Archive for category: Newsletter

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.

For enquiries, please email: [email protected] or call at (852) 3487-6903.

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1. SFC emphasizes proper disclosure of inside information
2. SFC commences Market Misconduct Tribunal proceedings over alleged insider dealing in Warderly shares
3. SFC reprimands and fines Kingston HK$500,000 for fitness and properness concerns
4. SFC bans Wong Wai Hong for six months for breaching the Code of Conduct
5. SFC recovers HK$190 million for investors of collapsed hedge fund
6. SFC bans Benjamin Zhu Zhiwei for 18 months for misconduct
7. Hong Kong Game Theory Association Limited and sole director convicted of unlicensed activities
8. Intermediaries reminded full compliance with Know Your Client and account opening procedures
9. Update on reporting and record keeping rules for OTC derivatives
10. SFC enhances regime to regulate alternative liquidity pools
11. SFC launches new register of cold shoulder orders
12. Joint Announcement of China Securities Regulatory Commission and SFC on Mutual Recognition of Funds
13. SFC and CSRC sign agreement on Mainland-Hong Kong Mutual Recognition of Funds
14. SFAT affirms SFC decision to ban Sun Xiao for 13 months
15. Former licensee convicted of false trading

1.  SFC emphasizes proper disclosure of inside information

On 29 April 2015, the SFC published the latest edition of its Corporate Regulation Newsletter highlighting the importance of the proper disclosure of inside information by listing applicants and listed companies.

Background

The newsletter describes, through a number of examples, some of the factors that should be considered when determining whether information needs to be disclosed. These include, among others, the certainty and materiality of the information as well as whether it diverges from market expectations. The newsletter also advises companies to be careful when they repeat information which was either included in their prospectuses or otherwise already announced.

The newsletter also addresses disclosures by listing applicants. In particular, it reinforces the obligation on sponsors to conduct reasonable due diligence to ascertain the accuracy of the information disclosed in listing documents. The newsletter further states that where the identities of a listing applicant’s major customers are not included in the prospectus, that information cannot be supplied at roadshows or in marketing materials. The SFC also encouraged listing applicants to take particular care in ensuring that incentive schemes for initial public offerings are appropriate and easy to understand.

Comment

Pursuant to section 307D of the SFO, listed companies have an obligation to disclose inside information to the public as soon as reasonably practicable after the information has come to their knowledge, subject to specified exceptions under section 307B of the SFO. Inside information is considered to have come to the knowledge of a listed corporation if (a) an officer of the corporation, in the course of performing his duties as an officer of the corporation, has or ought reasonably to have known about the inside information; and (b) a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation. If this obligation is breached, the listed corporation and/or its directors may be subject to civil liability of a regulatory fine up to HK$8 million and/or other sanctions under section 307N of the SFO.

To view the Corporate Regulation Newsletter, please visit:

http://www.sfc.hk/web/EN/files/ER/Reports/CRN/CR_201504.pdf

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR39

2. SFC commences Market Misconduct Tribunal proceedings over alleged insider dealing in Warderly shares

On 4 May 2015, the SFC commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Mr Lo Hang Fong (“Mr Lo”), a former Company Secretary of Warderly International Holdings Limited (“Warderly”), and Mr Luu Hung Viet Derrick (“Mr Luu”), a lender and potential investor of Warderly, for alleged insider dealing in Warderly shares.

Background

The SFC alleges that Mr Lo and Mr Luu were aware that Warderly was in a perilous financial position with banks withdrawing credit facilities when they sold the company’s shares in 2007 and avoided a total loss of HK$12,564,516. The SFC further alleges that Mr Lo and Mr Luu knew the financial crisis facing Warderly was material, highly price sensitive and not generally known to the market.

Warderly began to encounter cash flow problems in mid-2006 due to a surge in the price of raw materials and the settlement of a large tax claim with the Inland Revenue Department. From July 2006 onwards, Warderly experienced a number of material events concerning its financial position, including tightening of banking facilities and subsequent events such as overdue loans, rescheduled payments, demand letters and writs issued by banks. Furthermore, on 14 May 2007, the SFC directed the SEHK to suspend all dealings in Warderly shares under Rule 8 of the Securities and Futures (Stock Market Listing) Rules. Trading of Warderly shares resumed on 16 December 2013 after Warderly underwent a restructuring of its business operations and a change of its management team.

Comment

The definition of insider dealing is set out in sections 270 and 291 of the SFO. Under those sections, insider dealing includes the situation when a person dealing in the Hong Kong listed securities of a corporation is connected with the listed corporation and knowingly has inside information in relation to the listed corporation. Under the Ordinance, “inside information” refers to specific information in relation to a corporation, its shareholders or officers, or its listed securities or their derivatives, which is not generally known to the persons who are accustomed to dealing or would be likely to deal in those securities, but would likely affect the price of the listed securities materially if the information was disclosed.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR41

3.  SFC reprimands and fines Kingston HK$500,000 for fitness and properness concerns

On 5 May 2015, the SFC reprimanded and fined Kingston Securities Limited (“Kingston”) HK$500,000 for fitness and properness concerns.

Background

The SFC found that on 19 January 2009, an employee of Kingston, while in Macao, opened accounts for 22 Macao residents and took orders and payment from those clients, who each bought one or three board lots of PCCW Limited (“PCCW”) shares. The transactions in question involved PCCW shares that were later voted in the shareholders’ meeting in early 2009 to consider the scheme of arrangement (scheme) proposing the delisting and privatization of PCCW, and the scheme was subsequently withdrawn.

Since neither Kingston nor its employee involved were authorized by the Monetary Authority of Macao (“AMCM”) to conduct regulated activities, including opening securities accounts and taking orders for securities trading in Macao, the conduct was in breach of the Financial System Act of Macao. In October 2014, the AMCM in its proceedings against Kingston, made a final ruling to sanction and fine the firm MOP750,000 for its breach of the Financial System Act.

Kingston’s conduct has subsequently raised the SFC’s concern over Kingston’s fitness and properness as an SFC-licensed corporation. The SFC considers that Kingston’s contravention of the laws of Macao casts doubt on the firm’s reputation, character and reliability because as an SFC-licensed corporation, the duty of Kingston to demonstrate these qualities is not only restricted to conduct in the Hong Kong market. It is also imperative for Kingston to respect and comply with rules of relevant regulatory authority and laws of relevant jurisdictions, particularly those where Kingston conducts its business activities. This is evident in the circular issued by the SFC to intermediaries in January 2014, reminding them about their obligations when conducting cross-border business, including the importance of ensuring compliance with all relevant laws and obligations.

Comment

According to paragraph 12.1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”), a licensed person should comply with, and implement and maintain measures appropriate to ensuring compliance with the law and relevant regulatory requirements. This general obligation to observe legal and regulatory requirements applies to activities conducted by the licensed person whether in or outside Hong Kong, with respect to all applicable requirements of any relevant regulatory authority. Furthermore, a licensed corporation having employees or agents conducting business activities on its behalf in other jurisdictions, irrespective of whether such persons are licensed under the SFO, is likely to be regarded by the SFC as responsible for their conduct. Therefore, if these persons are not licensed under the laws or regulations of such other jurisdictions when they should be, or they otherwise conduct themselves in an improper manner, this may constitute a breach of paragraph 12.1 of the Code of Conduct and may also call into question the fitness and properness of such a corporation and/or individual to be, or remain, licensed under the SFO. As such, licensed corporations should enquire as to how the law of other jurisdictions applies to the particular activity before conducting any cross-border business activities.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR42

4.  SFC bans Wong Wai Hong for six months for breaching the Code of Conduct

1. the client’s authority must be in writing;
2. the authority should specify the person who is authorized to operate the account, stating that the person is an employee or agent of the licensed or registered person, if the authority is granted to such person;
3. the terms of the authority should be explained by the licensed or registered person or a person employed by it to the client if the authority is given to such persons to operate the account;
4. the authority should be confirmed annually by the licensed or registered person with the client – for this purpose, it is permissible for the licensed or registered person to notify the client before the expiry date that it will be automatically renewed unless the client specifically revokes it before the expiry date;
5. the account should be designated as a discretionary account;
6. senior management should approve the opening of the account; and
7. internal control systems should be installed to ensure that the operation of the account is properly supervised.

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR43

5.  SFC recovers HK$190 million for investors of collapsed hedge fund

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR44

6. SFC bans Benjamin Zhu Zhiwei for 18 months for misconduct

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR45

7. Hong Kong Game Theory Association Limited and sole director convicted of unlicensed activities

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR46

8. Intermediaries reminded full compliance with Know Your Client and account opening procedures

On 12 May 2015, the SFC issued a Circular reminding intermediaries on the importance of appropriate account opening procedures for investors in and outside Hong Kong in order to fully comply with the Know Your Client (“KYC”) and account opening procedures requirements under the Code of Conduct.

Background

The Circular was issued after the SFC had identified certain deficiencies and an unsatisfactory practice by licensed corporations during recent supervisory reviews of KYC and account opening procedures. As a result, the SFC urged intermediaries to take proper measures to effectively authenticate the client’s identity and the client’s execution of account opening documents. Intermediaries are reminded to ensure that the identity and other personal information about their clients are accurate and up-to-date to ensure their clients are contactable.

The Circular also identifies that the use of an affiliate which itself is not a regulated financial institution and is not subject to similar KYC requirements to perform the task of certifying the identity documents of new clients and client’s execution of account opening documents may result in inadequacies due to the lack of relevant knowledge and experience of the affiliate. As such, intermediaries are strongly discouraged from appointing any affiliate which is not a regulated financial institution to perform such task.

If intermediaries fail to maintain and implement proper policies and procedures for compliance with the KYC and account opening procedures, they may be subject to disciplinary actions by the SFC.

Comment

The KYC requirements are set out in paragraph 5.1 of the Code of Conduct, which states that prior to executing any transaction for a client, a licensed or registered person is required to satisfy itself on reasonable grounds of the identity, address and contact details of the ultimate originator and the ultimate beneficiary of a transaction and keep a record of the information used to establish the same. In the case of a collective investment scheme (“CIS”) or discretionary account, this will require the licensed or registered person to establish the identity of the CIS or account and its manager. The identities of the ultimate beneficiaries only need to be established where they are in fact giving the instructions.

The above requirements are supplemented by paragraph 5.4 of the Code of Conduct and the Client Identity Guidance Note in Schedule 2 of the Code of Conduct, which contains further clarifications and examples of the above requirements.

To view the Circular, please visit: http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=15EC28

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR47

9. Update on reporting and record keeping rules for OTC derivatives

On 15 May 2015, the HKMA and SFC released conclusions on the further consultation on mandatory reporting and related record keeping obligations under the new OTC derivatives regime. Proposals on certain aspects of the reporting regime were revised after taking into account market feedback.

Background

On 18 July 2014, the HKMA and SFC commenced a one-month public consultation on the Securities and Futures (OTC Derivatives Transactions – Reporting and Record Keeping Obligations) Rules. Thereafter, on 28 November 2014, the HKMA and SFC issued the Consultation Conclusions. The further consultation, which ended on 23 December 2014, sought further views on three ancillary matters relating to: (i) the reporting of valuation transaction information (including the details of this requirement and the proposed implementation timetable); (ii) the designation of a list of jurisdictions for the purpose of the masking relief; and (iii) the list of stock markets, futures markets and clearing houses to be prescribed for the purposes of defining the scope of the OTC derivatives regime.

Highlights of the consultation conclusion include requirements on:

• Daily valuation reporting
• Jurisdictions for masking relief
• Markets and clearing houses to be prescribed
• Definition of the term “affiliate”
• Record keeping obligations

The revised Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules attached to the conclusions paper was gazetted on the same today and was tabled before the Legislative Council on 20 May 2015 for negative vetting. A set of draft FAQs has also been uploaded on the HKMA and SFC websites to help market participants better understand how the rules operate.

Comment

Part VI of the SFO grants the SFC powers to make detailed rules relating to the keeping of account and records by licensed or registered intermediaries and associated entities of an intermediary whose client assets are received or held by them. As such, the SFC has made the Securities and Futures (Keeping of Records) Rules under s.151 of the SFO.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR49

10. SFC enhances regime to regulate alternative liquidity pools

On 15 May 2015, the SFC released consultation conclusions on proposals to enhance and unify the regulatory regime for alternative liquidity pools (“ALPs”).

From 27 February to 25 April 2014, the SFC conducted a two-month consultation concerning the regulation of ALPs. The SFC received 59 written responses from industry associations, market participants (including ALP operators), professional and statutory bodies as well as individuals during the consultation. The respondents generally welcomed the proposals.

The enhanced regime included the following highlights:

• no individual investors (including individual professional investors and their wholly owned investment holding corporations) will be allowed to use ALPs;
• client facilitation orders will be treated as proprietary orders, which will have a lower execution priority in ALPs than agency orders; and
• there will be no mandatory “opt-in” requirement before client orders can be routed to ALPs, but ALP operators should permit their clients to opt out of having their orders transacted in ALPs.

Mr Ashley Alder, the SFC’s CEO, said, “The enhanced regulatory regime aims to provide a level playing field for all ALP operators in Hong Kong. We have developed the regime in light of practices in major international markets and the principles published by the International Organization of Securities Commissions.” He further stated that “the SFC will closely monitor market and regulatory developments, and may propose further policy refinements and rule changes in the future to maintain an appropriate balance between market innovation and investor protection”.

The new regime involves amendments to the Code of Conduct, which include a new paragraph 19 and a new Schedule 8 which are set out in Appendices B and C to the Consultation Conclusions. This regime will come into effect on 1 December 2015.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR15

11. SFC launches new register of cold shoulder orders

On 21 May 2015, the SFC launched a new public register of cold shoulder orders to facilitate compliance by intermediaries when dealing with clients who are subject to these sanctions.

Background

The new register, which can be accessed under the Alert List the homepage of the SFC’s website, contains the names of those who are the subjects of current cold shoulder orders made by the courts, the MMT or the Takeovers Panel. The Alert List also includes a table of disqualification orders made against directors of companies and a link to “Have you seen these people?” which contains information of individuals being sought by the SFC in relation to its investigations or enforcement inquiries.  Names on these lists will be deleted once the period of prohibition or disqualification is completed. The SFC therefore encourages intermediaries to refer to the list from time to time to ensure compliance with the orders.

“Successful enforcement relies upon the cooperation of market participants and we hope the new register will make those who are prohibited from trading in Hong Kong or disqualified from acting as company directors more readily identifiable,” said the SFC’s Executive Director of Enforcement, Mr Mark Steward.

Comment

A cold shoulder order is a prohibition on investing or trading in Hong Kong markets for up to 5 years. On the other hand, a disqualification order is a prohibition on someone from being a director of a corporation, and carries a maximum term of 15 years.

Pursuant to sections 12.2(c) and 12.3 of the Introduction to the Codes on Takeovers and Mergers and Share Buy-Backs (the “Codes”), the Takeovers Panel and the Takeovers Executive may impose sanctions requiring licensed corporations, licensed representatives, registered institutions, or relevant individuals, for a stated period, not to act or continue to act in any or a stated capacity for any person who has failed to comply, or has indicated that he does not intend to comply, with either the Codes or a ruling. Moreover,  Under sections 257(1)(b) and 307N(1)(b) of the SFO, the MMT can make a cold shoulder order against a person requiring that the person shall not, without the leave of the Court of First Instance, in Hong Kong, directly or indirectly, in any way acquire, dispose of or otherwise deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme for a period not exceeding 5 years. Furthermore, a cold shoulder may be made by the Court of First Instance under the following two sections. Pursuant to section 213(2)(g) of the SFO, the Court of First Instance may make any ancillary order which the Court of First Instance considers necessary in consequence of the making of any of the orders referred to in paragraphs (a) to (f). Additionally, section 214(2)(a) of the SFO provides that the Court of First Instance may make an order restraining the carrying out, or requiring the carrying out, of any act or acts.

12. Joint Announcement of China Securities Regulatory Commission and SFC on Mutual Recognition of Funds

The China Securities Regulatory Commission (“CSRC”) and SFC have recently decided to embark on the Mainland-Hong Kong Mutual Recognition of Funds (“MRF”) initiative to deepen Mainland-Hong Kong financial cooperation and promote the joint development of the Mainland and Hong Kong capital markets. On 22 May 2015, the SFC made a joint announcement setting out the details of the MRF initiative.

The CSRC and SFC have agreed on the implementation principles, and the mode and operation of the MRF. On 22 May 2015, the CSRC and SFC signed a memorandum of regulatory cooperation in respect of the MRF. Through the MRF, the CSRC and SFC will allow Mainland and Hong Kong funds that meet the eligibility requirements to follow streamlined procedures to obtain authorization or approval for offering to retail investors in each other’s market.

Further, the announcement states that the MRF is an important element in the opening up of the Mainland capital market and an important milestone in the mutual opening of the Mainland and Hong Kong markets. The MRF will enhance the mutual capital market access between the Mainland and Hong Kong and is significant in (i) deepening the exchange and cooperation of Mainland and Hong Kong asset management industries, broadening cross-border investment channels, and enhancing the competitiveness of the Mainland and Hong Kong fund markets; (ii) laying a foundation for the CSRC and SFC to jointly develop a fund regulatory standard, promoting the integration and development of the Asian asset management industry and encouraging the transformation of Asian savings into cross-border investments; and (iii) providing more diverse fund investment products to Mainland and Hong Kong investors, expanding business opportunities and enhancing the international competitiveness of Mainland and Hong Kong fund management firms.

The announcement also mentions the “Provisional Rules for Recognized Hong Kong Funds” and “Circular on Mutual Recognition of Funds between the Mainland and Hong Kong”, which are documents prepared by the CSRC and SFC. The said documents set out the eligibility requirements, applications procedures, operational requirements and regulatory arrangements of the MRF, and will form the basis of regulation and enforcement, and market participants’ business operations. The CSRC and SFC have also established a cooperation mechanism for cross-border regulation and enforcement, to ensure that Mainland and Hong Kong investors receive equal protection.

Moreover, the CSRC and SFC will establish equivalent eligibility requirements for recognizing Hong Kong and Mainland funds promote the mutually beneficial development of recognized funds and broadly balanced cross-border in and out fund flows, and will hold briefings to explain to the market the application procedures and requirements for the MRF. Readers should note that the MRF will be implemented on 1 July 2015.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR52

13. SFC and CSRC sign agreement on Mainland-Hong Kong Mutual Recognition of Funds

On 22 May 2015, the SFC and CSRC have signed a Memorandum of Regulatory Cooperation on Mainland-Hong Kong MRF, which will allow eligible Mainland and Hong Kong funds to be distributed in each other’s market through a streamlined vetting process. The scheme will be implemented on 1 July 2015. .

The Memorandum also established a framework for exchange of information, regular dialogue as well as regulatory cooperation in relation to the cross-border offering of funds.

“The MRFs initiative is a major breakthrough in the opening up of the Mainland’s funds market to offshore funds. It will also open up a new frontier for the Mainland and Hong Kong asset management industries and make available a wider selection of fund products to investors in both markets,” the SFC’s Chairman, Mr Carlson Tong (“Mr. Tong”) said.

“More importantly, this initiative will lay the foundation for the CSRC and SFC to jointly develop a fund regulatory standard, promoting the integration and development of the Asian asset management industry,” Mr Tong added.

Further details of the scheme are set out in the joint announcement issued by the SFC and the CSRC and in the SFC Circular issued on 22 May 2015.

To view the Joint announcement, please visit:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR52

To view the SFC Circular, please visit:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=15EC29

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR51

14. SFAT affirms SFC decision to ban Sun Xiao for 13 months

On 26 May 2015, the SFC had banned Ms Sun Xiao (“Ms Sun”) from re-entering the industry for 13 months from 22 May 2015 to 21 June 2016 after the Securities and Futures Appeals Tribunal (SFAT) affirmed the SFC’s decision and ordered her to pay the SFC’s costs.

An SFC investigation found that Ms Sun:

• maintained a personal securities account and conducted personal trades in the account without disclosing it to her former employer; and
• failed to avoid potential conflicts of interest in that she (i) recommended target companies to her former employer as potential investment opportunities, without disclosing that she held shares in these companies and/or (ii) traded in shares of the target companies after she had recommended them to her former employer as potential investment opportunities, while two of these companies were on the firm’s restricted trading list.

The SFC concluded that Ms Sun’s failures were in breach of the Code of Conduct. Her non-disclosure of trading activities in the secret account was deliberate and dishonest, and called into question her fitness and properness as a licensed person.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR54

15. Former licensee convicted of false trading

On 27 May 2015, The Eastern Magistrates’ Court convicted Mr Wong Chun (“Mr Wong”) of false trading in respect of the shares of Sino-Tech International Holdings Limited (“Sino-Tech”).

Mr. Wong was remanded in custody pending sentencing. The case was adjourned to 19 June 2015.

The SFC alleged that, between December 2010 and January 2011, Mr Wong created a false or misleading appearance of active trading in shares of Sino-Tech, using matched trades and some wash trades between his own account and the accounts of two other investors he was able to control to grossly inflate trading volume by more than 400%.

As a result, the securities accounts controlled by Mr Wong were able to off-load more than 200 million shares making a gross profit of more than HK$2 million that he would otherwise not be able to do so.

The SFC’s Executive Director of Enforcement, Mr Mark Steward, said, “Falsifying the market for or the price of securities misleads the investing public and is dishonest. The SFC will continue to prosecute deliberate and dishonest manipulation and offenders can expect to receive terms of imprisonment.”

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR55

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

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Contents:

1. SFC bans Katherina Lo Ka Shun for two years for improper trading arrangement
2. SFC obtains court order to wind up China Metal Recycling (Holdings) Limited
3. SFC seeks comments on Principles of Responsible Ownership
4. SFC seeks disqualification and compensation orders against former chairman and directors of Inno-Tech Holdings Limited
5. SFC bans Wong Chun Yin for life for misconduct
6. SFC bans Luo Jianglan for six months for failing to adhere to short selling regulations
7. Market Misconduct Tribunal sets date for hearing on alleged false research report
8. Court of Final Appeal allows appeal of Pacific Sun Advisors Limited and its director

1.  SFC bans Katherina Lo Ka Shun for two years for improper trading arrangement

On 25 February 2015, the SFC banned Ms Katherina Lo Ka Shun (“Lo”) from re-entering the industry for two years from 24 February 2015 to 23 February 2017. Lo was licensed under the Securities and Futures Ordinance (“SFO”) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to Quam Securities Company Limited from 21 October 2010 to 1 January 2014. Lo is currently not a licensed person.

Background

The SFC found that Lo sold 30 million shares in Grand Peace Group Holdings Limited (“Grand Peace”) held by her and her daughter on a pre-arranged basis. The transaction was executed on market on 11 September 2012 at prices which Lo knew that they were not the price she privately agreed with the purchaser. The actual terms Lo agreed to dispose the shares included a cash discount payable to the purchaser amounting to a total sum of HK$700,000.

Although Lo claimed that she did not know that the disposal of shares was improper, the SFC found that as a licensed person with over 10 years of experience in the industry, it is not an excuse that Lo was ignorant to the improperness of such a trading arrangement as she is expected to know the consequences of her conduct. In addition, Lo’s eagerness to sell the shares was not found to be a valid excuse for agreeing to and taking part in the misconduct which had the effect of giving an inaccurate share price to the market. As such, there was no reasonable explanation for the payment of the cash discount and for such a transaction being executed on-market. On-market transactions should reflect what has actually been agreed between the parties.

The SFC considered that this transaction casts considerable doubt on Lo’s fitness and properness to be a licensed person, and subsequently banned her from re-entering the industry for two years.

Comment

Readers should note that pursuant to section 245 of the SFO, false trading is a type of market misconduct. These may be tried both as a criminal offence and in the Market Misconduct Tribunal (“MMT”), which determines its proceedings based on the civil standard, “on the balance of probabilities”. If the SFC, after investigation into any particular case, decides that the civil route is appropriate, it may, with the consent of the Secretary for Justice, institute proceedings in the MMT.  At the conclusion of the proceedings, the MMT will issue a public report which states whether any market misconduct has taken place, make orders and give reasons for such orders. False trading is considered particularly damaging because it is disadvantageous to innocent investors and would destabilize the market.

Further information can be found in the Statement of Disciplinary Action issued by the SFC:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=15PR17&appendix=0

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR17

2.  SFC obtains court order to wind up China Metal Recycling (Holdings) Limited

On 26 February 2015, the Court of First Instance (“CFI”) ordered that China Metal Recycling (Holdings) Limited (“China Metal Recycling”) be wound up in the public interest on the application of the SFC. China Metal Recycling was incorporated in the Cayman Islands on 18 July 2007. On 10 June 2009, it issued a prospectus for Global Offering. On 22 June 2009, its shares were listed on the Main Board of the Stock Exchange of Hong Kong Limited (“SEHK”). About HK$1,685 million, net of listing expenses, were raised by the initial public offering of the company. Trading in shares of China Metal Recycling has been suspended since 28 January 2013.

Background

On 26 July 2013, the SFC presented a petition to the CFI to wind up China Metal Recycling under section 212 of the SFO and obtained an order to appoint Cosimo Borrelli and Jocelyn Chi Lai Man, both of Borrelli Walsh Limited, as joint and several provisional liquidators for China Metal Recycling. This case is particularly seminal as it is the first time that the SFC obtained a court order to wind up a Hong Kong-listed company under section 212 of the SFO for the purpose of protecting the company’s minority shareholders, creditors and the investing public.

The SFC alleged that the affairs of China Metal Recycling involved a highly complex, sophisticated and dishonest scheme spanning Hong Kong, Macao, the Mainland and the United States of America (“US”). The scheme inflated China Metal Recycling’s performance, revenue and profit dating back to the time of its IPO prospectus in 2009 and becoming larger and more complex in the subsequent years until it was brought to an end when the SFC commenced these proceedings in July 2013. The scheme involved the use of China Metal Recycling’s wholly owned off-shore subsidiary in Macao, Central Steel (Macao Commercial Offshore) Limited (“Central Steel Macao”) which was the conduit for a substantial part of the company’s annual profits between 2007 and 2012 and was also a factory for generating false documents and instruments by which these profits were falsified. Further, the scheme also involved fake shipments of scrap metal between the US and the Mainland, false shipping documents, false accounts, and highly complex round robin transactions spanning continents.

As a result, the aggregate revenue and gross profit of China Metal Recycling for the years 2007 to 2009 appears to have been overstated by around 46% or over HK$8 billion and 72% or over HK$1 billion respectively. By way of illustration, Central Steel Macao made 431 payments totaling around US$2.4 billion to its purported key suppliers in the US and Hong Kong in 2012. About 98% of the funds were passed on to its purported customers and eventually circulated back to Central Steel Macao through a multitude of bank accounts, all through multiple entities set up around the world yet controlled centrally within China Metal Recycling.

Moreover, there was no sign of the scheme terminating or at least curtailing in scale after the IPO, or even after the SFC started investigating into the matter. On the contrary, the fictitious circulation of funds increased both in terms of scale and complexity.

The former management of the company and its subsidiaries prior to the appointment of the provisional liquidators denied any impropriety and, until recently, opposed the SFC’s case. However, without accepting any liability, the former management withdrew from the case and took no part in the hearing.

The Order

After considering the SFC’s evidence, the Honorable Mr. Justice Harris granted the order to wind up China Metal Recycling, and indicated that he would deliver reasons for the decision in due course.

Mr. Mark Steward, the Executive Director of Enforcement, said, “This is an audacious and dishonest scheme using multiple secret nominees established all around the world to deceive Hong Kong investors and creditors into believing this company had a track record and a performance that it simply did not have. It has been stopped and control will vest with independent, court appointed liquidators. The liquidators will be able to conduct an independent assessment of the company’s real position, in the best interests of all those with a financial interest in the case.”

Further, he added, “This has been a very challenging investigation, an unparalleled dogged pursuit to uproot this misconduct in as many parts of the world as the company falsely claimed its containers had travelled. The SFC will continue this pursuit to combat corporate misconduct like this and there is no doubt our work in this matter is not finished yet.”

Comment

Readers should note that pursuant to section 212 of the SFO, the SFC is permitted to apply for a winding-up order against companies if it appears to the SFC that it is desirable in the public interest to do so, and the Court may grant the order on the ground that it is just and equitable to wind up those companies. This case illustrates that an example of public interest is the protection of investors and creditors against fraud.

For details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR18

3.  SFC seeks comments on Principles of Responsible Ownership

On 2 March 2015, the SFC launched a three-month consultation on proposed Principles of Responsible Ownership which provide guidance for how investors should fulfil their ownership responsibilities in relation to their investment in a listed company.

Background

The seven principles of responsible ownership asks investors to do the following:

• To establish and report to their stakeholders their policies for discharging their ownership responsibilities;
• To monitor and engage their investee companies;
• To establish clear policies on when to escalate their engagement activities;
• To have clear policies on voting;
• To be willing to act collectively with other investors when appropriate;
• To report to their stakeholders on how they have discharged their ownership responsibilities; and
• When investing on behalf of clients, to have policies on managing conflicts of interests.

The principles, which are non-binding and voluntary, operate on a “comply-or-explain” basis. Investors are encouraged to “sign up” to the principles and either disclose how they comply with the principles, or else explain why some or all of the principles do not, or cannot, apply. The principles are relevant to individual and retail investors in that they provide general guidance on share ownership engagement, although some elements of the principles, such as reporting to stakeholders, do not expressly apply to individuals.

“Whilst the primary responsibility for a company’s success rests with the company’s board, investors in a company also play a significant role by holding the board to account for the fulfillment of its responsibilities,” said Mr. Ashley Alder, the SFC’s Chief Executive Officer. “Recognizing the importance of responsible ownership benefits the company, its investors and the economy as a whole,” he added.

The public is invited to submit their comments to the SFC on or before 2 June 2015. Readers may submit written comments via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2810 5385.

Comment

The SFC states in its Consultation Paper that in any mature market economy, there is reliance upon shareholders to evaluate investment opportunities and allocate their capital according to their assessment of risk and likely returns and to then monitor the performance of the company and assess the effectiveness of their capital allocation. In order for them to do so, they need to seek information and monitor the progress of their investee companies. By doing so, responsible shareholders carry out a function that is essential for effective capital allocation that contributes to the economic growth of a society. For instance, while directors are required by law to act in the interests of the shareholders of the company, shareholders are similarly expected to take action where they believe that directors are not acting in the interests of the company or its shareholders. As such, the law provides all shareholders with voting rights and other rights to enable them to engage with directors and to monitor the progress of their investment in the company.

Further, the SFC notes that in the past several decades, there has been a notable increase in institutional ownership of publicly listed companies, and that the importance of the roles and responsibilities of institutional investors in corporate governance has been placed under scrutiny following the global financial crisis of 2008. The SFC therefore emphasizes the importance of encouraging proactive ownership engagement between investors and publicly listed companies. Therefore, whilst the Hong Kong market retains a relatively high proportion of shares held directly by individuals, like all markets, much of each individual’s wealth invested in listed companies is not held directly. Individuals are thus dependent on others to exercise shareholder rights in a way that benefits them individually and society generally. The Consultation is therefore aimed towards providing guidance: (i) to assist investors in determining how best to meet their ownership responsibilities whether these are exercised directly or through intermediaries; and (ii) for intermediaries on whom investors are depending to exercise ownership responsibilities. This guidance is currently provided in the form of the Principles of Responsible Ownership set out in Appendix A of the Consultation, and the SFC is seeking market comments on the said Principles.

It is particularly important to note that since investors pursue different investment objectives, the aim of the Principles is not to advocate any particular investment strategy or to prescribe, quantify or identify the degree of investor engagement necessary to qualify an investor as a responsible investor or good corporate citizen. Instead, the Principles seek to encourage each investor to consider the shareholder engagement policies that are suitable to its circumstances and to then implement these policies, either directly or by selecting intermediaries to do so on its behalf.

To view the Consultation Paper on the Principles of Responsible Ownership, please visit: http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=15CP2

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR19

4.  SFC seeks disqualification and compensation orders against former chairman and directors of Inno-Tech Holdings Limited

On 9 March 2015, the SFC commenced legal proceedings in the CFI against the former chairman and directors of Inno-Tech Holdings Limited (“Inno-Tech”) over alleged misconduct that caused the company to lose more than HK$125 million.

Background

Inno-Tech is a company that has been listed on the Growth Enterprise Market of the SEHK since 12 August 2002. Up to 2002, it was principally engaged in the provision of intranet design for residential communities and electronic property management software consultancy. According to its website, Inno-Tech is now engaged in the business of development and sale of intelligent home electronic application system and development of outdoor advertising business on the Mainland. Trading in Inno-Tech shares was suspended since 26 January 2015.

The SFC alleges that Inno-Tech’s former chairman and director, Ms Wong Yuen Yee, and three former directors, namely Mr. Robert Wong Yao Wing, Mr. Wong Kwok Sing and Mr. Lam Shiu San (collectively the “Four Former Directors”), breached their duties as directors in relation to the acquisitions and/or disposals of interests in three hotels and a gold mine on the Mainland between 2007 and 2010 resulting in substantial and material losses to Inno-Tech. The hotels and gold mine concerned are Xindu Hotel, Kaiping Hotel, Changlin Hotel and De Xing City Zhang Jia Fan Gold Mine. The total losses caused by the transactions amounted to more than HK$125 million.

Specifically, the SFC alleges that the Four Former Directors have failed to:

• Carry out adequate investigation into or due diligence prior to the acquisitions of the interests in the three hotels and the gold mine;
• Negotiate the consideration for acquiring the interests in the three hotels and the gold mine;
• Assess or to obtain any independent assessment of whether an investment in the gold mine was a commercially suitable or an appropriate one for Inno-Tech;
• Assess the purchase price of the interests in the gold mine properly;
• Give adequate consideration to who would be appropriate to appoint as directors and/or who to put in charge in respect of gold mining matters; and
• Supervise the running of the gold mine properly.

Orders sought

The SFC is seeking orders that the Four Former Directors be disqualified as company directors and that Inno-Tech bring proceedings against them for compensation or, alternatively, that they be ordered to pay compensation to Inno-Tech directly.

The first hearing of the petition presented by the SFC will be heard in the CFI on 29 April 2015.

Comment

Readers should note that the SFC has the power to commence legal proceedings under section 214 of the SFO, under which the court may, among other things, make orders to disqualify a person from being a director or being involved, directly or indirectly, in the management of any corporation for up to 15 years. The court may also order a company to bring proceedings in its own name against any person specified in the order and may make any other order it considers appropriate.

For a details on the material events and allegations made by the SFC, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=15PR20&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR20

5.  SFC bans Wong Chun Yin for life for misconduct

On 10 March 2015, the SFC banned Mr. Wong Chun Yin (“Wong”), a former relationship manager of the Standard Chartered Bank (Hong Kong) Limited (“SCBHK”), from re-entering the industry for life. Wong was a relevant individual engaged by SCBHK to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the SFO from September 2009 to June 2012. 

Background

The SFC found that, between October 2011 and May 2012, Wong effected fund transactions in clients’ accounts without their authorization to meet his sales targets and tried to conceal his misconduct by tampering with one client’s contact information. Further, it was found that Wong also falsified client instructions for the transactions by misleading the clients into signing fund order forms which were blank or with essential instruction particulars missing from the forms.

The SFC found that Wong’s dishonest conduct was not in the best interests of clients and was in breach of the SFC’s Code of Conduct by or Registered with the SFC (“Code of Conduct”). As a result, the SFC concluded Wong is not a fit and proper person to be licensed.

The case was referred to the SFC by the Hong Kong Monetary Authority (“HKMA”). The affected clients have been made whole by SCBHK.

Comment

The HKMA’s linkage with the SFC relates primarily to the supervision of banks, since authorized financial institutions (“AFIs”) which are regulated by the HKMA have to be registered with the SFC as registered institutions if they wish to carry out an SFC-regulated activity. In supervising these AFIs, the HKMA applies all SFC criteria, including the “fit and proper” criteria. If the HKMA suspects malpractice by registered institutions in respect of an SFC-regulated activity, it may refer such cases to the SFC, which may directly review those institutions.

Further, readers should note that pursuant to section 194 of the SFO, if the SFC finds that a “regulated person is guilty of “misconduct” or is not a fit and proper person, the SFC may:

• In the case of a licensed corporation or representative, revoke or suspend the license in respect of all or part of the licensed corporation or representative, revoke or suspend the license in respect of all or part of the regulated activity;
• In the case of the responsible officer, revoke or suspend approval as a responsible officer;
• Publicly or privately reprimand the regulated person;
• Prohibit the regulated person from applying for a license, registration, approval as a responsible officer or entry in the HKMA register, or to act as an executive officer; and
• Separately or in addition order the regulated person to pay penalty up to the greater of HK$10 million or three times the profit gained or loss avoided as a result of his misconduct.

For the Statement of Disciplinary Action issued by the SFC, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=15PR21&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR21

6.  SFC bans Luo Jianglan for six months for failing to adhere to short selling regulations

On 11 March 2015, the SFC banned Ms Luo Jianglan (“Luo”) from re-entering the industry for six months from 10 March 2015 to 9 September 2015.

Background

The SFC found that on 22 August 2013, Luo, who was an associate of her employer’s Client Facilitation Desk, created a short sell order of 300,000 shares in China Resources Land Limited (“CRL Order”) and released part of the order to the market without ensuring a relevant stock borrow arrangement in place as required by her employer’s procedures for ensuring compliance with short selling regulations. At the time when Luo created the CRL Order, J.P. Morgan as a group held sufficient CRL shares to cover the order.

Luo did not report her breach in respect of the CRL Order to her employer but took various steps to conceal it, including falsely represented to the compliance department that she had arranged prior internal stock transfer to cover the short position.

The SFC considered Luo’s conduct called into question her fitness and properness to be a licensed person. The SFC considers Luo’s failure to adhere to her employer’s short selling procedures and the steps she took to cover up the error from her employer as unacceptable.

Comment

Pursuant to General Principle 1 of the Code of Conduct, all licensed persons are required to act honestly, fairly, and in the best interests of their clients and the integrity of the market when conducting regulated activities. Further, General Principle 2 of the Code of Conduct requires all licensed persons to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market.

Readers should note that Section 170(1) of the SFO prohibits “naked” or “uncovered” short selling. It creates a criminal offence for a person to sell securities at or through a recognized stock market unless at the time of the sale, he (or his client, if he is an agent) has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or believes and has reasonable grounds to believe that he (or his client, as the case may be) has such a right.

For the avoidance of doubt, section 170 applies only to short sales conducted at or through a recognized stock market, i.e., at present, the SEHK. It does not apply to off-exchange short sales.

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7.  Market Misconduct Tribunal sets date for hearing on alleged false research report

On 19 March 2015, the Honorable Mr. Justice Hartmann, chairman of the MMT, has fixed a hearing date for the proceedings commenced by the SFC against Mr. Andrew Left (“Mr. Left”) of Citron Research in relation to alleged market misconduct involving the publication of a research report on Evergrande Real Estate Group Limited (“Evergrande”) in June 2012.

Background

On 22 December 2014, the SFC commenced proceedings in the MMT against Mr. Left, alleging market misconduct involving the publication of a research report on Evergrande, a company listed on the SEHK on 5 December 2009, in June 2012. Mr. Left resides in the US 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, inter alia, that Evergrande was insolvent and had consistently presented fraudulent information to the investing public. Following the publication of the report, the share price of Evergrande fell sharply on the same day. In fact, the share price of Evergrande reached a 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

Further, the SFC alleges that shortly before publishing the report, Left short sold 4.1 million shares of Evergrande which he subsequently bought back, making a notional profit of over HK$2.8 million. Mr. Left made a total realized profit of approximately HK$1.7 million.

The MMT has now reserved 22 February to 8 March 2016 for the hearing.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR24

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8.  Court of Final Appeal allows appeal of Pacific Sun Advisors Limited and its director

On 20 March 2015, the Court of Final Appeal (“CFA”) today upheld an appeal by Pacific Sun Advisors Limited (“Pacific Sun”) and its director Mr. Andrew Pieter Mantel (“Mr. Mantel”) in relation to issuing advertisements to promote a collective investment scheme (“CIS”) without the authorization of the SFC.

Background

On 21 March 2013, the Eastern Magistracy acquitted Pacific Sun and its director Mr. Mantel for four counts of issuing advertisements to promote a CIS without the authorization of the SFC in contravention of section 103 of the SFO.

The SFC alleged that between November and December 2011, the defendants issued an advertisement on the corporate website of Pacific Sun promoting a CIS called “Pacific Sun Greater China Equities Fund” (the “Fund”) without the authorization of the SFC. It was also alleged that on or around 2 and 3 December 2011, the defendants issued an advertisement regarding the launch of the Fund to the public by email without the authorization of the SFC.

During three days of evidence, the defendants submitted that they intended to sell interests in the units of the Fund only to professional investors and so the advertisements did not require authorization by the SFC under a statutory exemption. The SFC, on the other hand, submitted that the exemption did not permit advertisements that had not been authorized by the SFC to be issued to the public and that in this case there was no evidence that the interests in the Fund had only been sold to professional investors. The Magistrate accepted the defendant’s argument and ruled that the advertisements did not constitute invitations to the public to invest in the fund.

The case in the CFI

Subsequently, the SFC appealed the decision. On 27 January 2015, the CFI overturned the acquittals of Pacific Sun and Mr. Mantel. The SFC argued that the acquittal decision was based on legal errors. The CFI agreed and ordered the case to be remitted back to the Magistrate for reconsideration as the advertisements in question did not fall within the exemption in section 103(3)(k) of the SFO, which applies if the securities are or are intended to be disposed of only to professional investors. The CFI made it clear that the exemption only applies where the advertisements states on its face that the terms of the offer are limited to professional investors. As a result, Pacific Sun and Mantel were charged with four counts of issuing advertisements to promote a CIS without the authorization of the SFC in contravention of section 103 of the SFO.

The SFC considered that this ruling protects retail investors from the risks of direct marketing of inappropriate or risky investment products.

The case in Tsuen Wan Magistrate’s Court

On 10 June 2014, Pacific Sun and Mr. Mantel were convicted at the Tsuen Wan Magistrates’ Court on four charges of issuing advertisements to promote a CIS without the authorization of the SFC. Pacific Sun was fined HK$20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months.

The case in the CFA

The ruling of the CFA on 20 March 2015 overturned the abovementioned decision of the CFI on the interpretation of section 103 of the SFO. Pacific Sun and Mantel were acquitted after they argued successfully that they could rely upon an exclusion contained in section 103(3)(k) of the SFO. As a result, the acquittal verdict at the Eastern Magistracy stands.

The CFA held that the CFI erred in its ruling in that the exclusion applies even if the intention to dispose of the securities or interests in a CIS only to professional investors is not expressed in the advertisement, invitation, or document. The CFA clarified that the burden of establishing that the exclusion applies rests on the defendant and not on the SFC, and that the professional investor exemption would not apply if a person published an unauthorized offer to the public and sold the advertised securities to a retail investor.

The SFC will further study the CFA’s decision to determine whether there should be any proposal to amend section 103 of the SFO.

Comment

Pursuant to section 103 of the SFO, it is an offence to make an offer of investments to the public unless the circumstances of the offer are in accordance with the permitted routes of doing so (e.g. with the authorization of the SFC). However, there is an exemption under section 103(3)(k) of the SFO, which states that an advertisement does not need SFC authorization where the advertisement is in respect of securities, structured products or interests in a CIS that are or are intended to be disposed of only to professional investors.

The significance of the CFA’s ruling is that advertisements of CIS that may be unsuitable for retail investors can be issued to the general public even if the issuer only intends to sell them to professional investors. It also means a contravention of section 103 of the SFO, which occurs upon the issue of a relevant unauthorized offer to the public, can only be established well after the offer to the public has been issued.

Despite this, readers should take care in issuing such offers of investment to the public. For the avoidance of risk, readers may consider explicitly stating on the face of the document that the terms of the offer are limited to professional investors.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR26

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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