Newsletter – September 2014

Newsletter – September 2014

  1. SFC commences proceedings against CITIC, its former chairman and executive directors
  2. SFC suspends Eric Shum Kam Chi for three years for sponsor failures
  3. SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters
  4. SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements
  5. Court convicts unlicensed investment portfolio manager

1.  SFC commences proceedings against CITIC, its former chairman and executive directors

On 11 September 2014, the Securities and Futures Commission (“SFC”) has instituted proceedings in both the Court of First Instance (“CFI”) and the Market Misconduct Tribunal (“MMT”) against CITIC Limited (“CITIC”), formerly known as CITIC Pacific Limited, and five of its former executive directors, namely chairman Mr Larry Yung Chi Kin, managing director Mr Henry Fan Hung Ling, deputy managing directors Mr Leslie Chang Li Hsien, Mr Peter Lee Chung Hing, and executive director Mr Chau Chi Yin (“the five directors”).

The allegations

The SFC alleged that CITIC and the five directors engaged in market misconduct involving disclosure of false or misleading information on CITIC’s financial position arising from the massive losses incurred by CITIC over its investment in leveraged foreign exchange contracts in 2008 contrary to sections 227 or 298 of the Securities and Futures Ordinance (“SFO”). Both market misconduct provisions prohibit the distribution of materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to have a price effect on the company’s securities.

According to the SFC, CITIC issued a circular on 12 September 2008 that contained a false or misleading statement about its financial position (“the Circular”). The Circular was published on the Stock Exchange of Hong Kong Limited (“SEHK”) listed company announcement system on the Hong Kong Exchanges and Clearing Limited (“HKEx”) website on 12 September after market close, and was distributed to its shareholders on 16 September 2008. It concerned an unrelated transaction and disclosed that “the Directors are not aware of any adverse material change in the financial or trading position of the Group since 31 September 2007”. However, in a market announcement on 20 October 2008, CITIC disclosed that it suffered a massive realised and mark to market loss up to that date arising from a number of leveraged foreign exchange contracts which CITIC had entered into to manage currency risk of its Australian iron ore mining project exposure (“the Profit Warning”). The SFC therefore alleges that the five directors were aware of the huge financial exposure arising from those contracts on 7 September 2008, before the Circular was issued.

The prices of CITIC shares, which were suspended from trading on 20 October 2008 before the Profit Warning, fell 55% from HK$14.52 to close at HK$6.52 on 21 October 2008 when trading resumed.

Relief sought

The SFC is seeking restoration or compensation orders under section 213 of the SFO in the Court of First Instance to compensate or restore the pre-transaction positions of up to 4,500 investors who purchased CITIC shares between the date on which the SFC alleges the false or misleading information was announced and the date on which the true financial position was disclosed. The SFC is also seeking for CITIC and the five directors to be sanctioned by the MMT.

The amount that CITIC may be required to pay will need to be the subject of assessment by the CFI if liability is established.  It may depend on variables such as the total purchases during the relevant period, the purchaser’s acquisition price, sale price, or whether the purchaser continues to hold shares.


Under the market misconduct provisions of the SFO, licensed persons are prohibited from distributing materially false or misleading information that is likely to induce another person to subscribe for or buy securities or is likely to materially affect the price on the relevant securities. It is therefore important that licensed individuals and ensure at all times that promulgated information is accurate.

If a licensed person is found guilty of market misconduct provisions, he may thus not be considered fit and proper to continue being licensed. Pursuant to Paragraph 7.1 of the Fit and Proper Guidelines, a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty, misfeasance or other market-related crimes, or even by the SFC’s findings in the absence of an unfavourable court’s finding.

Readers should also note that this case will be very significant in establishing precedent governing the calculation of what may be required to restore a shareholder who has traded in a market affected by false or misleading information.

For details, please refer to the SFC articles:

2.  SFC suspends Eric Shum Kam Chi for three years for sponsor failures

On 16 September 2014, the SFC suspended Mr Eric Shum Kam Chi (“Shum”) as a representative in all regulated activities and withdrawn approval for him to act as a responsible officer for three years from 15 September 2014 to 14 September 2017 for serious deficiencies in the sponsor work relating to the listing of Sino-Life Group Limited (“Sino-Life”) on the Growth Enterprise Market (“GEM”) of the SEHK. Mr Shum was previously a responsible officer and sponsor principal of Sun Hung Kai International Limited (“Sun Hung Kai International”) which acted as the sole sponsor for Sino-Life.


On 27 January 2014, the Securities and Futures Appeals Tribunal (“SFAT”) affirmed the decision of the SFC to sanction Sun Hung Kai International. It took disciplinary action by reprimanding the company, fining it HK$12 million, and suspending its licence to provide advisory service on corporate finance for one year.

An SFC investigation revealed that Sun Hung Kai International had failed to conduct proper due diligence between October 2007 and September 2009 on Sino-Life’s business in relation to a number of material issues, and had placed undue reliance on the work delegated to external experts.

It was discovered that Sun Hung Kai International’s regulatory breaches were attributable to Shum who failed to discharge his duties as its senior management. The SFC found that as head of the firm’s transaction team, Shum had failed to:

  • assess the accuracy and the completeness of the information submitted by Sino-Life to demonstrate that it had satisfied the financial requirements to list on the GEM;
  • ascertain the existence of various encumbrances on the title of a major business deal of Sino-Life in Taiwan;
  • properly assess the business of Sino-Life’s wholly-owned subsidiary in Taiwan;
  • ensure true, accurate and complete disclosure was made to the SEHK and in Sino Life’s Prospectus and sponsor declaration; and
  • keep proper books and records in relation to the sponsor work conducted.

Shum originally sought to review the SFC’s decision at the SFAT, but withdrew his application before the SFAT hearing.

The Penalty

In deciding the penalty, the SFC took into account:

  • the fact that although Shum had knowledge of the fact that Sun Hung Kai International was selective in its disclosure to the SEHK during the listing process, he still signed the sponsor declaration announcing that all information submitted to the SEHK was true, accurate and complete to his knowledge; and
  • Shum’s otherwise clean disciplinary record.


In failing to discharge his duties as senior management, Shum had breached the regulatory requirements under the Code of Conduct, which requires a licensed individual to exercise due skill, care and diligence (General Principle 2), ensure the maintenance of appropriate standards of conduct and adherence to proper procedures (General Principle 9) and diligently supervise subordinates and sponsor work undertaken by the firm (Paragraph 4.2). This reflects negatively on an individual’s fitness and properness to be licensed, under Paragraph 7.1 of the Fit and Proper Guidelines and could lead to serious consequences such as fines, suspension and revocation of a SFC licence. Readers should therefore note that consistently reviewing internal controls and procedures is extremely important to maintain a high standard of diligence and integrity in order to avoid breaching regulatory requirements particularly those relating to responsible officer.

For details please refer to:

3.  SFC publishes annual review of the Stock Exchange of Hong Kong’s performance in regulating listing matters

On 19 September 2014, the SFC published its annual review of the SEHK’s performance in its regulation of listing matters during 2013

In Government’s Consultation Conclusions on Proposals to Enhance the Regulation of Listing published in March 2004, the Government recommended that the SFC should prepare annual reports on its reviews regarding SEHK’s performance of its listing functions.

In this year’s annual report, the SFC found that the operational procedures and decision-making processes reviewed were appropriate in enabling the SEHK to discharge its statutory obligations in maintaining an orderly, informed and fair market. The SFC also identified certain areas for the SEHK to focus on in enhancing its performance.

For full report, please visit:

For details please refer to:

4.  SFC publishes consultation conclusions on amendments to professional investor regime and further consults on client agreement requirements

On 25 September 2014, the SFC released consultation conclusions on the proposed amendments to the professional investor regime and launched a further consultation on client agreement requirements


On 15 May 2013, the SFC issued a consultation paper on proposed amendments to the professional investor regime and the client agreement requirements. After reviewing all the comments received during the consultation, the SFC has decided to proceed with the proposal not to allow intermediaries when serving individual professional investors to be exempt from the suitability requirement and other fundamental requirements that have a significant bearing on investor protection under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code”).

The Suitability Requirement

The suitability requirement is the pillar of the Code and ensures the suitability of a recommendation or solicitation for a client is reasonable in all circumstances. The other fundamental requirements inherently linked with the suitability requirement or that have significant bearing on the Code include, among other things, the need to disclose certain transaction related information, the need to enter into a written agreement and the provision of relevant risk disclosure statements. Mr Ashley Alder, the SFC’s Chief Executive Officer, said that in arriving at a balanced outcome, the SFC considered the views of respondents carefully to ensure that individual investors who are classified as professional investors are adequately protected.

Other features

Other features of the revised professional investor regime include:

  • individual professional investors and corporate professional investors will continue to be allowed to participate in private placement activities;
  • the minimum monetary threshold for qualifying as individual professional investors and corporate professional investors will be maintained at the current levels (under the Securities and Futures (Professional Investor) Rules, the minimum portfolio threshold for individual professional investors is HK$8 million and the minimum total assets threshold for corporate professional investor is HK$40 million); and
  • a principles-based criteria that will replace the specific tests now used to assess whether exemptions to the Code requirements apply when intermediaries serve corporate professional investors. For the purposes of clarification, the SFC will publish frequently-asked-questions on the assessment criteria, which will apply to investment vehicles owned by individual professional investor and by family trusts. If investment vehicles can satisfy the assessment criteria, intermediaries serving them can be exempt from the suitability requirement.

Implementation and Further Consultation

The amendments relating to the professional investors regime will become effective on 25 March 2016, and a separate internal study of the suitability requirement, including the gathering of industry views, will be conducted in due course.

Furthermore, in response to market feedback, the SFC has modified its proposals on client agreement requirements and now seeks to further consult the public on the wording of a proposed new clause to be incorporated into all client agreement as a contractual term. The SFC will provide intermediaries with further guidance on the description of actual services in their client agreements, and proceed with the proposed Code amendments that provide that client agreements should not contain terms which are inconsistent with the obligations under the Code or mis-describe the actual services provided to the client. All proposals relating to client agreement requirements will take effect on a date specified when the further public consultation of the proposed new clause is concluded.

The SFC is inviting the public to submit their comments on or before 24 December 2014 in relation to the proposed new clause. Written comments may be sent via the SFC website (, by email to, by post or by fax to 2284 4460.


In preparation for the new regime, readers may submit their comments regarding both the suitability requirement and the proposed new clause. Intermediaries may find it useful to adopt the SFC’s suggestions regarding client agreements to ensure that they remain in compliance with their obligations under the Code and do not provide misleading information to the client. In particular, the revised regime’s new principle-based criteria may be particularly useful to intermediaries with investment vehicle clients, to assess whether they may be exempted from the suitability requirement.

To see the full consultation paper, please see:

For further details, please refer to:

5.  Court convicts unlicensed investment portfolio manager

On 26 September 2014, the Eastern Magistrates’ Court convicted Mr Tam Kwok Pui of providing asset management service without obtaining a licence from the SFC


An investigation by the SFC found that between 1 March 2011 and 31 August 2012, Tam, whilst unlicensed, recruited a client through an investment seminar he organised and provided the client with asset management services which included managing a portfolio of securities and futures contracts for the client. The services he provided required him to satisfy the SFC that he was fit, proper and competent in asset management. He never sought SFC’s approval and was thus not authorized to provide these services.


Tam pleaded guilty and was fined HK$10,000 for the offence. The court also ordered him to pay the SFC’s investigation costs.


Pursuant to section 114 of the SFO, it is an offence to carry on a business of providing asset management services or other regulated activities without a licence from the SFC. To obtain a Type 9 licence for asset management, an individual must prove that he is fit and proper in compliance with the Fit and Proper Guidelines, and has the requisite competence to provide the relevant regulated services. To secure SFC licences, prospective licensees may seek advice from independent compliance consultants such as CompliancePlus.

Investors may also check the SFC’s Public Register of Licensed Persons and Registered Institution on the SFC website ( to ensure that people who provide asset management services are properly licensed.

For details, please refer to:

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

Receipt of this newsletter indicates that CompliancePlus has been using your email address to market to you the compliance services that CompliancePlus is able to provide you.

CompliancePlus provides compliance consulting services to financial companies, hedge fund managers and individuals. Our dedicated team of compliance officers has years of professional experience equipped with in-depth knowledge of both functional and compliance experience in managing and minimizing regulatory, operational and reputational risks. By partnering with CompliancePlus, our clients gain access to compliance solutions that they can trust and the latest knowledge of regulatory policies and procedures.

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

To subscribe, update your email address or unsubscribe, please email