Newsletter – April 2016

 

Content

  1. SFC bans Yuen Siu Lun for seven years
  2. SFC suspends Ernest Ho Gar Fai for four months
  3. SFAT affirms SFC decision to reprimand and fine Moody’s over Red Flags Report
  4. SFC commences MMT proceedings against Yorkey Optical International (Cayman) Limited, its CEO and Financial Controller for late disclosure of inside information
  5. SFC bans Andrew Chow Ho Cheung for life
  6. SFC formally adopts initiatives to enhance fund authorization process after pilot-run
  7. Defendants acquitted of unlicensed dealing
 

1. SFC bans Yuen Siu Lun for seven years

On 24 March 2016, Yuen Siu Lun was banned by the SFC for seven years following investigation of him obtaining rebates and causing loss to his company by amending transaction data for the purposing of benefitting clients.           

Background

The SFC has banned Mr. Yuen Siu Lun, a former responsible officer of Bright Smart Forex Limited (BS Forex) and head of the bullion operations of Bright Smart Global Bullion Limited (BS Bullion), from re-entering the industry for seven years from 24 March 2016 to 23 March 2023 for abusing the access right granted to him and making order amendments to bullion contracts as a means of obtaining a personal financial benefit.

The disciplinary action follows an investigation by the SFC which found that, from April to October 2014, Yuen amended the data of approximately 300 bullion transactions in the accounts of seven clients even though there were no genuine error trades which called for amendment.  Such amendments, which were made without the knowledge and approval of Yuen’s ex-employer, benefited certain clients at the expense of BS Bullion.  Yuen caused a total loss of approximately HK$1.26 million to BS Bullion which comprised of profits and rebates arising out of all the orders placed in the accounts of the relevant clients.

According to an oral agreement with the clients, Yuen received rebate for each completed trade and gained a personal financial benefit in a total sum of approximately HK$180,000.  Although the SFC does not regulate gold bullion business, it considers that Yuen is not a fit and proper person to remain licensed under the Securities and Futures Ordinance (SFO).

Comments

Yuen was licensed under the SFO to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contract), Type 3 (leveraged foreign exchange trading) and Type 9 (asset management) regulated activities.  Apart from BS Forex, he was also accredited to Bright Smart Securities International (H.K.) Limited, Bright Smart Futures & Commodities Company Limited and Bright Smart Asset Management Limited from 22 September 2014 to 9 October 2014.  Yuen is currently not licensed by the SFC.

Readers should refer to section 129 of the SFO for the SFC’s criteria used to assess whether a person is fit and proper to be licensed/registered.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR30&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR30

 
2. SFC suspends Ernest Ho Gar Fai for four months

On 24 March 2016, Ernest Ho Gar Fai was suspended by the SFC for four months following investigation of him allowing a client to trade futures contracts through his mother’s account and thus casted doubt on his fitness and properness as a licensed person.

Background

The SFC has suspended Mr Ernest Ho Gar Fai for four months from 24 March 2016 to 23 July 2016.

The SFC investigation found that from September to December 2013, Ho allowed a client, who is his mother’s friend, to trade in futures contracts through his mother’s account held with Fulbright Futures Limited (Fulbright Futures).  He also failed to properly receive and keep records of the client’s order instructions.

Although Ho’s mother allowed the client to trade through her futures account, it is inexcusable for Ho to have allowed the trades to be conducted in such a way.  Ho’s conduct falls short of the standard set out in the Code of Conduct and casts doubt on his fitness and properness as a licensed person.

In deciding the sanction, the SFC took into account all relevant circumstances, including that Ho had no previous disciplinary record with the SFC.

Comments

Ho is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities, and has been accredited to Fulbright Securities Limited for Type 1 regulated activity and Fulbright Futures Limited for Type 2 regulated activity since 2007.

Readers are reminded that the General Principle 2 (diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission provides that a licensed person should act with due skill, care and diligence in conducting business activities.  Among others, paragraph 3.9 provides that licensed person should record and immediately time stamp records of order instruction particulars, and paragraph 5 provides a licensed person should take steps to establish the true and full identity of each client, and before effecting a transaction, be satisfied on reasonable grounds as to the identity of the person ultimately responsible for originating transaction instructions and the identity of the person who stand to gain the commercial or economic benefit and/or bear the commercial or economic risk of the transaction.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR31&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR31

 
3.  SFAT affirms SFC decision to reprimand and fine Moody’s over Red Flags Report

On 5 April 2016, Moody’s was reprimanded and fined HK$11 million for various preparation and publication errors in relation to its Red Flag Report and thus breaching the Code of Conduct.

Background

The SFC has reprimanded Moody’s Investors Service Hong Kong Limited (Moody’s) and fined it HK$11 million for various failures relating to its preparation and publication of the special comment report entitled “Red Flags for Emerging-Market Companies: A Focus on China” published on 11 July 2011 (the Report).

The SFC’s action against Moody’s follows the determination of the Securities and Futures Appeals Tribunal (SFAT) which confirms the SFC’s jurisdiction over Moody’s in this case.

The SFAT has affirmed the SFC’s findings that, Moody’s, in preparing and publishing the Report which purportedly identified risk factors of Mainland rated issuers:

  • failed to provide sufficient explanations for the red flags assigned by it to the rated companies and to set out relevant justifications to the red flags in the Report, and had, as a result, painted an unfair, unclear and misleading picture of the companies;
  • chose to list the red flags assigned to each company and to highlight six companies with the largest number of flags in the Report as “negative outliers” to make the Report “actionable” despite the assessment performed by its analysts showed that there was no significant correlation between the number of red flags and the companies’ credit risk; and
  • failed to ensure the accuracy of the red flags assigned to the companies.

The SFAT found that in the preparation and publication of the Report, Moody’s was carrying on its regulated activity of providing credit rating services.  The SFAT also found that there were substantive breaches of General Principles 1 and 2 of the Code of Conduct.  The SFAT has determined that Moody’s should be subject to a public reprimand and a pecuniary penalty of HK$11 million.

The SFC’s Chief Executive Officer, Mr Ashley Alder, said, “The Code of Conduct sets general principles and standards of conduct that all licensed or registered persons, including credit rating agencies, must follow.  The purpose of the Code of Conduct is to maintain high standards of conduct by intermediaries and to ensure intermediaries remain fit and proper.”

Comments

Moody’s is licensed under the Securities and Futures Ordinance to carry on business in Type 10 (providing credit rating services) regulated activity.

In the Report, Moody’s assessed 49 non-financial Chinese entities against 20 warning signs it called “red flags” to identify possible corporate governance and accounting risks. The Report highlighted and discussed six companies which received the highest number of red flags among the other rated peers, and they were identified as “negative outliers”.  The Report also displayed the number and type of red flags assigned to each of the 49 companies in various tables.

Readers are reminded that General Principle 1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) requires that a licensed or registered person should act honestly, fairly, and in the best interest of its clients and the integrity of the market in conducting its business activities.

The SFC’s findings under General Principle 1 are limited to Moody’s failure to act fairly, in the best interests of its clients, and the integrity of the market. In its Reasons for Determination, the SFAT also made it clear that there are no findings of dishonest conduct or intention to mislead by Moody’s.

Readers are also reminded that General Principle 2 of the Code of Conduct requires that a licensed or registered person should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market in conducting its business activities.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR34

4.  SFC commences MMT proceedings against Yorkey Optical International (Cayman) Limited, its CEO and Financial Controller for late disclosure of inside information

On 6 April 2016, the SFC commenced proceedings against Yorkey in the Market Misconduct Tribunal for Yorkey’s failure to make timely disclosure on price sensitive information, thus breaching disclosure requirements in the SFO.

Background

The SFC has commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Yorkey Optical International (Cayman) Limited (Yorkey) for failing to disclose price sensitive information as soon as reasonably practicable.

The SFC has also commenced proceedings in the MMT against Mr Nagai Michio, the Chief Executive Officer and Executive Director of Yorkey, and Mr Ng Chi Ching, Financial Controller and Company Secretary of Yorkey, for their reckless or negligent conduct causing the alleged breach by Yorkey of the provisions of the statutory corporate disclosure regime or their failure to take all reasonable measures from time to time to ensure that proper safeguards exist to prevent the alleged breach.

The SFC found that, contrary to the published expectations of Yorkey’s management of significant growth and increasing profitability for the second half of 2012 as compared to the first half of 2012, Yorkey in fact sustained material losses in the second half of 2012 and its financial performance deteriorated significantly with the result that there was a substantial year-on-year decline in its 2012 profits on a full-year basis.

The information about Yorkey’s material losses in the second half of 2012 and the significant deterioration in its financial performance were apparent from the figures contained in the internal management accounts.  These figures would have been a clear indication to the senior management of Yorkey that the results for the second half of 2012, and hence the full year of 2012, would be much worse than expected.  This information came to the knowledge of Yorkey and its CEO from around mid-December 2012 or mid-January 2013 at the latest. However, it was not disclosed to the public until the publication of Yorkey’s audited annual results for the year ended 31 December 2012 (2012 Final Results) on 25 March 2013.

The SFC alleges that the information about Yorkey’s material losses in the second half of 2012 and the significant deterioration in its financial performance was specific information regarding Yorkey, price sensitive and not generally known to the public at the material time. Had the information been known to the investing public, it would be likely to materially affect the share price of Yorkey.

Comments

The proceedings to be take place at the MMT will determine firstly whether a breach of a disclosure requirement under sections 307B and 307G of Part XIVA of the Securities and Futures Ordinance (SFO) has taken place and secondly the identity of any person who is in breach of the disclosure requirement.

Readers are reminded that, under section 307B of the SFO, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public. In addition, under section 307G of the SFO, every officer of a listed corporation must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the corporation. If a listed corporation is in breach of a disclosure requirement, an officer of the corporation – (a) whose intentional, reckless or negligent conduct has resulted in the breach; or (b) who has not taken all reasonable measures from time to time to ensure that proper safeguards exist to prevent the breach, is also in breach of the disclosure requirement.

For a copy of the  SFC’s Notice commencing the MMT proceedings, please refer to:

http://www.mmt.gov.hk/eng/rulings/Yorkey_ruling_06042016_e.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR33

 

 

5.  SFC bans Andrew Chow Ho Cheung for life

On 21 April 2016, Andrew Chow Ho Cheung was prohibited from re-entering the industry for life following his conviction for offences of fraud and theft under the Theft Ordinance.

Background

At the material time, Chow was responsible for introducing and selling investment products to customers of HSBC. The Court found that Chow has forged the signatures of a number of customers on bank documents, changed the subscription fee rates on subscription forms without the knowledge and agreement of a client; and made unauthorized payments and withdrawals to and from a number of customers’ accounts. Chow was sentenced to two years imprisonment by the District Court on 19 May 2015.

Chow’s case was referred to the SFC by the Hong Kong Monetary Authority. The SFC considers Chow is not a fit and proper person to be licensed or registered to carry on regulated activities as a result of his convictions.

Comments

Chow was a relevant individual engaged by HSBC to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance. Chow is currently not registered with the Hong Kong Monetary Authority or licensed by the SFC.

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 further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR36

 

 

6. SFC formally adopts initiatives to enhance fund authorization process after pilot-run

On 22 April 2016, following a six-month pilot period ending on 8 May 2016, the SFC announced that it will proceed to formally adopt its initiatives to enhance the authorization process for new fund applications (“Revamped Process”) and for new Mandatory Provident Funds (MPF) and Pooled Retirement Fund (PRF) products.

Background

On 9 November 2015, the SFC launched the Revamped Process. During the six-month pilot period, the SFC has been closely monitoring the operation of the Revamped Process and has engaged in open dialogue with industry participants to seek their feedback on the process since its launch.

Under the Revamped Process, a “two-stream” approach will be adopted by the SFC in processing new fund applications with the support of the New Information Checklist and a comprehensive guide on practices and procedures for applications prepared by the SFC to facilitate applicants’ preparation for their applications and compliance with the applicable regulatory requirements (including the requirements under the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (Handbook) and the Code on Unit Trusts and Mutual Funds (UT Code)).

SFC learned that the Revamped Process has received broad industry support and the overall implementation and experience has been smooth and positive. New fund applications received under the Revamped Process (including both Standard Applications and Non-standard Applications) were processed in accordance with the Revised Performance Pledges. We noted that during the Pilot Period,

  1. the quality of new fund applications has generally improved;
  2. responses from applicants have been more timely; and
  3. overall processing time has been shortened in line with the target processing timeframe.

Along with the Revamped Process, the six-month application lapse policy for MPF and PRF products will be formally adopted with effect from 9 May 2016 after consulting the Mandatory Provident Fund Schemes Authority.

Comments

The Revamped Process has been working in promoting fund providers’ compliance and reducing the overall processing time for new fund applications without compromising investor protection.

As seen from the market reaction to the Revamped Process, the overall efficiency of the authorization process has been greatly enhanced since the launch of the pilot initiatives, which has been broadly supported by the industry. With an improved quality of fund applications and more timely responses from applicants, we are also pleased to see that a reduction in the overall processing time for new fund applications has been achieved without compromising investor protection.

For the circular on the pilot program, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=16EC23

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR38

 

 

7. Defendants acquitted of unlicensed dealing

On 22 April 2016, the District Court acquitted IPFUND Asset Management Limited (IPFUND) and Mr Ronald Sin Chung Yin of charges of dealing in securities without a licence.

Background

On 31 May 2014, the SFC commenced the criminal proceedings at the Eastern Magistrates’ Court against IPFUND and its sole director and shareholder Mr Ronald Sin Chung Yin. Both pleaded not guilty to four summonses on 3 July 2014.

The SFC alleged that between February 2011 and December 2011, IPFUND and Sin, both of whom have never been licensed by the SFC, offered and disposed of interests in 16 CIS to investors. IPFUND and 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.

The Judge found that IPFUND was carrying on a business in operating 16 collective investment schemes at the relevant time. However he found that when the investors were investing in these schemes, they were in fact acquiring shares in private shell companies which held the real properties in question and as the definition of “securities” excluded shares of private companies, he held that there was no “dealing in securities”.

Comments

Readers should note that section 114 states that, no person shall carry on a business in a regulated activity, or hold himself as carrying out a business in a regulated activity except for:

  • A corporation licensed under section 116 or 117 for the regulated activity;
  • An authorized financial institution registered under section 119 for the regulated activity;
  • A person authorized under section 95(2) for the regulated activity;
  • When a person is carrying out Type 8 regulated activity by reason only of carrying on one or more activities specified in Part 3 of Schedule 5 to the SFO; or
  • Where in relation to Type 8 regulated activity, a person is only providing financial accommodation and reasonably believes that the financial accommodation is not to be used to facilitate (a) the acquisition of securities listed on a stock market (whether a recognized stock market or any other stock market outside Hong Kong), or (b) the continued holding of such securities.

Further, section 390 SFO states that where the commission of an offence under the SFO by a corporation is proved to have been aided, abetted, counselled, 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.

Therefore, readers should be aware that only those who meet one of exceptions above can conduct regulated activities. To avoid doubt, readers may find it useful to consult external compliance firms with extensive expertise in licensing such as CompliancePlus Consulting Limited.

For further details, please refer to the SFC’s press releases dated 13 January 2015 and 31 March 2015:

Unlicensed dealing prosecution transferred to District Court

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

Court sets trial date for indictable prosecution for unlicensed dealing

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=15PR34

 

 

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

 

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