Newsletter – June 2015
- SFC statement on Hanergy Thin Film Power Group Limited
- SFC reprimanded BNP Paribas Securities (Asia) Limited HK$11 million for failing to report cross trades to the Stock Exchange
- SFC banned Yu Chun Chieh for life for misappropriating client’s money
- SFC concluded consultation on supervisory assistance to regulators outside Hong Kong
- SFC reprimanded and fined Phillip Securities (Hong Kong) Limited HK$1 million over mis-selling of investment product
- Lo Chun Lam convicted of unlicensed futures contracts business
- Former licensee given community services and cold shoulder order for false trading
- SFC statement on the SEHK’s draft proposal on weighted voting rights
1. SFC statement on Hanergy Thin Film Power Group Limited
On 28 May 2015, the Securities and Futures Commission (“SFC”) issued a statement on Hanergy Thin Film Power Group Limited in accordance with the SFC’s Disclosure Policy given the public interest following reports denying such measures have been taken.
The SFC wishes to clarify that a formal investigation into the affairs of Hanergy Thin Film Power Group Limited has been active and is continuing.
The SFC will make no further comment about the investigation.
For details, please refer to:
2. SFC reprimanded BNP Paribas Securities (Asia) Limited HK$11 million for failing to report cross trades to the Stock Exchange
On 1 June 2015, the SFC reprimanded and fined BNP Paribas Securities (Asia) Limited (“BNP”) a total of HK$11 million for its failures to report its direct business transactions (“cross trades”) to The Stock Exchange of Hong Kong Limited (“SEHK”) over a 10-year period.
Background
The SFC’s investigation found that BNP failed to report a total of 4,443 pairs of cross trades to the SEHK involving a total of over HK$6 billion worth of shares conducted by BNP from December 2002 to January 2013. BNP’s reporting failures breached the trading requirements of the SEHK and the Code of Conduct.
As a licensed corporation, BNP also failed to employ effectively resources and procedures needed for the proper performance of its business, including the failure to provide the dealers responsible for the reporting at BNP with sufficient resources to enable them to discharge their reporting duties. The SFC considered that BNP’s failures were particularly serious as they lasted for an extended period of time and involved a large number of trades.
Mr. Mark Steward, the Executive Direct of Enforcement of the SFC, said, “This case demonstrates that reporting failures cannot be taken lightly. This is because market transparency and displaying accurate information to the investing public are essential not only to aid informed investment decisions but also to maintain a fair and orderly market.”
Comment
Readers should note that pursuant to General Principle 7 and paragraph 12.1 of the Code of Conduct, a licensed person should comply with all regulatory requirements applicable to the conduct of its business, including the rules of any exchange of which it is a participant.
In this case, the relevant rules applicable to BNP includes Rule 526 of the Rules of the Exchange, which requires Exchange Participants to report cross trades to the SEHK within specific timeframes. Furthermore, pursuant to General Principles 2 and 3 of the Code of Conduct, licensed persons or corporations are required to conduct their business activities with due skill, care and diligence, in the best interests of its clients and the integrity of the market, employ adequate resources and adopt effective procedures which are needed for the proper performance of its business activities. Paragraph 4.2 of the Code of Conduct also requires licensed corporations to supervise diligently persons employed by it to conduct business on its behalf. Failure to comply with the abovementioned rules may reflect adversely on the fitness and properness of the licensed individual or corporation to remain licensed, and could lead to suspension or revocation of a license. Therefore, readers may find it beneficial to consult external compliance firms to ensure that such rules are complied with.
For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR57
3. SFC banned Yu Chun Chieh for life for misappropriating client’s money
On 2 June 2015, the SFC banned Mr Yu Chun Chieh (“Mr Yu”), a former licensed representative, from re-entering the industry for life for misappropriating an investor’s money and misleading him with false account statements.
Background
In around May 2013, Mr Yu persuaded a Taiwan-based investor to deposit money for fund investment into Mr Yu’s private bank account in Hong Kong on the false basis that a bank account in Hong Kong was needed to open a securities account with his employer, a licensed corporation. Mr Yu claimed that he will return the money to the investor after the securities account is opened.
The investor subsequently transferred around HK$3.9 million into Mr Yu’s bank account which Mr Yu then misappropriated by transferring the money to another private account in Taiwan. None of the moneys were used to open any securities account or to acquire securities for the investor. To cover up his misconduct, he falsified account statements with his firm’s letterhead to mislead the investor into believing that the money was invested in the funds as agreed. The SFC considers that Mr Yu’s dishonest conduct calls into serious question his fitness and properness to be a licensed person and decided to ban him for life.
Comment
General Principle 1 of the Code of Conduct states that a licensed or registered person “should act honestly, fairly and in the best interests of its clients and the integrity of the market.” Specifically, representations and information to clients should be accurate and not misleading. Failure to adhere to the Code of Conduct could call into question the person’s fitness and properness to remain licensed, and could lead to suspension or revocation of a SFC license.
Furthermore, such conduct could be charged as theft under section 9 of the Theft Ordinance (Cap. 210), which is a criminal offence. Upon conviction, a person who commits theft could be liable to imprisonment for up to 10 years.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR58
4. SFC concluded consultation on supervisory assistance to regulators outside Hong Kong
On 5 June 2015, the SFC released consultation conclusions on proposed amendments to the Securities and Futures Ordinance (“SFO”) for providing assistance to regulators outside Hong Kong.
Background
On 19 December, the SFC issued the Consultation Paper on Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations for public consultation until 16 January 2015.
After considering the comments of all the respondents, the SFC has decided to propose legislative changes to enable the SFC to provide a particular form of supervisory assistance to regulators outside Hong Kong upon request by making enquiries and obtaining certain records and documents from licensed corporations or their related corporations. These proposed amendments relate to sections 180 (in respect of supervisory powers of the SFC) and 186 (in respect of assistance that may be provided by the SFC to regulators outside Hong Kong) of the SFO. The proposed supervisory assistance will be subject to both existing and new legislative safeguards.
These proposals will also enhance the SFC’s ability to enter into reciprocal supervisory arrangements with regulators outside Hong Kong that will include two-way exchanges of relevant supervisory information. The proposed amendments will give the SFC discretion to provide supervisory assistance to a regulator outside Hong Kong but will not impose an obligation to do so. Information obtained in this manner may only be used for non-enforcement purposes. It should also be noted that while the proposals are incremental to the SFC’s existing information gathering powers, they do not alter existing positions regarding legal professional privilege or privilege against self-incrimination.
Comment
The purpose of the proposed amendments are to enable to the SFC to adhere more closely to international regulatory standards, and to perform more effective supervision of licensed corporations which operate in multiple jurisdictions. Global supervisory cooperation is considered very important among international regulators as it assists regulators to better assist the financial and regulatory risks of industry participants and their likely effects on investors.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR60
5. SFC reprimanded and fined Phillip Securities (Hong Kong) Limited HK$1 million over mis-selling of investment product
On 16 June 2015, the SFC reprimanded and fined Phillip Securities (Hong Kong) Limited (“Phillip Securities”) HK$1 million for failings over its sale of a fund to four clients
Background
An SFC investigation revealed that Phillip Securities sold the American Pegasus Fixed Income Fund – Series II Segregated Portfolio to the four clients around August 2004, involving transaction amount of approximately HK$819,000. The fund was liquidated in July 2011 and the clients have not been able to recover their investment. The American Pegasus Fixed Income Fund – Series II Segregated Portfolio is a viatical settlement which invested in senior life settlement insurance policies issued by investment grade insurance companies in the United States. It is not a product authorised by the SFC. In June 2010, investors were notified that the fund would be wound up as it did not have sufficient value to continue to pay life insurance policy premiums until the expected maturity of the life settlement policies held by it. The fund was placed into official liquidation under Cayman Islands law in July 2011.
The SFC therefore found that Phillip Securities had failed to:
- conduct adequate due diligence on the fund before selling it to clients;
- provide adequate training and/or sufficient product information to its sales staff to ensure they fully understand the nature of the fund, risks involved, and for which types of investors the fund would have been suitable; and
- implement sufficient measures to ensure that its sales staff had assessed the suitability of the fund to clients, and to monitor and review the selling process.
In addition to the fine, Phillip Securities has also agreed to repurchase the fund from the clients at the principal amount less dividends plus interest if the amount had been invested in a 12-month fixed term deposit over the same period of time.
In deciding the sanction, the SFC took into account that Phillip Securities had co-operated with the SFC in resolving the disciplinary proceedings.
Comment
Pursuant to General Principles 2 and 5, and paragraphs 3.4 and 5.2 of the Code of Conduct, licensed corporations are required to ensure that, through the exercise of due diligence, their investment recommendations are based on thorough analysis and are reasonable in all the circumstances, and relevant material information was disclosed to clients.
Furthermore, General Principle 7 and paragraphs 4.3 and 12.1 of the Code of Conduct require licensed corporations to implement and maintain measures appropriate to ensuring compliance with relevant regulatory requirements and internal control procedures to protect their clients from financial losses arising from professional misconduct or omissions. Paragraph 4.2 of the Code of Conduct supplements this by requiring a licensed corporation to ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed by it to conduct business on its behalf. Therefore, it may be useful to consult external compliance firms to implement comprehensive checks and procedures to ensure such requirements and always complied with.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR65
6. Lo Chun Lam convicted of unlicensed futures contracts business
On 17 June 2015, the Eastern Magistrates’ Court convicted Mr. Lo Chun Lam (“Mr. Lo”) of carrying on a business of advising futures contracts when he was not licensed by the SFC to do so.
Background
The court found that between May and August 2013, Mr Lo gave advice on futures contracts in the name of “Cat Sir” or “Trader Cat” to subscribers who had paid to join private discussion groups he had set up in Facebook and LINE, a smartphone application. Subscribers paid fees of HK$3,750 in order to access the private discussion groups for three months. Mr Lo, who pleaded guilty, was fined HK$7,500 and was ordered to pay the SFC’s investigation costs.
Comment
According to section 114 of the a person who carries on a business in a regulated activity or holds himself out as carrying on a business in a regulated activity commits an offence unless he has obtained a license from the SFC. Readers who are unsure of how to apply for licenses and which license to apply for should consult external compliance firms specializing in licensing.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR62
7. Former licensee given community services and cold shoulder order for false trading
On 19 June 2015, the Kowloon City Magistrates’ Court sentenced Mr Wong Chun (“Mr Wong”) to a statutory maximum of 240 hours of community service and imposed a cold shoulder order against him for two years for false trading in the shares of Sino-Tech International Holdings Limited (“Sino-Tech”).
Background
On 27 May 2015, the Eastern Magistrates’ Court convicted Mr. Wong of false trading in respect of the shares of Sino-Tech. 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
Mr. Wong was remanded in custody pending the sentencing on 19 June 2015, after he was found guilty. The Court also ordered Mr. Wong to pay to the SFC’s investigation costs.
Comment
Under section 303(2)(b) of the SFO, where a person is convicted of an offence under the SFO, the court may, in addition to any penalty, make an order that the person shall not, without the leave of the court, 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 the period (not exceeding five years) specified in the order. Such order may last for up to 5 years. Persons who are subject to cold shoulder order will be registered on the SFC website under “Current Cold Shoulder Orders”.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR67
8. SFC statement on the SEHK’s draft proposal on weighted voting rights
On 25 June 2015, the SFC issued the statement in relation to the SEHK draft proposal on weighted voting rights (“WVR”).
Background
The SEHK’s Consultation Conclusions on WVR published on 19 June 2015 outlined some of the relevant features of the draft proposal for a second stage consultation on WVR. The SFC has considered a more detailed version of the proposal.
The Board of the SFC has unanimously concluded that it does not support the draft proposal for primary listings with WVR structures.
The Board of the SFC’s views are set out below.
Eligible applicants would be required to have a very high expected market capitalization:
- Size offers no assurance that a company would treat its shareholders fairly. Any corporate misconduct by an issuer with a large market capitalisation will likely affect more investors and have a greater impact on our markets. For example, these issuers are more likely to become index components which will compel index funds and other types of “passive” institutional investors (which invest public money) to buy and hold their stocks even if fund managers disagree with their WVR structures.
The SEHK would expect eligible applicants to have certain features relating to their businesses and the contribution of their founders as identified in a set of “enhanced suitability” criteria:
- The SFC has significant concerns about these proposals that require regulators to assess compliance with the criteria for companies to be eligible for WVR (for example, whether the applicant has some unique features that cannot be easily replicated and are likely to provide a sustainable competitive advantage, as well as the contribution of the founder or founders). Such criteria can only be applied subjectively and are therefore inherently vague. A regime that relies on the subjective judgement of regulators to determine which listing applicants are eligible for WVR would give rise to regulatory uncertainty and could result in inconsistent and unfair decision-making. The SFC is opposed to proceeding on this basis.
WVR structures would be permitted for new listing applicants only (with appropriate anti-avoidance measures):
- The SFC is of the view that Hong Kong’s securities markets and reputation would be harmed if WVR structures became commonplace. Among other things, the SFC considered whether the draft proposal justifiably restricts the extent to which WVR structures would be permitted and whether there were effective measures to prevent circumvention of these restrictions by ineligible applicants.
- For example, the draft proposal limits WVR structures to new applicants only. This means that existing listed companies and future issuers that list without WVR structures would not be permitted to adopt such structures. For this feature to work, there must be effective measures to prevent ineligible issuers from bypassing the limitation through arrangements such as spin-offs, assets transfers or other forms of corporate restructuring. The SFC has significant concerns regarding the effectiveness of anti-avoidance provisions proposed by the SEHK.
- It is insufficient to look only at controlling the number of WVR issuers. The SFC is concerned, for example, with the potential impact of acquisitions of existing listed assets by WVR issuers. Unrestricted, post-listing transactions could over time result in the transfer of a significant proportion of existing listed businesses and assets to WVR structures. In the SFC’s view, such a development would be detrimental to our markets and the interests of the investing public generally.
- Separately, the draft proposal does not explain how many proposed safeguards and conditions (for example, whether a founder remains actively involved in management) can be monitored on an ongoing basis and what actions can be taken either by regulators or by public shareholders if they are not complied with.
A focus of the discussion to date on WVR has been competition from the United States for the listing of Mainland China businesses. Hong Kong’s business and competitive environment is affected by many factors and can change significantly within a relatively short period. In carrying out its regulatory functions, the SFC considers both long term and short term objectives and seeks to uphold the core principles of fairness and transparency which underpin Hong Kong’s reputation as an international financial centre.
The Board of the SFC has noted the extensive local and international public debate on and widespread coverage of the WVR issue over many months and has discussed the importance of Hong Kong’s reputation as an international financial centre. Against this background, the Board decided that it is in the public interest to issue this statement.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR69
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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