Newsletter – July 2016

Content

  1. SFC bans Chan Hau Wing for two years
  2. SFC Research paper – Half-yearly Review of the Global and Local Securities Markets
  3. Hong Kong’s fund management business holds steady in 2015
  4. SFC commences MMT proceedings against former senior executive of ENN Energy over alleged insider dealing

1. SFC bans Chan Hau Wing for two years

On 13 July 2016, Chan Hau Wing is banned from re-entering the industry for two years by the SFC over unauthorized trades in a client’s account.

Background

The SFC has banned Mr Chan Hau Wing from re-entering the industry for two years from 13 July 2016 to 12 July 2018 for conducting unauthorized trades in a client’s account (“Account”) and acted contrary to the internal policy of Yue Xiu Futures Company Limited (“Yue Xiu Futures“).

The SFC’s investigation found that in the early hours of 8 February 2014, Chan was given a client order to buy 13 futures contracts in crude oil but he mistakenly placed a sell order.  Instead of reporting the trading error to the management of Yue Xiu Futures in accordance to the company’s internal policy, Chan sought to reduce the trading loss by trading in the client account without any trading authorization from the client.

Chan did not report the matter to Yue Xiu Futures until the afternoon of 10 February 2014 after the client made enquiries with Yue Xiu Futures about the trades conducted in the Account.

Chan’s conduct, which fell short of the standard set out in the Code of Conduct, cast doubt on his fitness and properness to be a licensed person.

In deciding the sanction, the SFC took into account all relevant circumstances, including that Chan had no previous disciplinary record with the SFC. The affected client had been compensated by Yue Xiu Futures.

Comments

Chan is licensed under the Securities and Futures Ordinance to carry on Type 2 (dealing in futures contracts) regulated activity and was accredited to Yue Xiu Futures until March 2014.  Chan is currently not licensed by the SFC nor registered with the Hong Kong Monetary Authority.

Readers are reminded that, under the General Principle 2 (diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), a licensed person should act with due skill, care and diligence in conducting business activities.

Paragraph 7.1 of the Code of Conduct also provides that licensed person should not effect a transaction for a client unless before the transaction is effected the client, or a person designated in writing by the client, has specifically authorized the transaction.

In order to comply with the rules above, licensed persons are advised to obtain client’s approval prior to conduct any trades in client’s account.

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=16PR68&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR68

2. SFC Research paper – Half-yearly Review of the Global and Local Securities Markets

On 15 July 2016, the SFC published the Half-yearly Review of the Global and Local Securities Markets.

Background

The SFC summarises on the major statistics and performances of the Global and Local securities market during the past first half of 2016:

  • During the first half of 2016, the Hong Kong market fell amid volatile global and Mainland markets. Worries about the global economic outlook heightened, reflecting uncertainties about US interest rate hikes. Concerns over the slowdown of the Mainland economy as well as volatile renminbi and stock market weighed on sentiment in the Hong Kong market. In Hong Kong, the Hang Seng Index (“HIS”) and the Hang Seng China Enterprises Index (“HSCEI”) fell 5.1% and 9.8% respectively following the decline in the Mainland market. Volatility in the renminbi and commodity prices added to the losses. Uncertainties about the timing of the US interest rate hikes as well as concerns about rising credit risks and increasing bad debts in the Mainland weighed on the market. Sentiment was affected by uncertainties about Brexit. Expectations over central banks’ stimulus measures and speculation of the launch of Shenzhen-Hong Kong Stock Connect trimmed some losses.
  • In the US, the Dow and the S&P 500 (“S&P”) rose 2.9% and 2.7% respectively, while the Nasdaq fell 3.3%. In early 2016, economic data and corporate earnings in the US were weaker than expected. The US market recovered as rate hike concerns receded in March. Investors were more optimistic that the US economy would be able to withstand the impact of higher rates. The UK referendum voted to leave (Brexit) the European Union (“EU”) on 23 June. This heightened volatility not only in the UK but across global financial markets. The market rebounded later as investor sentiment improved on easing concerns about Brexit.
  • In Europe, the FTSE rose 4.2%, whilst the DAX and CAC fell 9.9% and 8.6% respectively. In early 2016, the markets dropped amid continued uncertainties over the global economic outlook and worries about deflation. Declining oil prices triggered concerns about a rise in bad debts at banks which were more exposed to energy companies. In March, the markets rose supported by stimulus measures by the European Central Bank (“ECB”). In June, the markets became volatile again amid concerns over Brexit. However, losses were recouped later on easing worries about Brexit and hopes of more stimulus by central banks to support the market and economy. In particular, the UK market rebounded given the support by a weaker British pound, which might translate into stronger overseas revenues.
  • In Asia, the Nikkei 225 Index in Japan dropped 18.2% during the first half of 2016. The Japanese market fell on lingering worries over weak global and domestic economic outlook and sliding commodity prices. A stronger yen also aggravated losses. The performance of other major regional markets was mixed during the first half of 2016, ranging from a 2.3% loss in Malaysia to a 12.2% gain in Thailand.
  • In the Mainland, the Shanghai Composite Index (“SHCOMP”) and the Shenzhen Composite Index (“SZCOMP”) dropped 17.2% and 14.5% respectively in the first half of 2016. There were concerns about a weaker renminbi and the uncertain economic outlook. Investors were also worried that the government might adopt prudent monetary policies in spite of a sluggish economic outlook. Concerns over default risks in the corporate bond sector also weighed on the market.
The SFC identified the following risks and uncertainties facing the Hong Kong market:
  • In the US, the timing of interest rate hikes remains uncertain. The US dollar may continue to strengthen, weighing on commodity prices. This may result in capital outflows from emerging markets, some of which rely strongly on commodity exports. Investors are also concerned about the impact of rising interest rates on the US and global economy. As higher volatility will likely continue in overseas and regional markets, the Hong Kong market may be affected.
  • In the Mainland, investor sentiment is fragile given mixed economic data and the volatile renminbi exchange rate. There are concerns that the renminbi might further depreciate amid worries about the Mainland’s economic slowdown. Dimmed hopes for proactive government stimulus measures will likely continue to weigh on the market. Investors are also cautious about high bad debts and rising credit default risks which can affect the Mainland banking sector. All of these will continue to affect the outlook of the Hong Kong market, which is closely linked with the Mainland market.
  • In Europe, economic recovery remains fragile and worries over deflation persist. It is uncertain as to what extent the supportive policy would be able to offset the impact of any future US interest rate hikes on the economy. If economic growth stalls, the financial health of some indebted EU nations may be affected. In addition, Brexit has complicated the situation and created further political and economic uncertainties in Europe. This heightened uncertainty of the global economic outlook will add more volatility to global and local markets.

The SFC predicts that the performance of the Hong Kong market will continue to be affected by a combination of risks related to the Mainland and uncertainties in overseas markets.

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

http://www.sfc.hk/web/EN/files/SOM/RS%20Paper/EN/RS%20paper%2059.pdf

3.  Hong Kong’s fund management business holds steady in 2015

On 22 July 2016, the SFC published the annual Fund Management Activities Survey (FMAS) with findings indicating steadiness in the fund management business in Hong Kong last year.

Background

The SFC released its annual Fund Management Activities Survey which shows that the combined fund management business in Hong Kong decreased slightly by 1.6% year-on-year to HK$17,393 billion as of 31 December 2015.

The survey’s findings indicate that funds sourced from overseas investors accounted for 68.5% of Hong Kong’s fund management business (excluding real estate investment trusts (REITs)). During the year, aggregate private wealth management business including both the private banking business and private client funds, which form part of the asset management and fund advisory business, increased by 4.3% to HK$4,775 billion.

Below is a breakdown of the performance of different market players during 2015:

  • Licensed corporations registered a year-on-year decrease of 6.2% in their aggregate asset management and fund advisory business to HK$12,123 billion, representing the largest proportion of the combined fund management business.
  • Registered institutions recorded a 12.1% increase in their aggregate asset management and private banking business to HK$4,602 billion.
  • Insurance companies reported a 3.5% increase in their assets under management to HK$468 billion.

Some other findings of the survey:

  • Asset management business decreased by 4% to HK$12,259 billion.
  • The proportion of assets managed in Hong Kong increased consistently over the past three years and reached 55.7% of the asset management business.
  • More than 58% of the assets managed in Hong Kong were invested in equities.
  • The market capitalisation of SFC-authorized REITs remained steady.

The FMAS report also notes that the SFC is actively pursuing strategies to enhance the market infrastructure for the asset management business in Hong Kong. Following on the implementation of the Mainland-Hong Kong MRF scheme, the SFC will continue to explore similar cooperation arrangements with other jurisdictions. Other initiatives include introducing a new legal and regulatory framework for open-ended fund companies, developing online and alternative fund distribution platforms, and working closely with the industry to broaden the types of fund products.

The FMAS has been conducted annually since 1999 to help the SFC assess the state of the industry for policy and operational planning. This year, a total of 621 institutions responded to the survey on a voluntary basis. They included 555 licensed asset management and fund advisory corporations, 45 registered financial institutions and 21 insurance companies.

Comments

Respondents of this survey fall into three categories: (i) asset management and fund advisory companies licensed under section 116 or 117 of the Securities and Futures Ordinance (“SFO”); (ii)   registered institutions under section 119 of the SFO, which are authorized financial institutions as defined in section 2(1) of the Banking Ordinance; and (iii) insurance companies registered under the Insurance Companies Ordinance providing long term business. Readers shall refer to the appendices at the below link for summary of some key findings from the SFC in graphs.

For a copy of the survey, please refer to:

http://www.sfc.hk/web/EN/files/ER/Reports/2015%20FMAS%20Report_English_Final_20160720.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR71

4.  SFC commences MMT proceedings against former senior executive of ENN Energy over alleged insider dealing

On 25 July 2016, the SFC announced the commencement of proceedings against former senior executive of ENN Energy in the Market Misconduct Tribunal on alleged insider dealing activities.

Background

The SFC has commenced proceedings in the Market Misconduct Tribunal (“MTT”) against Mr Cheng Chak Ngok, former executive director, chief financial officer and company secretary of ENN Energy Holdings Limited (“ENN Energy”), over alleged insider dealing in the shares of China Gas Holdings Limited (“China Gas”).

On 12 December 2011, ENN Energy and China Petroleum & Chemical Corporation issued a joint Pre-Conditional Voluntary General Offer (“PVGO”) announcement regarding their offer to acquire all of the outstanding shares of China Gas at HK$3.50, representing a premium of 25 per cent to the previous closing price of China Gas’ shares.

The SFC alleges that Cheng, who was aware of the details of the PVGO since mid-November 2011, purchased China Gas’ shares via a nominee account between mid-November 2011 and early December 2011. The shares were sold shortly after the announcement was made at a profit of around HK$3 million.

The SFC also alleges Cheng was aware that the details of the PVGO was information material to the share price of China Gas and was not publicly known before the issue of the announcement.

Comments

The proceedings to be take place at the MMT will determine firstly whether any market misconduct in the nature of insider dealing or otherwise within the meaning of section 270 of Part XIII of the Securities and Futures Ordinance (“SFO”) has taken place and followed by the identity of any person who has engaged in the market misconduct found to have been perpetrated and the amount of any profit gained or loss avoided as a result of the market misconduct found to have been perpetrated.

Readers are reminded that, under section 270(1)(f) of the SFO, a person having received, directly or indirectly, from a person whom he knows or has reasonable cause to believe is contemplating or is no longer contemplating making a take-over offer for the corporation, information to that effect which he knows is inside information in relation to the corporation deals in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives, gives rise to insider dealing.

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

http://www.mmt.gov.hk/eng/rulings/China_Gas_Holdings_Limited_Notice_25072016_e.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR72

 

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

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Newsletter – June 2016

Content

  1. SFC reprimands and fines Guotai Junan Securities (Hong Kong) Limited HK$1.3 million
  2. SFC reprimands and fines SynerWealth Financial Limited HK$2.7 million
  3. SFC obtains disqualification orders against former senior executives of China Best Group Holding Limited
  4. SFC issues Restriction Notice to a broker to stop a client from withdrawing shares and transferring money connected with suspected insider dealing
  5. Court rules on appeals over unlicensed activities
  6. SFC reprimands and fines Schroder Investment Management (Hong Kong) Limited HK$1.8 million for disclosure failures
  7. SFC reprimands and fines State Street Global Advisors Asia Limited HK$4 million over management of Tracker Fund

1. SFC reprimands and fines Guotai Junan Securities (Hong Kong) Limited HK$1.3 million

On 30 May 2016, Guotai Junan Securities (Hong Kong) Limited (“Guotai Junan”) was reprimanded and fined HK$1.3 million by the SFC for non-compliance with the regulatory requirements in relation to ascertaining client identity.

Background

In July 2014, the SFC requested Guotai Junan to provide details of the ultimate clients of certain transactions it effected for an intermediary client in Korea. Guotai Junan was unable to provide the requested information within two business days of the request pursuant to the Client Identity Rule Policy, due to the intermediary client’s failure to comply with its obligation under its client agreement.

The intermediary client informed the SFC and Guotai Junan on 1 August 2014 that as a matter of Korean law, it could not provide the requested client identity information without its clients’ written consent.  It was not until January 2015 that Guotai Junan provided the requested information to the SFC.

Notwithstanding this, Guotai Junan continued to effect more than 8,000 transactions for the intermediary client between August 2014 and January 2015 despite having been reminded by the SFC of its obligation to refuse the business of those who are not prepared to provide ultimate client information to the regulators.

In the circumstances, the SFC found that at the time when Guotai Junan effected those transactions, it could no longer be satisfied on reasonable grounds that it would be able to make available the ultimate client information in relation to such transactions to the SFC on request, which is in contravention of the Client Identity Rule Policy.
In deciding the sanctions, the SFC took into account all relevant circumstances, including, Guotai Junan:

  • co-operated with the SFC in resolving the disciplinary proceedings; and
  • has agreed to conduct an independent review of its systems and controls in respect of its compliance with the regulatory requirements on ascertaining client identity.

Comments

Guotai Junan is licensed to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (SFO).

Reader is reminded that, under paragraph 5.4 of the Code of Conduct for Persons Licensed by or Registered with the SFC, the Client Identity Rule Policy explains the client identity rule, and the general approach the SFC will take in enforcing the client identity rule.

Under its client agreement with Guotai Junan, the intermediary client:
(a) agreed to provide ultimate client information to the SFC, the Stock Exchange of Hong Kong and/or the Hong Kong Futures Exchange (“the Regulators”), within two business days of a request; and
(b) confirmed that they and their clients have waived the benefit of any law which prohibited the provision of ultimate client information to the Regulators.

The Client Identity Rule Policy stipulates that a licensed person must refuse the business of those who are not prepared to provide client identity information to the Regulators upon request (paragraph 23).  The Client Identity Rule also stipulates that if a licensed person has been put on notice that some intermediary in the chain of intermediaries involved in a transaction might not comply with its agreement in relation to that transaction so that the licensed person could no longer be satisfied on reasonable grounds that the information would be available to the Regulators on request and continued to deal with that intermediary, the SFC would consider taking disciplinary action against the licensed person (paragraph 27).

For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR49&appendix=0

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR49

2. SFC reprimands and fines SynerWealth Financial Limited HK$2.7 million

On 31 May 2016, SynerWealth Financial Limited (“SynerWealth”) was reprimanded and fined HK$2.7 million for internal control failures relating to short selling orders and for failing to report the deficiencies of its trading system to the SFC in a timely manner as required under the SFC’s Code of Conduct.

Background

The SFC’s investigation found that from November 2012 to January 2014, there were at least 65 instances of short sales executed by SynerWealth which resulted from its failure to put in place effective internal control procedures to detect and prevent short selling.

The SFC also found that SynerWealth identified deficiencies in its self-developed trading system as early as January 2013, but it failed to report the material errors or defects of the system to the SFC.
In deciding the disciplinary sanction, the SFC took into account all relevant circumstances of the case, including that:

  • adequate and effective internal control systems are fundamental to the fitness and properness of a licensed corporation;
  • SynerWealth’s failures lasted for about 14 months; and
  • SynerWealth had an otherwise clean disciplinary record.

Comments

SynerWealth is licensed to carry on business in Type 1 (dealing in securities) regulated activity under the Securities and Futures Ordinance (SFO).

Reader is reminded that, under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC, a licensed or registered person is required to report to the SFC immediately on the happening of any material failure, error or defect in the operation or functioning of its trading, accounting, clearing or settlement systems or equipment.

For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR50&appendix=0

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR50

3.  SFC obtains disqualification orders against former senior executives of China Best Group Holding Limited

On 31 May 2016, the SFC obtained disqualification orders in the Court of First Instance against three former senior executives of China Best Group Holding Limited (“China Best”) for breaching their directors’ duties in handling a proposed acquisition of interests in a coal mine in 2008.

Background

The Court earlier found that that Mr. Wang Jian Hua, former advisor to the board of China Best, had diverted to himself the corporate opportunity of a proposed acquisition of 60% of the equity interest in ChongHou Energy Resources Limited from Asset Rich International Limited (“Asset Rich”), a company ultimately owned by a nominee of Wang and therefore not third parties independent of China Best.

Wang was also found to have devised a scheme to conceal his personal benefit in the proposed acquisition at the expense of China Best and failed to disclose his interest to China Best’s board and in the issue of two false and misleading announcements dated 3 March and 3 December 2008.

The Court also found that Wang’s wife, Ms. Ma Jun Li, former chairman and executive director of China Best, and Mr. Zhang Da Qing, former chief executive officer and executive director of China Best, had failed to make reasonable enquiries in respect of Asset Rich’s and its ultimate beneficial shareholder’s background and connection with Wang and had wrongfully authorized the issue of the two announcements.

The Court has ordered be disqualified Wang from being a director or being involved in the management of any listed or unlisted company in Hong Kong, without leave of the Court, for 10 years. Ma and Zhang were both disqualified for six years.

In making the disqualification orders, the Court considered the gravity of Wang’s misconduct, his role as part of the senior management of the company and the fact that the proposed acquisition was a very substantial acquisition for China Best under the Listing Rules of the Stock Exchange of Hong Kong. The disqualification period imposed for Ma and Zhang took into account their failure to make enquiries and inform themselves about the company’s affairs and to exercise care and diligence in the proposed acquisition.

Comments

Wang was the chairman and an executive director of China Best until he resigned with effect from 25 November 2005. Notwithstanding his resignation, Wang held a position of advisor to the board of China Best and remained part of the senior management at material times. Ma was appointed as an executive director of China Best on 29 August 2003 and was elected as the chairman on 25 November 2005. Zhang was appointed as China Best’s chief executive officer and an executive director on 5 June 2007.  Both Ma and Zhang had resigned from China Best with effect from 4 October 2011.

China Best was listed on the Main Board of the Stock Exchange of Hong Kong Limited on 26 March 1996.  The principal activities of China Best’s associates and subsidiaries were coal processing, international air and sea freight forwarding and the provision of logistics services as well as trading of securities.

Readers are reminded that, Under section 214 of the SFO, 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 having being conducted in a manner involving defalcation, fraud or other misconduct.

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR52

4.  SFC issues Restriction Notice to a broker to stop a client from withdrawing shares and transferring money connected with suspected insider dealing

On 3 June 2016, Kingsway Financial Services Group Limited was prohibited from processing shares and cash of a client due to suspected insider dealing in accordance to the Restriction Notice issued by the SFC.

Background

The SFC has issued a Restriction Notice to Kingsway Financial Services Group Limited (“KFS”) prohibiting it from processing cash and shares held in a client account that holds proceeds of suspected insider dealing.

KFS is not subject to the SFC’s investigation into suspected insider dealing and the Restriction Notice does not affect KFS’s operations or its other clients.  KFS has rendered full assistance to the SFC during the investigation.

The Restriction Notice prohibits KFS, without prior written consent from the SFC, from processing any instructions from the client (or anyone authorized to operate the account) with respect to the shares of a Hong Kong-listed company, including: (i) withdrawing the shares and/or transferring monies arising from the disposal of the shares; and/or (ii) disposing or dealing with the shares.  KFS is also required to notify the SFC upon receipt of any of these instructions.

The SFC considers that the issue of the Restriction Notice, which prevents dissipation of proceeds of suspected insider dealing held in the account, is desirable in the interest of the investing public or in the public interest. Therefore, the investigation is continuing.

Comments

KFS is licensed to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO.

Readers are reminded that, under the Restriction Notice, pursuant to sections 204 and 205 of the SFO, a licensed corporation is prohibited from entering into transactions of a specified description or other than of a specified description, or entering into transactions in specified circumstances or other than in specified circumstances, or entering into transactions to a specified extent or other than to a specified extent, which required the licensed corporation to carry on business in, and only in, a specified manner; and to prohibit the licensed corporation from dealing with any relevant property in a specified manner or other than in a specified manner.

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR53

 

5.  Court rules on appeals over unlicensed activities

On 6 June 2016, C.L. Management Services Limited (“C.L. Management”) and its sole owner and director Ms Clarea Au Suet Ming’s appeal was dismissed by the court. At the same time, the SFC’s appeal on a point of law against the decision of the Eastern Magistracy was also dismissed.

Background

On 29 April 2014, C.L. Management and Au were convicted on three counts of holding out charges and acquitted of one count of carrying on a business in advising on corporate finance without a licence. They were fined a total of HK$1.5 million and Au was sentenced to a total of 6 months’ imprisonment suspended for 18 months.

C.L. Management and Au appealed against their conviction. At the same time, the SFC appealed against the decision of the Eastern Magistracy in acquitting them.

Both appeals were dismissed as the Court found that there are no merits in any of the grounds advanced on behalf of them.

Comments

Readers are reminded that under the Securities and Future Ordinance (SFO), advising on corporate finance is a regulated activity which requires a Type 6 (Advising on Corporate Finance) licence from the SFC.

Furthermore, under section 114(1)(a) and 114(8) of the SFO, a person commits an offence when the person, without reasonable excuse, carries/carried on a business in a regulated activity without a licence.

This is well noted from this decision that the offence of carrying on a business of regulated activity without a licence does not require proof of a mental element. Thus, it is important to ensure that the Licensed Corporation and the all its staff members are properly licensed with the relevant licence.

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR56

 

6. SFC reprimands and fines Schroder Investment Management (Hong Kong) Limited HK$1.8 million for disclosure failures

On 15 Jun 2016, Schroder was reprimanded and fined HK$1.8 million over interest disclosure failures which led to breaches of the SFO.

Background

The SFC has reprimanded and fined Schroder Investment Management (Hong Kong) Limited (“Schroder”) HK$1.8 million for failing to disclose all notifiable interests in Hong Kong listed shares.

An SFC investigation found that from August 2005 to January 2013, Schroder failed to disclose to the Stock Exchange of Hong Kong Limited (“SEHK”) and the relevant listed companies all notifiable interests in Hong Kong listed shares held in client portfolios and managed by Schroders plc and certain of its subsidiaries (“Schroder Entities”) where they did not have or were unable to exercise proxy voting rights. Schroder is responsible for preparing and filing the notices disclosing all notifiable interests in Hong Kong listed shares for the Schroder Entities to SEHK and the relevant listed companies.

Although legal advice obtained by Schroder advised that an “interest” in shares was broadly defined and was not confined to the exercise of a voting right, Schroder failed to properly follow the advice.

According to Schroder, it discovered the disclosure failures in November 2012 when it was preparing to implement a new global system for the monitoring and reporting of disclosable interests in shares. In February and March 2013, Schroder filed a total of 236 substantial shareholders notices to the SEHK to correct the disclosure notices filed for the Schroder Entities from July 2010 to January 2013.

In deciding the penalty, the SFC took into account the duration and extent of Schroder’s disclosure failings, Schroder’s self-report to the SFC upon discovery of its disclosure failings, Schroder’s co-operation with the SFC’s investigation and disciplinary process and that it has taken steps to improve its global system for monitoring and disclosing shares in Hong Kong listed companies and its clean disciplinary record.

Comments

Schroder is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising in securities) and Type 9 (asset management) regulated activities.

Schroders plc is a company incorporated in England and Wales which carries on asset management business together with its subsidiaries on a global basis. The Schroder Entities invest directly in Hong Kong listed shares for their clients.

Readers are reminded that, under Section 310(1) of the Securities and Futures Ordinance (“SFO”), a person comes under a duty of disclosure if he/she acquires an interest in or ceases to be interested in shares in the relevant share capital of a listed corporation, or where a change occurs affecting a person’s existing interest in shares in a listed corporation’s share capital in specified circumstances.

Under Section 313(1) of the SFO, those specified circumstances include where the person: (a) first acquires a notifiable interest; (b) ceases to have a notifiable interest; (c) has a notifiable interest but the percentage levels of his interest have changed; (d) has a notifiable interest but the nature of his interest has changed.

According to Section 315 of the SFO, the notifiable percentage level for notifiable interests is 5% and the specified percentage level for changes to notifiable interests is 1%.

Furthermore, under General Principle 7 of the SFC Code of Conduct, a licensed corporation should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market.

Paragraph 12.1 of the Code of Conduct also provides that a licensed corporation should comply with, and implement and maintain measures appropriate to ensuring compliance with, the law and relevant regulatory requirements.

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=16PR59&appendix=0

For more information about the requirements for disclosure of interests, please refer to:
http://en-rules.sfc.hk/net_file_store/new_rulebooks/h/k/HKSFC3527_4511_VER20.pdf

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR59

 

7. SFC reprimands and fines State Street Global Advisors Asia Limited HK$4 million over management of Tracker Fund

On 15 June 2016, State Street Global Advisors Asia Limited was reprimanded and fined HK$4 million by the SFC for its failure to comply with the requirements in in the management of Tracker Fund of Hong Kong.

Background

The SFC has reprimanded and fined State Street Global Advisors Asia Limited (“SSGA”) HK$4 million for its failure to comply with regulatory requirements in the management of Tracker Fund of Hong Kong (“Fund”).

An SFC investigation found that from 1 December 2008 to 30 June 2013 (relevant period), the cash balances of the Fund that were deposited with State Street Bank and Trust Company’s (“SSBT”) demand deposit account did not earn any interest because SSBT’s deposit rates on Hong Kong dollars were zero.  SSBT was the Fund’s trustee and an affiliate of SSGA.  SSGA did not check the rate of interest offered by other banks.

According to the SFC’s investigation findings, the prevailing commercial interest rates on Hong Kong dollars (“HKD”) for a deposit of the same size and term as the Fund’s cash balances were above zero during the Relevant Period.

The SFC considers that SSGA had failed to ensure that interest received on the Fund’s Hong Kong dollar cash balances from its connected person was at a rate not lower than the prevailing commercial rate for a deposit of that size and term as required by the Code on Unit Trusts and Mutual Funds (“UT Code”).

The SFC also found that SSGA’s internal procedures on the management of the Fund’s cash balances were inadequate.  By not following the requirements of the UT Code and the Trust Deed when depositing the Fund’s cash balances with SSBT, SSGA had failed to manage and minimise the conflict between the interests of the Fund’s investors and the interests of SSGA/SSBT.

The SFC further found that SSGA had wrongly represented in six interim and annual reports of the Fund that the Fund’s cash balances were placed in a non-interest bearing current account when in fact the cash was deposited with SSBT in an interest bearing account earning zero interest.

In deciding the sanctions, the SFC took into account that SSGA:

  • co-operated with the SFC in resolving the SFC’s concerns;
  • agreed to make a voluntary payment of HK$318,315 into the Fund;
  • agreed to engage an independent reviewer to conduct an internal controls review of the cash management policy and procedures of SFC-authorized funds managed by SSGA; and
  • has a clean disciplinary record in relation to its regulated activities.

Comments

SSGA is licensed to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), and Type 9 (asset management) regulated activities under the SFO.

The SFC concluded that SSGA failed to ensure prevailing commercial interest rates was received from a connected person, unable to maintain internal controls, failed to manage and minimize the conflict of interests, and provided misstatements in annual and interim reports of the Fund.

Readers are reminded that under paragraph 1.2(c) of the of the Fund Manager Code of Conduct, a fund manager is required to maintain satisfactory internal controls and written compliance procedures which address all applicable regulatory requirements; and under paragraph 10.10 of the UT Code, if cash forming part of the scheme’s assets is deposited with the trustee/custodian, the management company, the investment adviser or with any connected person of these companies (being an institution licensed to accept deposits), interest must be received on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term.

Furthermore, under General Principle 4 of the Overarching Principles Section of the SFC Products Handbook, Product Providers, counterparties and service providers should avoid being placed in a conflict of interest position that may undermine the interests of the investors of the relevant product, and Product Provider should avoid situations where conflicts of interest may arise including any actual or potential conflicts that may arise between different parties in respect of a product.

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=16PR61&appendix=0

For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR61

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

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Regulatory News (Jul 2016)