Newsletter – March 2016

Content

4.  SFC publishes consultation conclusions on Principles of Responsible Ownership

On 7 March 2016, the SFC published the consultation conclusion in relation to the introduction of the Principles of Responsible Ownership, a set of principles and guidance to assist investors to determine how best to meet their ownership responsibilities.

Background

The SFC released consultation conclusions on the Principles of Responsible Ownership which aim to provide guidance on how investors should fulfil their ownership responsibilities in relation to investments in Hong Kong listed companies.

Having carefully considered all the respondents’ comments, the SFC has decided to introduce the proposed principles with minor changes, removing references to individual and retail investors from the principles.

“The Principles of Responsible Ownership describe what we perceive as best practices for share ownership and we encourage investors to adopt them,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “This can encourage an investment culture where engagement with investee companies is seen as paramount and fundamental and which in turn strengthens corporate governance.”

The principles, which are voluntary, are intended to apply to investors who invest money or hold shares on behalf of clients or stakeholders to whom they are accountable.

Investors who hold or receive funds from the public which are invested in shares of Hong Kong listed companies are encouraged to adopt the principles and to make disclosures to their stakeholders accordingly.
Investors who do not think the principles are relevant to or suitable for them are encouraged to disclose to stakeholders why they have not been adopted at the outset and what alternative measures they have put in place, if any.

The SFC will monitor the application of the principles to determine whether amendments or other changes may be necessary.

Comments

The SFC issued the Consultation Paper on the Principles of Responsible Ownership on 2 March 2015. The consultation period ended on 2 June 2015. The Principles of Responsible Ownership are available on the SFC website (http://www.sfc.hk/web/EN/rule-book/principles-of-responsible-ownership.html).

The SFC received written submissions from 56 respondents, including 11 asset management firms, eight individuals, three law firms, 10 Hong Kong listed companies and 17 societies or associations. Further representations made to the SFC by interested parties after the end of the consultation period were also reviewed and considered.

According to the Principles of Responsible Ownership, to discharge their ownership responsibilities investors should engage with the companies in which they invest to promote the long-term success of these companies; investors should: (a) establish and report to their stakeholders their policies for discharging their ownership responsibilities; (b) monitor and engage with their investee companies; (c) establish clear policies on when to escalate their engagement activities; (d) have clear policies on voting; (e) be willing to act collectively with other investors when appropriate; (f) report to their stakeholders on how they have discharged their ownership responsibilities; and (g) when investing on behalf of clients, have policies on managing conflicts of interests.

For a copy of the consultation conclusions, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=15CP2

For a copy of the consultation paper, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP2

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR23

5.  SFC bans Raaj Shah for 12 months

On 10 March 2016, Raaj Shah was banned by the SFC for 12 months following investigation of him failing to disclose all his personal accounts and not obtaining prior approval for transactions.

Background

The SFC has banned Mr Raaj J Shah from re-entering the industry for 12 months from 10 March 2016 to 9 March 2017.

The SFC investigation found that during the period from January 2009 to May 2014 Shah, a responsible officer of Matchpoint Investment Management Asia Limited (MIMAL), failed to disclose all his personal accounts and obtain prior approval for securities transactions, in breach of the staff personal trading policy of MIMAL.

Shah circumvented MIMAL’s employee trading policies which meant that MIMAL was not able to monitor his personal trading activities. The SFC considers Shah’s conduct, which fell short of the standards required of him, calls into question his fitness and properness to be a licensed person.

Comment

Shah was licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 9 (asset management) regulated activity. Shah was accredited to Matchpoint Investment Management Asia Limited from 4 September 2009 to 6 July 2015. Shah is currently not a licensed person under the SFO.

Readers are reminded that, under paragraph 12.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC, licensed corporations are required to implement procedures and policies on employee trading and to actively monitor the trading activities in their employees’ accounts and their related accounts.

MIMAL’s staff personal trading policy requires all employees and directors to disclose their personal accounts with outside brokers upon joining the firm. It also requires its employees and directors to obtain pre-clearance for securities transactions. Shah only managed to disclose one among three of his personal accounts and it was shown that he was aware of MIMAL’s policies on personal account dealing and his disclosure obligations as he did sought authorization for personal trades in that very account by completing a Personal Trade Authorization Request Form in accordance to the Compliance Manual.

The SFC considered Shah’s concealment of his other personal accounts as deliberate and dishonest and therefore calls into question his fitness and properness to be a licensed person.

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=16PR24&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR24

6. SFC commences MMT proceedings against Mayer Holdings Limited and its senior management over late disclosure of inside information

On 11 March 2016, the SFC commenced proceedings in the Market Misconduct Tribunal (MMT) against Mayer Holdings Limited and 10 of its current and former senior executives for late disclosure of price-sensitive information.

Background

The SFC has commenced proceedings in the MMT against Mayer Holdings Limited (Mayer) for failing to disclose price sensitive information as soon as reasonably practicable.

The SFC has also commenced proceedings in the MMT against the company’s 10 current and former senior executives for their reckless or negligent conduct causing the alleged breach by Mayer of the provisions of the statutory corporate disclosure regime.

They include Mayer’s former chairman and executive director, Mr Hsiao Ming-chih; former company secretary and financial controller, Mr Chan Lai Yin Tommy; former executive directors, Mr Lai Yueh-hsing, Mr Chiang Jen-Chin, Mr Lu Wen-yi and Mr Xue Wenge; former independent non-executive directors, Mr Huang Jui-hsiang, Mr Lin Sheng-bin and Mr Alvin Chiu; and non-executive director, Mr Li Deqiang.

The SFC found that between April and August 2012, while auditing Mayer’s financial statements for the year ended 31 December 2011, the then auditors of Mayer repeatedly communicated with Mayer’s management about issues they identified including:

• the suspicious nature of the disposal of a wholly-owned subsidiary of Mayer, for HK$15.5 million;
• Mayer did not control projects in Vietnam, which it bought for HK$620 million, and their valuations appeared to have been inflated; and
• two subsidiaries of Mayer’s jointly controlled entity had made substantial prepayments of US$10 million and US$4 million respectively without security to suppliers which appeared to be irrecoverable (collectively, outstanding audit issues).

On 23 August 2012, Mayer’s then auditors indicated that they would qualify their audit opinion for the financial statements for the year ended 31 December 2011 if the outstanding audit issues were not resolved (potential qualified audit report).

On 27 December 2012, Mayer received a resignation letter from its then auditors. But, Mayer only disclosed the auditors’ resignation together with brief details of the outstanding audit issues on 23 January 2013.

The SFC alleges that the auditors’ resignation, the outstanding audit issues together with the potential qualified audit report and the US$10 million prepayment to the supplier were specific information regarding Mayer, price sensitive and not generally known to the public at the material time. The information would also have been viewed negatively by the investors and were of sufficient gravity to affect the share price of Mayer.

Comment

Mayer was listed on the Main Board of The Stock Exchange of Hong Kong Limited (SEHK) in June 2004.  Trading in the shares of Mayer has been suspended since 9 January 2012.

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 statement of institution of proceedings, please refer to:

http://www.mmt.gov.hk/eng/rulings/Mayer.Holdings.Ltd.04032016_e.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR25

7. SFC bans Ng Hongs for 10 months

On 14 March 2016, Ng Hongs was banned by the SFC for 10 months after being found failing to obtain senior management’s approval before entering into discretionary arrangement with client.

Background

The SFC has banned Mr Ng Hongs, a former account executive of China Merchants Securities (HK) Co., Limited (CMSHK), from re-entering the industry for 10 months from 12 March 2016 to 11 January 2017 for breach of the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”).

The SFC found that Ng obtained a written authorization from his client which authorized him to conduct trades on a discretionary basis in the client’s account. He did not, however, obtain CMSHK’s management approval before entering into such arrangement with the client and effected transactions for the client on a discretionary basis between August 2010 and September 2011 without CMSHK’s knowledge.

The SFC considers that the client’s interests were prejudiced as Ng’s failure deprived the client from the firm’s protection on discretionary account. A written authorization which was signed by the client without the firm’s knowledge and approval did not offer the client any protection as the client’s securities account was not designated as a discretionary account by the firm and the operation of the client’s securities account could not be properly monitored and supervised by the firm.

Comments

Ng was 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 was accredited to China Merchants Securities (HK) Co., Limited and China Merchants Futures (HK) Co., Limited from 5 August 2010 to 25 February 2013. Ng is currently not licensed by the SFC.

Readers are reminded that, under paragraph 7.1 of the Code of Conduct, a licensed person is required to (a) obtain the client’s written authorization for operating a discretionary account; (b) confirm at least on an annual basis whether the client wishes to revoke such authority; (c) designate such account as a discretionary account; and (d) obtain senior management’s approval for opening the discretionary account.

As a licensed representative, Ng breached paragraphs 7.1(c) and (d) of the Code of Conduct as he failed to obtain CMSHK’s management approval before entering into discretionary arrangement with the Client.

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=16PR26&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR26

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