclosure of risks, and suitability assessments.

For a copy of the findings of the second mystery shopping programme, please visit:

http://www.sfc.hk/web/EN/files/ER/Reports/Mystery_Shopping_Programme_Findings_2014_EN.pdf

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR148

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7. SFC launched consultation on supervisory assistance to overseas regulators  

On 19 December 2014, the SFC began a one-month consultation on proposed amendments to the SFO relating to supervisory assistance to overseas regulators

Background

The Consultation Paper on Proposed Amendments to the SFO for Providing Assistance to Overseas Regulators in Certain Situations aims to enable more effective and comprehensive supervision of regulated entities which operate in multiple jurisdictions and to secure access for Hong Kong licensed corporations to certain overseas markets which are only open to jurisdictions that are parties to international cooperation arrangements.

The Hong Kong legal framework under the SFO for providing assistance to overseas regulators for enforcement matters fully meets international norms and has been in place for many years. For supervisory matters, the Hong Kong legal framework under the SFO does not meet international norms that have developed since the SFO was enacted in one narrow respect. This is that, whilst the SFC may share information in its possession with overseas regulators, it is not able to exercise its supervisory powers to obtain information for the purposes of assisting an overseas regulator in non-enforcement related matters where a licensed corporation (or its group company) is also regulated by that overseas regulator. The proposals in the Consultation Paper therefore aim to fill in this gap.

The proposals

The proposed amendments would enable the SFC to provide a narrow form of supervisory assistance to overseas regulators upon request by means of making enquiries and obtaining records and documents from a licensed corporation or its licensed corporations. More specifically, the SFC proposes that sections 180 (in respect of supervisory powers of the SFC) and 186 (in respect of assistance that may be provided by the SFC to overseas regulators) of the SFO be amended so that a narrow form of supervisory assistance could be provided upon request to overseas regulators. Further, the proposed amendments give the SFC discretion to provide supervisory assistance to an overseas regulator but will not impose an obligation to do so. However, it should be noted that information obtained by overseas regulators in this manner may only be used for non-enforcement purposes.

The proposals are limited to requests for assistance to determine compliance with legal or regulatory requirements administered by the overseas regulator or to ascertain the risks to the stability of the overseas financial system, and which are related to a licensed corporation that is regulated by the SFC and the overseas regulator. The proposals will not affect Hong Kong licensed corporations where neither they nor their group companies are regulated by overseas regulators. Alternatively, the requests must concern a related corporation of a Hong Kong licensed corporation where the related corporation is regulated by the overseas regulator. “Related corporation” is defined in section 3 of Part 1 of Schedule 1 to the SFO.

Comment

Readers should note that if they wish to submit comments to the SFC, they should do so on or before 16 January 2015. Written comments may be sent via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2284 4660.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR149

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8.  Court froze bank accounts of suspected boiler rooms

On 19 December 2014, the SFC obtained interim injunctions in the CFI, freezing bank accounts suspected of receiving monies from investors of alleged frauds known as boiler rooms.

The interim orders obtained protect approximately HK$4.3 million in the bank accounts which allegedly hold the proceeds of unlicensed or boiler room activities being carried out by the following entities (collectively “the Three Entities”):

The bank accounts are held by six entities, namely, Timeprime Limited; Lynwin Limited; Resmart Limited; Fieldmark Corporation Limited; DH Corporation Limited and SMD Partnership Limited.

The court has adjourned, until 7 January 2015, the hearing of the SFC’s application for orders to stop Broadspan, Shepherds Hill and Rich Futures from carrying on unlicensed activities and suspending their websites. The interim orders in relation to the bank accounts will remain in force until the hearing of the SFC’s application for final orders against all the parties, the date of which has yet to be fixed.

The SFC brought proceedings under section 213 of the SFO. The SFC is also seeking final orders against the Three Entities, including permanent injunctions and other orders to provide relief to any victims. The SFC’s investigation is continuing.

Comment

Readers should note that under section 114(1)(b) of the SFO, it is an offence for a person to hold himself out as carrying on a business in a regulated activity without a licence, and section 109 of the SFO provides that it is an offence to issue a related advertisement. Boiler rooms are entities that usually claim to be licensed for regulated securities or futures business and issue related advertisements when they are not licensed or actually in that jurisdiction. The usual way a boiler room works is that they call investors claiming to be in Place A, but are actually in Place B. They ask the investors to invest in a financial product in Place C and to send money to an account in Place D. A boiler room will often transfer money received from the investors from an account in one place to an account in another place almost as soon as it has been received. By the time the fraud is discovered, the money would have disappeared or transferred out of reach. There is an Alert List on the SFC website which lists (boiler room) firms which are unlicensed in Hong Kong and are suspected to be targeting Hong Kong investors or claim to have an association with Hong Kong.

Further, readers should be aware that under section 213 of the SFO, the SFC has the power to seek a broad range of orders, including: restraining orders, orders requiring restorative steps to be taken, the appointment of an administrator to property and declarations that contracts are void.

For details, please refer to: 

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR150

 

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

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