Regulatory News (Nov 2015)
/in Regulatory News /by Tony Chan- SFC proposes to expand short position reporting
- Market Misconduct Tribunal hands down decision on Asia TeleMedia Limited case
- SFC signs MoU with ESMA on cooperation arrangements and exchanges of information on derivatives contracts reported to trade repositories
- SFC proposes changes to the ATS Guidelines
- SFC bans Gong Yueyue for 15 years
- SFC moves to paperless individual licences
- Licence applicant convicted of providing false information to SFC
- SFC welcomes appointment of Non-Executive Directors
- SFC obtains court order to freeze $23.5 million assets of Maxim Capital Limited
- Launch of SFC Women’s Network
- Market Misconduct Tribunal dismisses application by Andrew Left of Citron Research
- SFC reprimands and fines Okasan International (Asia) Limited $4 million
Newsletter – October 2015
/in Newsletter /by Tony Chan- Joint HKMA-SFC consultation on mandatory clearing and reporting for OTC derivatives market
- SFC obtains disqualification orders against former chairmen and chief executive officer of First China Financial Network Limited
- SFC bans Wong Chun for eight years over false trading
- SFC launches pilot initiatives to enhance fund authorization process
- SFC bans Chan Chi Yuen for 18 months
- SFC bans Masashi Yonezawa for 30 months
- SFC bans Ko Shu Chuan for six years
- SFC bans Wong Sze Yiu for six months
1. Joint HKMA-SFC consultation on mandatory clearing and reporting for OTC derivatives market
On 30 September 2015, the Hong Kong Monetary Authority (“HKMA”) and the Securities and Futures Commission (“SFC”) jointly issued a consultation on introducing the first phase of mandatory clearing and the second phase of mandatory reporting under the new over-the-counter (“OTC”) derivatives regime.
Background
The joint consultation paper aims to consult the market on: (1) introducing mandatory central clearing to mandate the clearing of certain standardised interest rate swaps entered into between major dealers; and (2) expanding the existing mandatory reporting regime so that it covers all OTC derivatives, and requires the reporting of certain additional transaction information.
The first phase of mandatory clearing aims to mandate the clearing of certain standardised interest rate swaps entered into between major dealers. The key proposals identify: (1) the types of transactions that will be subject to mandatory clearing; (2) the persons who will be subject to the clearing obligation and in what circumstances; (3) the exemptions and reliefs that may apply and (4) the process for designating central counterparties for the purposes of the clearing obligation
The second phase of mandatory reporting aims to expand the existing reporting regime. Our key proposals include requiring the reporting of transactions in all OTC derivative products, widening the scope of transaction information to be reported, including requiring the reporting of daily valuations and identifying the specific data fields to be completed under the expanded reporting regime.
Interested parties are invited to submit comments to the HKMA or the SFC by:
- 31 October 2015 in respect of matters other than the proposed data fields, and
- 30 November 2015 in respect of the proposed data fields.
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=15CP4
For a copy of the abovementioned joint consultation paper, please visit:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP4
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR90
2. SFC obtains disqualification orders against former chairmen and chief executive officer of First China Financial Network Limited
On 2 October 2015, the SFC obtained disqualification orders in the Court of First Instance (the “Court”) against three former directors of First China Financial Network Holdings Ltd (“First China”): Mr Wang Wenming (“Mr Wang”), former Chairman, Mr Lee Yiu Sun (“Mr Lee”), former Chief Executive Officer, and Mr Richard Yin Yingneng (“Mr Yin”), Mr Wang’s predecessor.
Background
Mr Wang, Mr Lee and Mr Yin have been disqualified from being a director or being involved in the management of any listed or unlisted corporation in Hong Kong, without leave of the Court, for seven, five, and four years respectively. The disqualification order made against Mr Wang and Mr Lee took effect on 21 October 2015. The disqualification order made against Mr Yin took effect on 30 September 2015.
The SFC alleged that Mr Wang, Mr Lee and Mr Yin dishonestly breached their duties to First China by either concocting or lending support for the concoction of a non-existent oral agreement called the mutual understanding and agreement (“MUA”) that purportedly required First China to distribute a dividend of RMB18,692,000 to Fame Treasure Ltd, the seller of a company acquired by First China in 2007, which Mr Wang was a majority shareholder.
The Court made the disqualification orders after finding that the MUA was a concoction and that the clarification announcement issued by First China on 16 December 2008 which stated that the MUA requiring the distribution was false or misleading in a material particular.
Earlier this year the Court ordered that Mr Wang, Mr Lee and Mr Yin to repay First China a total sum of RMB18,692,000, being the amount they caused First China to distribute to Fame Treasure Limited on the basis that the MUA existed. First China has received this money from Mr Wang.
Comment
Under section 214 of the Securities and Futures Ordinance (“SFO”), the SFC can apply to the Court by petition for an order if it appears that corporation had conducted its business or affairs in a manner involving defalcation, fraud or other misconduct. Upon conviction, the Court may make orders disqualifying a person from being a company director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR93
3. SFC bans Wong Chun for eight years over false trading
On 8 October 2015, the SFC has banned Mr Wong Chun (“Mr Wong”), a former licensed representative, from re-entering the industry for eight years following his earlier conviction and sentencing for false trading in the shares of Sino-Tech International Holdings Limited (“Sino-Tech”).
Background
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 Wong were able to off-load more than 200 million shares, making a gross profit of more than $2 million that he would otherwise not be able to do so.
Comment
Market manipulation commonly includes the release of false or misleading information; the taking up of wash sales from one another within a certain trading period to increase the turnover of the stock or distort the actual share price; the placing of purchase orders at slightly higher prices or sale orders at lower prices to drive up or suppress the price of the securities when the market just opened (marking the open) and the drying up of stocks supply to exert undue upward price pressure on the stocks (cornering shares).
False trading takes place when a person does anything or causes anything to be done with the intention to create a false or misleading appearance of active trading in securities or futures contracts traded on a relevant recognized market, or by means of authorized automated trading services.
Readers should note that false trading is a form of market manipulation. It is a criminal offence and is a category of market misconduct under the SFO subject to severe punishment. Any SFC licensee found to have taken part in market manipulation may have their license suspended or revoked.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR95
4. SFC launches pilot initiatives to enhance fund authorization process
Background on Revamped Process initiative
Both initiatives will be implemented on 9 November 2015 for a six-month pilot period after which refinements may be made before the initiatives will be adopted as policy.
Under the Revamped Process, new fund applications will be bifurcated into two streams, namely “Standard Applications” and “Non-standard Applications”, with a view to promoting fund providers’ self-compliance and reducing the overall processing time without compromising investor protection. Under this approach, “Standard Applications” will be fast-tracked with an aim that SFC authorization (if granted) will be given on average between one to two months from the take-up date of the applications. “Non-standard Applications” will be processed under an enhanced process with an aim that SFC authorization (if granted) will be given on average within two to three months from the take-up date of the applications.
In formulating the Revamped Process, advice from a technical working group comprising industry stakeholders had been taken into account in devising a set of minimum disclosure requirements for offering documents and compiling a streamlined New Information Checklist.
“An authorization process that is more efficient and focuses more on key risks can meet the fund providers’ wish to reduce the ‘time to market’ of their funds for public offering,” the SFC’s Executive Director of Investment Products, Ms. Julia Leung said. “To achieve this, we need applicants to provide proper and quality submissions at the time of application and throughout the application process in a timely manner,” she added.
For further background information and details on the Revamped Process to be adopted by the SFC in processing new fund applications and the associated transitional arrangements, please refer to the SFC’s circular dated 9 October 2015 entitled “Launch of pilot revamped fund authorization process”:
http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=15EC49.
Readers should note there are also important links to the new minimum disclosure requirements for offering documents, the streamlined New Information Checklist and the Frequently Asked Questions on the Revamped Process within the abovementioned circular.
Requirements for Offering Documents:
http://www.sfc.hk/web/EN/files/PCIP/FAQ/Guide_for_UT_MF_Applications.pdf
Information Checklist:
http://www.sfc.hk/web/EN/forms/products/forms.html
Frequently Asked Questions:
Background on MPF and PRF initiative
Separately, a six-month application lapse policy will be applied to applications for new MPF and PRF products seeking SFC authorization following consultations with the Mandatory Provident Fund Schemes Authority (“MPFA”) and key industry stakeholders. This will bring the authorization process of these products in line with the six-month application lapse period currently applied to other SFC-authorized investment products in order to enhance the overall efficiency of the authorization process.
For further details regarding the six-month application lapse policy to be applied to MPF and PRF products, please refer to SFC’s circular dated 9 October 2015 entitled “Application lapse policy”:
http://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=15EC50.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR96
5. SFC bans Chan Chi Yuen for 18 months
Background
The disciplinary action follows Mr Chan’s conviction in 2013 for illegal short selling. The SFC found that Mr Chan also concealed his beneficial interest and personal trades conducted in his wife’s account from the licensed corporation that he was accredited to, including his illegal short selling activities. In addition, he failed to disclose the accounts of his wife and two sisters maintained with the licensed corporation between 2008 and 2011. His conduct was in breach of the internal policy of the licensed corporation.
As a result of Mr Chan’s concealment, he was able to circumvent the licensed corporation’s monitoring of the trades conducted by him in his wife’s account, making it impossible for the licensed corporation to detect his illegal short selling activities.
The SFC concluded that Mr Chan was guilty of misconduct, calling into question his fitness and properness as a licensed person. In determining the penalty, the SFC took into account all the circumstances, including Chan’s conduct was dishonest and intentional, his guilty plea to illegal short selling and the resulting fine imposed on him.
Comment
The implementation of the internal policy on employee trading is a regulatory requirement imposed on licensed corporations under paragraph 12.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”). Licensed corporations are also obliged to actively monitor the trading activities in their employees’ accounts and their related accounts in order to detect any potential conflict of interest and/or other malpractices arising from the employees’ trading activities.
General Principle 1 of the Code of Conduct requires all licensed persons to act honestly, fairly, and in the best interests of their clients and the integrity of the market when conducting their business activities. In so far as personal trading is concerned, employees of licensed corporations (including licensed representatives) should follow the employee dealing procedures of their employers because a failure to honour those controls will not only breach the internal policies of their employers but also prevent them from monitoring personal trading of their employees, which is important for the prevention and identification of potential market misconduct. As such, an employee does not follow the employee dealing procedures of their employers could call into question the person’s fitness and properness to remain licensed and could lead to suspension or revocation of a SFC license.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR94
6. SFC bans Masashi Yonezawa for 30 months
Background
The disciplinary action follows an SFC investigation which found that Mr Yonezawa, a trader on Nomura Hong Kong’s Delta One trading desk, made false entries in Nomura Hong Kong’s risk management system on three separate days between March and May 2013 to conceal the real risk exposure of his trades.
Mr Yonezawa, who was on secondment from Nomura Securities Co., Ltd in Japan at the material time, also made misrepresentations to his supervisors and the management of Nomura Hong Kong when he explained the trading losses resulting from his trades to them. As a result, Mr Yonezawa’s conduct prevented Nomura Hong Kong from effectively monitoring the trading activities of its Delta One trading desk.
In deciding the disciplinary action, the SFC has taken into account all relevant circumstances, including Mr Yonezawa’s conduct was deliberate and dishonest, and his remorsefulness for the misconduct.
Comment
Section 129 of the SFO provides that, in considering whether a person is fit and proper, the SFC may consider, in addition to any other matter that the SFC may consider relevant, the person’s ability to carry on the regulated activity competently, honestly and fairly, and the reputation, character, reliability and financial integrity of the person.
In this case, Mr Yonezawa’s conduct in making fictitious entries in Euclid in order to conceal the real risk exposure resulting from his trading activities was deliberate and dishonest. His action prevented Nomura Hong Kong from monitoring the trading activities of its Delta One trading desk. Mr Yonezawa’s dishonesty is further exemplified by the fact that he misled his supervisors about his trading activities in order to prevent them from discovering his speculative trading. The dishonest nature of his conduct also demonstrates that he presents a risk to confidence in the financial market
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR99
7. SFC bans Ko Shu Chuan for six years
Background
The disciplinary action follows an SFC investigation which found that Ms Ko, a former vice president of DBS Bank (Hong Kong) Limited (DBSHK), fabricated a Bachelor of Economics degree certificate purportedly issued by Tamkang University in Taiwan. Ko made false representations about her academic qualifications and provided a fake degree certificate to DBSHK for the purpose of obtaining employment in 2012.
Ms Ko was subsequently dismissed by DBSHK after admitting that the degree certificate was fake and that she fabricated it using her sister’s certificate.
The SFC considers Ms Ko’s conduct to be plainly dishonest and it casts serious doubts on her competency, character and reliability as a licensed person. The SFC has reported Ms Ko’s conduct to the Police.
Comment
Section 129 of the SFO provides that, in considering whether a person is fit and proper, the SFC may consider, in addition to any other matter that the SFC may consider relevant, the person’s ability to carry on the regulated activity competently, honestly and his/her character and reliability. Ms. Ko’s conduct in misrepresenting her educational qualifications and fabricating and providing a fake degree certificate to her employer was plainly dishonest and call into question her fitness and properness to be a regulated person.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR100
8. SFC bans Wong Sze Yiu for six months
On 26 October 2015, the SFC has banned Mr Wong Sze Yiu, a former account executive of Core Pacific-Yamaichi International (H.K.) Limited (“CPYI”), from re-entering the industry for six months from 26 October 2015 to 25 April 2016 for failures in relation to managing a client’s account on a discretionary basis.
Background
The disciplinary action follows an investigation by the SFC which found that, from around February or March 2012 until September 2014, Wong conducted discretionary trading in a client’s account without obtaining her written authorization, and without the knowledge and approval of his employer.
Although the client verbally authorized Wong to trade in her account on a discretionary basis, the absence of written authorization prevented monitoring and supervision by Wong’s employer. The SFC considers that Wong’s conduct resulted in non-compliance with the regulatory requirements on the authorization and operation of a discretionary account under the Code of Conduct.
In deciding the sanction, the SFC took into account that Wong’s misconduct lasted for two and a half years, his clean disciplinary record and his cooperation with the SFC.
Comment
Under the Code of Conduct, a discretionary account is defined as client account in respect of which the client has authorized the licensed or registered person or any person employed by it (who must in turn be a licensed or registered person) to effect transactions on behalf of the account without the client’s prior approval for each transaction. The discretion may be absolute or subject to conditions.
Readers should take note that the Code of Conduct imposes the following requirements on the establishment and operation of discretionary accounts:
- the client’s authority must be in writing;
- 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;
- 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;
- 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;
- the account should be designated as a discretionary account;
- senior management should approve the opening of the account; and
- internal control systems should be installed to ensure that the operation of the account is properly supervised.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR102
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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: [email protected] or call at +852-3487 6903.
To subscribe, update your email address or unsubscribe, please email [email protected]