Newsletter – May 2016

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Content

  1. Licence applicant Chiu Sing Ho convicted of providing false information to SFC
  2. SFC reprimands and fines Solid King Securities Limited HK$700,000
  3. SFC bans Yeung Chun Him for 12 months
  4. Takeovers Panel rules on breach of Takeovers Code by a subsidiary of Alibaba Group Holding Limited
  5. Administrators complete distribution of restoration payments to investors affected by Tiger Asia’s insider dealing
  6. SFC publicly criticises China New Way Investment Limited and related parties for breach of Takeovers Code

1. Licence applicant Chiu Sing Ho convicted of providing false information to SFC

On 28 April 2016, Mr Chiu Sing Ho was convicted and fined HK$10,000 by the Court for making false or misleading representations when making licence applications to the SFC.

Background

The Eastern Magistrates’ Court convicted Mr Chiu Sing Ho of making false or misleading representations in his two licence applications to the SFC.

Chiu was fined HK$10,000 and ordered to pay the SFC’s investigation costs after pleading guilty.

The SFC found that, in November 2012 and December 2014, Chiu did not disclose to the SFC his previous criminal conviction in two licence applications.

The SFC expects applicants to make full and accurate disclosure of all information required in a licence application. Failure of applicants to do so might affect their fitness and properness to be licensed.

Comments

Readers are reminded that, pursuant to section 383 of the Securities and Futures Ordinance, applicants are required to disclose all prior criminal convictions, including those which the Rehabilitation of Offenders Ordinance (Cap 297) applies to, disciplinary sanctions in relation to any trade, business or profession and whether they have been investigated by a local or foreign regulatory or criminal investigatory body.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR40

2. SFC reprimands and fines Solid King Securities Limited HK$700,000

On 3 May 2016, Solid King was reprimanded and fined HK$700,000 by the SFC for its failure to comply with the requirements as to telephone recording and internal control procedures under the SFC Code of Conduct.

Background

The SFC has reprimanded Solid King Securities Limited (Solid King) and fined it HK$700,000 for failing to comply with the telephone recording requirements under the Code of Conduct and put in place effective internal control procedures to safeguard its telephone recording system and monitor its clients’ telephone orders.

The SFC’s investigation found that Solid King had failed to record client order instructions received through one of its telephone extension lines between May 2013 and January 2014 (relevant period) as the telephone machine concerned was disconnected from Solid King’s telephone recording system due to a loose electric cable.

During the relevant period, Solid King did not conduct any routine checks on its telephone recording system, nor did it review the recordings of client telephone orders on a regular basis. The loose electric cable was detected and re-attached to the telephone recording system by Solid King on 2 January 2014 and it discovered that its telephone recording system had failed to record client order instructions during the relevant period when it was required by the SFC on 8 January 2014 to produce the telephone recordings of certain client orders. As a result of the undetected defect in its telephone recording system, Solid King was unable to produce the telephone recordings required by the SFC.

Telephone recording of client orders is an integral part of an intermediary’s audit trails. It protects the interests of both the intermediary and its clients and serves as an effective compliance monitoring tool for preventing or detecting irregularities or fraudulent activities. Solid King’s failures have called into question its fitness and properness as an SFC licensee.

Comments

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

Readers are reminded that, under paragraph 3.9(b) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a licensed or registered person is required to: (i) use a telephone recording system to record the order instructions that are received from clients through the telephone; and (ii) maintain the telephone recordings as part of its records for at least six months.

The SFC explained that the rationale behind the requirement for tape recording a client’s orders is to ensure there is reliable evidence to fall back on when assessing any dispute between a broker and its client concerning the particulars of a trade order. The SFC is of the view that the telephone requirements protect the interests of both the broker and the client.

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR41&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR41

3.  SFC bans Yeung Chun Him for 12 months

On 6 May 2016, Yeung Chun Him was banned by the SFC for 12 months following investigation of him transferring client data for inappropriate purposes and thus breaching the SFC Code of Conduct and the Personal Data (Privacy) Ordinance.

Background

The SFC has banned Mr Yeung Chun Him from re-entering the industry for 12 months from 6 May 2016 to 5 May 2017 for transferring client data for purposes other than for which the data was collected, in breach of the Code of Conduct and the Personal Data (Privacy) Ordinance.

At the material time, Yeung was an Associate Portfolio Manager of Hong Kong and Shanghai Banking Corporation Limited (HSBC) responsible for opening accounts for small and medium-sized enterprise clients and promoting investment and insurance products.

The SFC found that:

  • on his last working day with HSBC on 13 December 2013, Yeung sent data concerning 1,540 customers (Client Information) from his HSBC email to his personal email;
  • Yeung then sent the Client Information from his personal email to his email at China Construction Bank (Asia) Corporation Limited (CCB) on the first day of his new job on 16 December 2013;
  • Yeung would be serving similar corporate clientele at CCB and he considered that the Client Information would facilitate his new job; and
  • upon the request of HSBC, CCB deleted the emails attaching the Client Information from its email server.

The SFC is of the view that Yeung’s conduct has called into question his fitness and properness to remain a licensed or registered person.

The case was referred to the SFC by the Hong Kong Monetary Authority.

Comments

Yeung was a relevant individual engaged by HSBC to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.  Yeung is currently not registered with the Hong Kong Monetary Authority or licensed by the SFC.

Readers are reminded that, under General Principle 2 of the SFC Code of Conduct, a licensed or registered person should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market when conducting its business activities.

Furthermore, under paragraph 12.1 of the Code of Conduct, a licensed or registered person should comply with, and implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered or issued by the Commission, the rules of any exchange or clearing house of which it is a member or participant, and the requirements of any regulatory authority which apply to the licensed or registered person.

Principle 3 of the Data Protection Principles of the Personal Data (Privacy) Ordinance provides that personal data shall not, without the prescribed consent of the data subject, be used for any purpose other than – (a) the purpose for which the data were to be used at the time of the collection of the data, or (b) a purpose directly related to the purpose referred to in paragraph (a).”

In light of the above, the SFC reached the decision to take disciplinary action against Yeung.

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=16PR42&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR42

4.  Takeovers Panel rules on breach of Takeovers Code by a subsidiary of Alibaba Group Holding Limited

On 18 May 2016, the Takeovers and Mergers Panel ruled that a subsidiary of Alibaba was in breach of the Takeovers Code during an acquisition action.

Background

The Takeovers and Mergers Panel (Takeovers Panel) published its written decision setting out the reasons for its ruling that Alibaba Group Holding Limited (Alibaba Group) has breached the Takeovers Code in its acquisition of CITIC 21CN Company Limited (CITIC 21CN), later renamed as Alibaba Health Information Technology Limited.

The Takeovers Panel found that during the acquisition process, Alibaba Group entered into certain agreements with a shareholder of CITIC 21CN, namely Mr Chen Wen Xin, to acquire his solely owned Hebei Huiyan Medical Technology Co. Ltd. Mr Chen is the younger brother of Ms Chen Xiao Ying, an executive director and vice chairman of CITIC 21CN.

The Takeovers Panel ruled that the agreements between Alibaba Group and Mr Chen constituted a special deal with favourable conditions which were not extended to all shareholders and was a clear breach of the Takeovers Code.

The Takeovers Panel also found that in consequence the whitewash waiver granted to Alibaba Group was invalidated and therefore a mandatory general offer obligation has been triggered unless waived.

However, in light of the difficulties in placing a precise value on the favourable conditions received by Mr Chen, and the prevailing market price CITIC 21CN’s shares since the whitewash transaction was announced, the Takeovers Panel noted that any additional value to the subscription price Alibaba Group paid to acquire a majority interest in CITIC 21CN was most unlikely to be material in the context, and therefore waived the mandatory general offer obligation.

Comments

Readers are reminded that, under the Takeovers Code, special deals are generally not permitted unless the Takeovers Executive provides the requisite consent. This reflects a fundamental principle in the Takeovers Code – General Principle 1 which states that “all shareholders are to be treated even-handedly and all shareholders of the same class are to be treated similarly.” In order to give effect to this General Principle, Rule 25 of the Takeovers Code prohibits transactions between an offeror, or potential offeror, and parties acting in concert with it and a shareholder in the offeree company.

For a copy of the Panel’s decision, please refer to:

http://www.sfc.hk/web/EN/files/CF/pdf/Takeovers%20and%20Mergers%20Panel%20-%20Panel%20Decision/Alibaba%20Group%20-%20Panel%20Decision_Eng_18%20May%2016.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR45

 

5.  Administrators complete distribution of restoration payments to investors affected by Tiger Asia’s insider dealing

On 19 May 2016, the process of distributing restoration payments back to investors affected by Tiger Asia’s insider dealing case had been completed in accordance to restoration orders made by the Court.

Background

The court appointed administrators have completed the process of returning HK$43.7 million to more than 1,500 investors affected by the insider dealing of Tiger Asia Management LLC and two of its senior officers, Bill Hwang and Raymond Park (Tiger Asia parties).

The payments were made under restoration orders made by the court following admissions of insider dealing and manipulation by the Tiger Asia parties in December 2013 in proceedings brought by the SFC under section 213 of the Securities and Futures Ordinance (SFO).

A total of HK$43,708,828 or 97% out of the restoration fund HK$45,266,610 has been paid out to 1,591 local and overseas investors. The SFC and the administrators have taken all reasonable steps to contact the remaining 209 investors with no success. The remaining sum of HK$1,408,487 was returned to the Tiger Asia parties with the approval of the court.

The purpose of the restoration orders is to make insider traders financially accountable to those with whom they trade and to restore those counterparties to the financial position they were in before the transactions.

Comments

Tiger Asia was founded in 2001 and is a New York-based asset management company that specialises in equity investments in China, Japan and Korea. All of its employees are located in New York. Tiger Asia has no physical presence in Hong Kong.

On 20 Dec 2013, the Court of First Instance ordered Tiger Asia Management LLC (Tiger Asia) and two of its senior officers, Mr Bill Sung Kook Hwang and Mr Raymond Park (collectively the Tiger Asia parties), to pay a total of HK$45,266,610 to investors affected by their insider dealing involving two Hong Kong-listed banking stocks.

The court orders followed admissions by the Tiger Asia parties in a statement of agreed and admitted facts filed in the Court of First Instance by the SFC in its proceedings under section 213 of the SFO that they contravened Hong Kong’s laws prohibiting insider dealing when dealing in the shares of Bank of China Limited (BOC) and of China Construction Bank Corporation (CCB) in December 2008 and January 2009 and manipulated the price of CCB shares in January 2009.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR46

 

6. SFC publicly criticises China New Way Investment Limited and related parties for breach of Takeovers Code

On 26 May 2016, the SFC publicly criticises China New Way Investment Limited as offeror and its related parties for acquiring shares in a company after the close of an offer and at above the offer price which breaches Rule 31.3 of the Takeovers Code.

Background

The SFC publicly criticised China New Way Investment Limited (“the Offeror”), Mr Wei Judong, Mr Zhang Xiaoliang, Ms Yang Weizhi, Mr Wei Lidong and Mr Xu Jianhua (“collectively referred to as the Parties”) for acquiring shares in China City Construction Group Holdings Limited, formerly known as Chun Wo Development Holdings Limited (“the Company”) within six months after the close of an offer at above the offer price in contravention of the Takeovers Code.

The Offeror is wholly owned by New Way International Investment Holdings Limited which in turn is beneficially owned by Wei Judong, Zhang, Yang and Huinong Financial Holdings Limited (a company indirectly wholly-owned by Wei Lidong), who each holds 25% of its issued shares. At the material time, Xu was the sole director of the Offeror.

On 2 January 2015, the Offeror made an unconditional mandatory general offer in cash for the Company’s shares at HK$1.099 per share. The offer closed on 23 January 2015.

On 6 and 7 July 2015, the Offeror made a series of on-market acquisitions of a total of 2,930,000 shares of the Company at prices ranging from HK$1.19 to $1.50 per share.

The Parties submitted that the breaches were not intentional but accepted that they have breached the Takeovers Code and agreed to the current disciplinary action taken against them.

Comments

The Company’s shares are currently listed on the Main Board of the Stock Exchange of Hong Kong Limited. The Company is principally engaged in engineering and construction work, property development and investment, as well as professional services including provision of security and property management services.

Readers are reminded that, pursuant to rule 31.3 of the Takeovers Code and in accordance with General Principle 1 of the Takeovers Code, the Offeror and its concert parties are prohibited from buying shares at prices higher than the offer price within six months after the end of the offer period except with the consent of the Takeovers Executive. The rule affords equal treatment to all shareholders of the offeree company.

For a copy of the Executive Statement, please refer to

http://www.sfc.hk/web/EN/files/CF/pdf/Notice%20of%20Criticism/Chun%20Wo_Eng_25%20May%2016.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR48

 

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

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Newsletter – April 2016

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Content

  1. SFC bans Yuen Siu Lun for seven years
  2. SFC suspends Ernest Ho Gar Fai for four months
  3. SFAT affirms SFC decision to reprimand and fine Moody’s over Red Flags Report
  4. SFC commences MMT proceedings against Yorkey Optical International (Cayman) Limited, its CEO and Financial Controller for late disclosure of inside information
  5. SFC bans Andrew Chow Ho Cheung for life
  6. SFC formally adopts initiatives to enhance fund authorization process after pilot-run
  7. Defendants acquitted of unlicensed dealing
 

1. SFC bans Yuen Siu Lun for seven years

On 24 March 2016, Yuen Siu Lun was banned by the SFC for seven years following investigation of him obtaining rebates and causing loss to his company by amending transaction data for the purposing of benefitting clients.           

Background

The SFC has banned Mr. Yuen Siu Lun, a former responsible officer of Bright Smart Forex Limited (BS Forex) and head of the bullion operations of Bright Smart Global Bullion Limited (BS Bullion), from re-entering the industry for seven years from 24 March 2016 to 23 March 2023 for abusing the access right granted to him and making order amendments to bullion contracts as a means of obtaining a personal financial benefit.

The disciplinary action follows an investigation by the SFC which found that, from April to October 2014, Yuen amended the data of approximately 300 bullion transactions in the accounts of seven clients even though there were no genuine error trades which called for amendment.  Such amendments, which were made without the knowledge and approval of Yuen’s ex-employer, benefited certain clients at the expense of BS Bullion.  Yuen caused a total loss of approximately HK$1.26 million to BS Bullion which comprised of profits and rebates arising out of all the orders placed in the accounts of the relevant clients.

According to an oral agreement with the clients, Yuen received rebate for each completed trade and gained a personal financial benefit in a total sum of approximately HK$180,000.  Although the SFC does not regulate gold bullion business, it considers that Yuen is not a fit and proper person to remain licensed under the Securities and Futures Ordinance (SFO).

Comments

Yuen was licensed under the SFO to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contract), Type 3 (leveraged foreign exchange trading) and Type 9 (asset management) regulated activities.  Apart from BS Forex, he was also accredited to Bright Smart Securities International (H.K.) Limited, Bright Smart Futures & Commodities Company Limited and Bright Smart Asset Management Limited from 22 September 2014 to 9 October 2014.  Yuen is currently not licensed by the SFC.

Readers should refer to section 129 of the SFO for the SFC’s criteria used to assess whether a person is fit and proper to be licensed/registered.

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=16PR30&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR30

 
2. SFC suspends Ernest Ho Gar Fai for four months

On 24 March 2016, Ernest Ho Gar Fai was suspended by the SFC for four months following investigation of him allowing a client to trade futures contracts through his mother’s account and thus casted doubt on his fitness and properness as a licensed person.

Background

The SFC has suspended Mr Ernest Ho Gar Fai for four months from 24 March 2016 to 23 July 2016.

The SFC investigation found that from September to December 2013, Ho allowed a client, who is his mother’s friend, to trade in futures contracts through his mother’s account held with Fulbright Futures Limited (Fulbright Futures).  He also failed to properly receive and keep records of the client’s order instructions.

Although Ho’s mother allowed the client to trade through her futures account, it is inexcusable for Ho to have allowed the trades to be conducted in such a way.  Ho’s conduct falls short of the standard set out in the Code of Conduct and casts doubt on his fitness and properness as a licensed person.

In deciding the sanction, the SFC took into account all relevant circumstances, including that Ho had no previous disciplinary record with the SFC.

Comments

Ho is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities, and has been accredited to Fulbright Securities Limited for Type 1 regulated activity and Fulbright Futures Limited for Type 2 regulated activity since 2007.

Readers are reminded that the General Principle 2 (diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission provides that a licensed person should act with due skill, care and diligence in conducting business activities.  Among others, paragraph 3.9 provides that licensed person should record and immediately time stamp records of order instruction particulars, and paragraph 5 provides a licensed person should take steps to establish the true and full identity of each client, and before effecting a transaction, be satisfied on reasonable grounds as to the identity of the person ultimately responsible for originating transaction instructions and the identity of the person who stand to gain the commercial or economic benefit and/or bear the commercial or economic risk of the transaction.

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=16PR31&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR31

 
3.  SFAT affirms SFC decision to reprimand and fine Moody’s over Red Flags Report

On 5 April 2016, Moody’s was reprimanded and fined HK$11 million for various preparation and publication errors in relation to its Red Flag Report and thus breaching the Code of Conduct.

Background

The SFC has reprimanded Moody’s Investors Service Hong Kong Limited (Moody’s) and fined it HK$11 million for various failures relating to its preparation and publication of the special comment report entitled “Red Flags for Emerging-Market Companies: A Focus on China” published on 11 July 2011 (the Report).

The SFC’s action against Moody’s follows the determination of the Securities and Futures Appeals Tribunal (SFAT) which confirms the SFC’s jurisdiction over Moody’s in this case.

The SFAT has affirmed the SFC’s findings that, Moody’s, in preparing and publishing the Report which purportedly identified risk factors of Mainland rated issuers:

  • failed to provide sufficient explanations for the red flags assigned by it to the rated companies and to set out relevant justifications to the red flags in the Report, and had, as a result, painted an unfair, unclear and misleading picture of the companies;
  • chose to list the red flags assigned to each company and to highlight six companies with the largest number of flags in the Report as “negative outliers” to make the Report “actionable” despite the assessment performed by its analysts showed that there was no significant correlation between the number of red flags and the companies’ credit risk; and
  • failed to ensure the accuracy of the red flags assigned to the companies.

The SFAT found that in the preparation and publication of the Report, Moody’s was carrying on its regulated activity of providing credit rating services.  The SFAT also found that there were substantive breaches of General Principles 1 and 2 of the Code of Conduct.  The SFAT has determined that Moody’s should be subject to a public reprimand and a pecuniary penalty of HK$11 million.

The SFC’s Chief Executive Officer, Mr Ashley Alder, said, “The Code of Conduct sets general principles and standards of conduct that all licensed or registered persons, including credit rating agencies, must follow.  The purpose of the Code of Conduct is to maintain high standards of conduct by intermediaries and to ensure intermediaries remain fit and proper.”

Comments

Moody’s is licensed under the Securities and Futures Ordinance to carry on business in Type 10 (providing credit rating services) regulated activity.

In the Report, Moody’s assessed 49 non-financial Chinese entities against 20 warning signs it called “red flags” to identify possible corporate governance and accounting risks. The Report highlighted and discussed six companies which received the highest number of red flags among the other rated peers, and they were identified as “negative outliers”.  The Report also displayed the number and type of red flags assigned to each of the 49 companies in various tables.

Readers are reminded that General Principle 1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) requires that a licensed or registered person should act honestly, fairly, and in the best interest of its clients and the integrity of the market in conducting its business activities.

The SFC’s findings under General Principle 1 are limited to Moody’s failure to act fairly, in the best interests of its clients, and the integrity of the market. In its Reasons for Determination, the SFAT also made it clear that there are no findings of dishonest conduct or intention to mislead by Moody’s.

Readers are also reminded that General Principle 2 of the Code of Conduct requires that a licensed or registered person should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market in conducting its business activities.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR34

4.  SFC commences MMT proceedings against Yorkey Optical International (Cayman) Limited, its CEO and Financial Controller for late disclosure of inside information

On 6 April 2016, the SFC commenced proceedings against Yorkey in the Market Misconduct Tribunal for Yorkey’s failure to make timely disclosure on price sensitive information, thus breaching disclosure requirements in the SFO.

Background

The SFC has commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Yorkey Optical International (Cayman) Limited (Yorkey) for failing to disclose price sensitive information as soon as reasonably practicable.

The SFC has also commenced proceedings in the MMT against Mr Nagai Michio, the Chief Executive Officer and Executive Director of Yorkey, and Mr Ng Chi Ching, Financial Controller and Company Secretary of Yorkey, for their reckless or negligent conduct causing the alleged breach by Yorkey of the provisions of the statutory corporate disclosure regime or their failure to take all reasonable measures from time to time to ensure that proper safeguards exist to prevent the alleged breach.

The SFC found that, contrary to the published expectations of Yorkey’s management of significant growth and increasing profitability for the second half of 2012 as compared to the first half of 2012, Yorkey in fact sustained material losses in the second half of 2012 and its financial performance deteriorated significantly with the result that there was a substantial year-on-year decline in its 2012 profits on a full-year basis.

The information about Yorkey’s material losses in the second half of 2012 and the significant deterioration in its financial performance were apparent from the figures contained in the internal management accounts.  These figures would have been a clear indication to the senior management of Yorkey that the results for the second half of 2012, and hence the full year of 2012, would be much worse than expected.  This information came to the knowledge of Yorkey and its CEO from around mid-December 2012 or mid-January 2013 at the latest. However, it was not disclosed to the public until the publication of Yorkey’s audited annual results for the year ended 31 December 2012 (2012 Final Results) on 25 March 2013.

The SFC alleges that the information about Yorkey’s material losses in the second half of 2012 and the significant deterioration in its financial performance was specific information regarding Yorkey, price sensitive and not generally known to the public at the material time. Had the information been known to the investing public, it would be likely to materially affect the share price of Yorkey.

Comments

The proceedings to be take place at the MMT will determine firstly whether a breach of a disclosure requirement under sections 307B and 307G of Part XIVA of the Securities and Futures Ordinance (SFO) has taken place and secondly the identity of any person who is in breach of the disclosure requirement.

Readers are reminded that, under section 307B of the SFO, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public. In addition, under section 307G of the SFO, every officer of a listed corporation must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the corporation. If a listed corporation is in breach of a disclosure requirement, an officer of the corporation – (a) whose intentional, reckless or negligent conduct has resulted in the breach; or (b) who has not taken all reasonable measures from time to time to ensure that proper safeguards exist to prevent the breach, is also in breach of the disclosure requirement.

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

http://www.mmt.gov.hk/eng/rulings/Yorkey_ruling_06042016_e.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR33

 

 

5.  SFC bans Andrew Chow Ho Cheung for life

On 21 April 2016, Andrew Chow Ho Cheung was prohibited from re-entering the industry for life following his conviction for offences of fraud and theft under the Theft Ordinance.

Background

At the material time, Chow was responsible for introducing and selling investment products to customers of HSBC. The Court found that Chow has forged the signatures of a number of customers on bank documents, changed the subscription fee rates on subscription forms without the knowledge and agreement of a client; and made unauthorized payments and withdrawals to and from a number of customers’ accounts. Chow was sentenced to two years imprisonment by the District Court on 19 May 2015.

Chow’s case was referred to the SFC by the Hong Kong Monetary Authority. The SFC considers Chow is not a fit and proper person to be licensed or registered to carry on regulated activities as a result of his convictions.

Comments

Chow was a relevant individual engaged by HSBC to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance. Chow is currently not registered with the Hong Kong Monetary Authority or licensed by the SFC.

The HKMA’s linkage with the SFC relates primarily to the supervision of banks, since authorized financial institutions (“AFIs”) which are regulated by the HKMA have to be registered with the SFC as registered institutions if they wish to carry out an SFC-regulated activity. In supervising these AFIs, the HKMA applies all SFC criteria, including the “fit and proper” criteria. If the HKMA suspects malpractice by registered institutions in respect of an SFC-regulated activity, it may refer such cases to the SFC, which may directly review those institutions.

Further, readers should note that pursuant to section 194 of the SFO, if the SFC finds that a “regulated person is guilty of “misconduct” or is not a fit and proper person, the SFC may:

  • In the case of a licensed corporation or representative, revoke or suspend the license in respect of all or part of the licensed corporation or representative, revoke or suspend the license in respect of all or part of the regulated activity;
  • In the case of the responsible officer, revoke or suspend approval as a responsible officer;
  • Publicly or privately reprimand the regulated person;
  • Prohibit the regulated person from applying for a license, registration, approval as a responsible officer or entry in the HKMA register, or to act as an executive officer; and
  • Separately or in addition order the regulated person to pay penalty up to the greater of HK$10 million or three times the profit gained or loss avoided as a result of his misconduct.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR36

 

 

6. SFC formally adopts initiatives to enhance fund authorization process after pilot-run

On 22 April 2016, following a six-month pilot period ending on 8 May 2016, the SFC announced that it will proceed to formally adopt its initiatives to enhance the authorization process for new fund applications (“Revamped Process”) and for new Mandatory Provident Funds (MPF) and Pooled Retirement Fund (PRF) products.

Background

On 9 November 2015, the SFC launched the Revamped Process. During the six-month pilot period, the SFC has been closely monitoring the operation of the Revamped Process and has engaged in open dialogue with industry participants to seek their feedback on the process since its launch.

Under the Revamped Process, a “two-stream” approach will be adopted by the SFC in processing new fund applications with the support of the New Information Checklist and a comprehensive guide on practices and procedures for applications prepared by the SFC to facilitate applicants’ preparation for their applications and compliance with the applicable regulatory requirements (including the requirements under the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (Handbook) and the Code on Unit Trusts and Mutual Funds (UT Code)).

SFC learned that the Revamped Process has received broad industry support and the overall implementation and experience has been smooth and positive. New fund applications received under the Revamped Process (including both Standard Applications and Non-standard Applications) were processed in accordance with the Revised Performance Pledges. We noted that during the Pilot Period,

  1. the quality of new fund applications has generally improved;
  2. responses from applicants have been more timely; and
  3. overall processing time has been shortened in line with the target processing timeframe.

Along with the Revamped Process, the six-month application lapse policy for MPF and PRF products will be formally adopted with effect from 9 May 2016 after consulting the Mandatory Provident Fund Schemes Authority.

Comments

The Revamped Process has been working in promoting fund providers’ compliance and reducing the overall processing time for new fund applications without compromising investor protection.

As seen from the market reaction to the Revamped Process, the overall efficiency of the authorization process has been greatly enhanced since the launch of the pilot initiatives, which has been broadly supported by the industry. With an improved quality of fund applications and more timely responses from applicants, we are also pleased to see that a reduction in the overall processing time for new fund applications has been achieved without compromising investor protection.

For the circular on the pilot program, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=16EC23

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR38

 

 

7. Defendants acquitted of unlicensed dealing

On 22 April 2016, the District Court acquitted IPFUND Asset Management Limited (IPFUND) and Mr Ronald Sin Chung Yin of charges of dealing in securities without a licence.

Background

On 31 May 2014, the SFC commenced the criminal proceedings at the Eastern Magistrates’ Court against IPFUND and its sole director and shareholder Mr Ronald Sin Chung Yin. Both pleaded not guilty to four summonses on 3 July 2014.

The SFC alleged that between February 2011 and December 2011, IPFUND and Sin, both of whom have never been licensed by the SFC, offered and disposed of interests in 16 CIS to investors. IPFUND and Sin managed and controlled those CIS which were not authorized by the SFC.

The funds contributed by the investors were allegedly pooled for use in purchasing commercial properties in Hong Kong; upon the sale of those properties, part of the profit earned would be distributed among the investors in proportion to their contribution towards the purchase price, and IPFUND received consultancy fees based on profits earned from the trading of these commercial properties.

The Judge found that IPFUND was carrying on a business in operating 16 collective investment schemes at the relevant time. However he found that when the investors were investing in these schemes, they were in fact acquiring shares in private shell companies which held the real properties in question and as the definition of “securities” excluded shares of private companies, he held that there was no “dealing in securities”.

Comments

Readers should note that section 114 states that, no person shall carry on a business in a regulated activity, or hold himself as carrying out a business in a regulated activity except for:

  • A corporation licensed under section 116 or 117 for the regulated activity;
  • An authorized financial institution registered under section 119 for the regulated activity;
  • A person authorized under section 95(2) for the regulated activity;
  • When a person is carrying out Type 8 regulated activity by reason only of carrying on one or more activities specified in Part 3 of Schedule 5 to the SFO; or
  • Where in relation to Type 8 regulated activity, a person is only providing financial accommodation and reasonably believes that the financial accommodation is not to be used to facilitate (a) the acquisition of securities listed on a stock market (whether a recognized stock market or any other stock market outside Hong Kong), or (b) the continued holding of such securities.

Further, section 390 SFO states that where the commission of an offence under the SFO by a corporation is proved to have been aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to any recklessness on the part of, any officer of the corporation, or any person who was purporting to act in any such capacity, that person, as well as the corporation, is guilty of the offence and is liable to be proceeded against.

Therefore, readers should be aware that only those who meet one of exceptions above can conduct regulated activities. To avoid doubt, readers may find it useful to consult external compliance firms with extensive expertise in licensing such as CompliancePlus Consulting Limited.

For further details, please refer to the SFC’s press releases dated 13 January 2015 and 31 March 2015:

Unlicensed dealing prosecution transferred to District Court

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=15PR5

Court sets trial date for indictable prosecution for unlicensed dealing

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=15PR34

 

 

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: [email protected] or call at +852-3487 6903.
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Regulatory News (Jun 2016)

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Regulatory News (May 2016)

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Regulatory News (Apr 2016)

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Newsletter – March 2016

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Content

  1. SFC establishes Fintech Contact Point
  2. SFC reprimands and fines Wan Xing HK$200,000
  3. SFC concludes consultation on changes to ATS Guidelines
  4. SFC publishes consultation conclusions on Principles of Responsible Ownership
  5. SFC bans Raaj Shah for 12 months
  6. SFC commences MMT proceedings against Mayer Holdings Limited and its senior management over late disclosure of inside information
  7. SFC bans Ng Hongs for 10 months
  8. SFC reprimands Unicorn Securities Company Limited and fines it and its former responsible officer HK$3.2 million

1. SFC establishes Fintech Contact Point

On 1 March 2016, the SFC established a Fintech (Financial Technology) Contact Point in order to enhance the communication between businesses in Hong Kong that involved in financial technology development and application and the SFC.

Background

The SFC established a Fintech Contact Point as a dedicated channel to encourage businesses involved in the development and application of financial technology in Hong Kong to engage with the SFC.

The SFC has also established a Fintech Advisory Group which will focus on the opportunities, risks and regulatory implications of developments related to Fintech.

According to the Government’s “Report of the Steering Group on Financial Technologies”, Fintech has developed rapidly in recent years.

A variety of Fintech activities are relevant to the SFC’s regulatory work. Among these are automated trading systems; financial product investment and distribution platforms, including robo-advisors; financing platforms, including peer-to-peer lending and equity crowdfunding platforms; and distributed ledger technology, including the application of blockchain to licensed intermediaries, securities and capital markets.

Other Fintech activities relevant to the SFC’s work include big data, data analytics and artificial intelligence to support front and back office operations of licensed intermediaries; compliance, risk and regulatory technologies, including technologies that support regulatory compliance, regulatory reporting and know-your-client; and cyber and data security technologies, including those for client authentication.

Comment

The purpose of the Fintech Contact Point is to facilitate the Fintech community’s understanding of the current regulatory regime, and to enable the SFC to stay abreast of the development of Fintech in Hong Kong. Individuals or firms interested in starting or developing a Fintech business and who believe that business may have implications under the SFO are encouraged to submit their enquiries to the SFC through the e-form (https://www.sfc.hk/web/EN/sfc-fintech-contact-point/submit-your-questions-or-ideas.html).

For information about the SFC Fintech Contact Point, please refer to:

http://www.sfc.hk/web/EN/sfc-fintech-contact-point/

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR19

2. SFC reprimands and fines Wan Xing HK$200,000

On 1 March 2016, Wan Xing was reprimanded and fined HK$200,000 by the SFC for failing the standard of diligence under the SFC Code of Conduct.

Background

SFC has reprimanded and fined Ms Wan Xing HK$200,000 for breach of the SFC’s Code of Conduct.

The SFC investigation found that shortly after BYD Company Limited announced on 23 May 2014 a placement of shares to be listed on the Stock Exchange of Hong Kong, Wan incorrectly represented to some placees that the placing shares allotted to them through the placement could be sold on 28 May 2014 without violating the short selling restriction under the Securities and Futures Ordinance.

Three placees proceeded to sell a total of 2,300,000 placing shares before completion of the placement when the shares were still subject to conditions and could not be sold until 30 May 2014.

The SFC considers it is imperative that all licensed representatives understand the short selling restriction because short selling may carry serious consequences for the uncovered short seller.

Wan did not have an adequate understanding of the short selling restriction and had failed to ascertain when the placement would become unconditional such that the placing shares could legitimately be sold by the placees.

In deciding on the sanction, the SFC considers that Wan’s misconduct had subjected the placees to legal and regulatory risks and fell short of the standard expected of a licensed representative under the Code of Conduct. The SFC also took into account that Wan showed remorse for her conduct.

Comments

Wan Xing is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 7 (providing automated trading services) regulated activities, and is accredited to UBS Securities Asia Limited for Type 1 and Type 2 regulated activities and UBS Securities Hong Kong Limited for Type 1 and Type 7 regulated activities.

Readers are reminded that, under section 170(1) of the SFO, a person shall not sell securities at or through a recognized stock market unless at the time he sells the securities, he or his principal has, or believes and has reasonable grounds to believe that he or his principal has, a presently exercisable and unconditional right to vest the securities in the purchaser of them. Illegal short selling is a criminal offence which carries a maximum penalty of HK$100,000 fine and two years imprisonment upon conviction. In addition, under General Principle 2 (Diligence) of the Code of Conduct, a licensed person should act with due skill, care and diligence in conducting business activities.

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=16PR18&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR18

3.  SFC concludes consultation on changes to ATS Guidelines

On 1 March 2016, the SFC published the consultation conclusion in relation to the proposed amendments to the Guidelines for the Regulation of Automated Trading Services (ATS).

Background

The SFC published conclusions to the consultation on proposed amendments to the ATS Guidelines.

In light of the respondents’ comments, the SFC has made a few changes to the proposed amendments by way of clarification.

The SFC intends to implement the revised ATS Guidelines with effect from the date when mandatory clearing of over-the-counter (OTC) derivative transactions is also implemented. This is expected to be on 1 September 2016.

Central counterparties (CCPs) wishing to provide mandatory clearing services for OTC derivative transactions from that day should ensure that their applications for ATS authorization and CCP designation, with full and complete information and documentation, reach the SFC on or before 29 April 2016.

Comments

The consultation paper on proposed changes to update the ATS Guidelines was released by the SFC on 20 November 2015. The consultation period ended on 31 December 2015. The SFC received 15 written submissions. The respondents generally supported the proposed changes.

As the commencement of phase 1 mandatory clearing of OTC derivative transactions is now deferred from 1 July 2016 to 1 September 2016 (subject to the legislative process for the relevant subsidiary legislation) the implementation of the revised ATS Guidelines is expected to be deferred to that date as well.

The SFC believes that this should allow sufficient time for interested CCPs to prepare their application(s) and for such applications to be processed by the SFC. Interested CCPs are encouraged to contact the SFC and submit their application(s) to the SFC as soon as possible.

The Revised ATS Guidelines are intended to apply to both new applicants as well as those who are already authorized. Existing ATS providers who have concerns about complying with the Revised ATS Guidelines should approach the SFC as soon as practicable to see how their concerns might be addressed.

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

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=15CP5

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

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP5

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR20

4.  SFC publishes consultation conclusions on Principles of Responsible Ownership

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

Background

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

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

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

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

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

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

Comments

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

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

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

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

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

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

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

For further details, please refer to:

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

 

5.  SFC bans Raaj Shah for 12 months

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

Background

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

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

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

Comment

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

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

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

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

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR24&appendix=0

For further details, please refer to:

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

 

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

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

Background

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

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

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

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

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

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

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

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

Comment

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

The proceedings to be take place at the MMT will determine firstly whether a breach of a disclosure requirement under sections 307B and 307G of Part XIVA of the Securities and Futures Ordinance (SFO) has taken place and secondly the identity of any person who is in breach of the disclosure requirement.

Readers are reminded that, under section 307B of the SFO, a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public. In addition, under section 307G of the SFO, every officer of a listed corporation must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the corporation. If a listed corporation is in breach of a disclosure requirement, an officer of the corporation – (a) whose intentional, reckless or negligent conduct has resulted in the breach; or (b) who has not taken all reasonable measures from time to time to ensure that proper safeguards exist to prevent the breach, is also in breach of the disclosure requirement.

For a copy of the SFC’s statement of institution of proceedings, please refer to:

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

For further details, please refer to:

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

 

7. SFC bans Ng Hongs for 10 months

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

Background

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

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

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

Comments

Ng was licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to China Merchants Securities (HK) Co., Limited and China Merchants Futures (HK) Co., Limited from 5 August 2010 to 25 February 2013. Ng is currently not licensed by the SFC.

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

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

For a copy of the statement of disciplinary action, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR26&appendix=0

For further details, please refer to:

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

8. SFC reprimands Unicorn Securities Company Limited and fines it and its former responsible officer HK$3.2 million

On 14 March 2016, the SFC reprimanded Unicorn Securities Company Limited and fined it and its former responsible officer HK$3.2 million for failing to ensure compliance with regulatory requirements in relation to segregation and proper handling of client assets.

Background

The SFC has reprimanded Unicorn Securities Company Limited (Unicorn Securities) and fined it and its former responsible officer, Mr Chan Hoi Shu, HK$3 million and HK$200,000, respectively, relating to failures in handling clients’ money and securities.

Chan, who was primarily responsible for the failures of Unicorn Securities in this connection, was also suspended for a period of 15 months from 12 March 2016 to 11 June 2017.

The SFC found that between March 2011 and December 2013, Unicorn Securities mishandled its clients’ dividend entitlements of shares of HSBC Holdings PLC (HSBC) by going against clients’ instructions in their choices between cash or scrip dividends (i.e. HSBC shares) when submitting their instructions to Hong Kong Securities Clearing Company Limited, and giving the clients’ dividends to others.

On seven occasions, Unicorn Securities chose and received scrip dividends for all clients regardless of the clients’ instructions. After allocating the dividends to clients who elected to receive scrip dividends, Unicorn Securities deposited the remaining scrip dividends into the account of Chan or the account of a client. Chan would then sell these HSBC shares in the market and pay Unicorn Securities an amount equivalent to the clients’ cash dividend entitlements for making payments to the clients who chose cash dividends. Chan kept the profit arising from the difference between the amount he received from selling the HSBC shares and the amount he had to pay to the firm.

Separately, Unicorn Securities chose and received cash dividends for all the clients on two occasions. For clients who opted for scrip dividends, Unicorn Securities would give the clients’ cash dividends to Chan who would then buy HSBC shares in the market to meet clients’ requests for scrip dividend, and he made a profit in the process.

The SFC also found that Unicorn Securities had connived in Chan’s transfer of client money into his personal account and withdrew securities from a client’s account without the necessary written direction from the client.
The conduct of Unicorn Securities demonstrated its failure to put in place adequate and effective internal controls to ensure compliance with relevant regulatory requirements in relation to segregation and proper handling of client assets.

Chan masterminded and involved the firm in the malpractice in handling its clients’ dividend entitlements, initiated and directed his staff to act contrary to clients’ instructions and to transfer clients’ money and securities to his personal accounts and instructed the share withdrawal from the client account without the required written direction.

In determining the penalties, the SFC took into account that:

  • Unicorn Securities and Chan had abused the trust placed by their clients in the firm;
  • Unicorn Securities co-operated in resolving the disciplinary proceedings while Chan admitted to his misconduct;
  • Unicorn Securities engaged an external consultant to conduct a review of its systems and controls in relation to compliance with applicable regulatory requirements and has adopted an automated operation system to reduce the risk of fraud; and
  • there is no evidence that clients suffered any loss as a result of the malpractice.

Comments

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

Chan is licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity. He acted as licensed representative and responsible officer of Unicorn Securities between October 1994 and October 2015. Chan had also been a shareholder of the firm until November 2014 and a director until October 2015. He is currently not accredited to any licensed corporation.

Readers are reminded that, under sections 5, 6 and 10 of the Securities and Futures (Client Securities) Rules and section 4 of the Securities and Futures (Client Money) Rules, an intermediary is required to ensure that client securities and client money should be segregated and dealt with in accordance with the clients’ instructions and cannot be transferred to officers or employees of the firm.

In handling their clients’ money and securities including their dividend entitlements, Unicorn Securities and Chan had failed to ensure compliance with regulatory requirements in relation to segregation and proper handling of client assets. Their acts of directing the clients’ stock dividends to Chan and a client and withdrawing securities from client’s account without the client’s written direction were in breach of the applicable regulatory requirements. Chan’s deposit of client money into his personal account and Unicorn Securities’ connivance to such act also breached their duty to ensure segregation of client money for the protection of client interests.

In addition, Unicorn Securities’ and Chan’s acts of electing stock dividends contrary to their clients’ instructions and giving their dividends to Chan and a client to make a profit without their clients’ knowledge and consent abused the trust that clients placed in the firm.

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=16PR27&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR27

 

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: [email protected] or call at +852-3487 6903.
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Newsletter – February 2016

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Content

  1. SFC publicly censures Goldman Sachs for breaches of the Takeovers Code
  2. HKMA and SFC release conclusions on introducing mandatory clearing and expanding mandatory reporting for OTC derivatives market
  3. SFC bans Chow Chi Keung for life
  4. SFC issues third-quarter report
  5. SFC bans Alice Yim Ping for three years
  6. SFC bans Jia Zhen for 10 months
  7. SFC concludes on expanding scope of short position reporting
  8. Arrest warrant issued for alleged insider dealer
  9. SFC reprimands and fines Yuanta Securities (Hong Kong) Company Limited HK$4 million

1. SFC publicly censures Goldman Sachs for breaches of the Takeovers Code

On 2 February 2016, Goldman Sachs was publicly censured for failing the expected standards of a financial advisor under the Takeovers Code.

Background

The SFC has publicly censured Goldman Sachs (Asia) L.L.C. (Goldman Sachs) for breaches of the Code on Takeovers and Mergers (“Takeovers Code”) whilst acting as a financial advisor to Wing Hang Bank, Limited (Wing Hang Bank) in relation to a voluntary general offer for the bank.

Goldman Sachs’ conduct fell far short of the standards expected of a financial advisor under the Takeovers Code in that between 8 November 2013 and 6 January 2014:

  • Goldman Sachs executed 111 trades in the securities of Wing Hang Bank without making the requisite dealing disclosures and no prior consent was obtained as required for 26 of these trades; and
  • Goldman Sachs failed to comply with the restrictions on issue and distribution of research reports in relation to the research reports it published on Wing Hang Bank.

In deciding the sanction, the SFC took into account Goldman Sachs’ cooperation and self-reporting of the breaches.

Comment

Goldman Sachs is an institution licensed to carry out Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance.

Goldman Sachs fell within the definition of “associate” of Wing Hang Bank for the purposes of the Takeovers Code immediately upon the verbal engagement of Goldman Sachs by Wing Hang Bank on 8 November 2013. The Takeovers Code defines an “associate” to include “any bank and financial and other professional adviser … to the offeree company”. Goldman Sachs was therefore under an obligation according to Rule 22 of the Takeovers Code which requires parties to an offer and their associates to disclose in this case the dealings in the relevant securities of Wing Hang Bank during the offer period either publicly or privately.

Goldman Sachs also fell foul of Rule 21.5 of the Takeovers Codes which forbids the purchase of offeree company shares or the dealing in convertible securities, warrants, options or derivatives in respect of such shares by a financial adviser to an offeree company during the offer period.

The principle behind the disclosure obligations and dealing restrictions under Rule 21.5 and 22 of the Takeover Codes was to maintain a high degree of transparency to the efficient functioning of the market in an offeree company’s shares during the critical period of an offer or possible offer. It also prevents abuse by advisers who are connected to an offeree company.

Practitioners and parties who wish to take advantage of the securities markets in Hong Kong are reminded by the SFC to conduct themselves in accordance with the Takeovers Codes in matters relating to takeovers, mergers and share buy-backs.

In the Executive Statement of this case issued by the SFC, it is stated that Goldman Sachs Investment Banking Team failed to inform Goldman Sachs Control Room of the commencement of the offer period for Wing Hang Bank. Goldman Sachs Control Room did not take any appropriate action even after it became aware of the verbal engagement of Goldman Sachs. Neither did it make any further enquiry with Goldman Sachs Investment Banking Team. Despite wide press coverage on the possible offer for Wing Hang Bank, Goldman Sachs Control Room still failed to follow up with Goldman Sachs Investment Banking Team to verify whether an offer period had commenced for Wing Hang Bank. The above reflected that there is a deficiency in terms of Goldman Sachs’ compliance policies and procedures in relation to takeovers in Hong Kong.

For a copy of the executive statement, please refer to:

http://www.sfc.hk/web/EN/files/CF/pdf/Public_censure/Public%20Censure%20(ENG).pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR7

2. HKMA and SFC release conclusions on introducing mandatory clearing and expanding mandatory reporting for OTC derivatives market

On 5 February 2016, HKMA and SFC published the consultation conclusion in relation to the proposals on introducing mandatory clearing and expanding mandatory reporting for OTC derivatives market.

Background

The Hong Kong Monetary Authority (HKMA) and the SFC published conclusions to the proposals made in a joint consultation on introducing mandatory clearing and expanding mandatory reporting for the second stage of the over-the-counter (OTC) derivatives regulatory regime. The conclusions paper sets out the revised proposals after taking into account market comments and feedback and seeks to further consult on the initial list of financial services providers.

Highlights

Introducing mandatory clearing (phase 1 clearing)

  • deferring commencement of phase 1 clearing from 1 July 2016 to 1 September 2016, subject to the legislative process;
  • defining “financial services provider” by reference to a list of entities to be published in the Government Gazette and seeking views on the initial list of financial services providers by 29 February 2016;
  • having a single clearing threshold which applies to all prescribed persons, whether they are incorporated locally or overseas;
  • excluding both deliverable FX forwards and deliverable FX swaps from the clearing threshold calculation;
  • providing a mechanism for exiting from the clearing obligation;
  • exempting from the clearing obligation certain transactions resulting from a multilateral portfolio compression cycle;

Expanding mandatory reporting (phase 2 reporting)

  • further deferring commencement of phase 2 reporting from 1 January 2017 to 1 July 2017, subject to the legislative process;
  • narrowing the backloading requirement for transactions reported prior to phase 2 reporting so that it does not apply to transactions maturing before 1 July 2018; and
  • excluding from the reporting obligation FX forwards which are entered into for the purposes of buying or selling securities in a foreign currency and which are settled within the settlement cycle for the securities.

Central counterparties who are authorized to provide automated trading services will be subject to mandatory reporting in its current form (phase 1 reporting) from 1 September 2016 to align with the commencement of phase 1 clearing.

A separate conclusions paper on the specific data fields to be completed under phase 2 reporting will be issued shortly.

Comments

On 30 September 2015, the HKMA and the SFC issued a joint consultation paper on introducing mandatory clearing and expanding mandatory reporting. The consultation paper included drafts of the proposed subsidiary legislation namely the Securities and Futures (OTC Derivative Transactions – Clearing and Record Keeping Obligations and Designation of Central Counterparties) Rules (Clearing Rules); and the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping Obligations) Rules (Reporting Rules).

The current phase of mandatory reporting, covering only certain interest rate swaps and non-deliverable forwards (phase 1 reporting), was implemented on 10 July 2015. The next phase (phase 2 reporting) is intended to cover other asset classes as well so as to align with the regulatory reform objectives of the G20 commitments.

The HKMA and SFC are concerned that a staggered approach will unreasonably delay full implementation of mandatory reporting in Hong Kong, particularly as most market participants are unlikely to be active in all five key asset classes. As an alternative, it is proposed in the consultation conclusion to defer the commencement of phase 2 reporting to 1 July 2017 (which is over 12 months from the day of enactment, instead of 6 months as previously proposed). This will allow an extended period for setting up and testing necessary systems and system connections.

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

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=15CP4

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

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=16PR8

3.  SFC bans Chow Chi Keung for life

On 11 February 2016, the SFC banned Chow Chi Keung for life for misappropriation of client monies, forgery and conduct of unauthorized transactions.

Background

The SFC has banned Mr Chow Chi Keung, a former licensed representative of Wocom Securities Limited (Wocom), from re-entering the industry for life for misappropriating client monies, forging client signatures and conducting unauthorized transactions in client accounts.

The disciplinary action follows a SFC investigation which found that, between 2010 and 2012, Chow, in order to conceal his trading losses in client accounts:

  • forged client signatures on 13 Wocom payment instruction forms to facilitate the withdrawal or transfer of client monies from nine client accounts to his or his wife’s personal accounts or other client accounts maintained at Wocom. The total sum in the payment instruction forms amounted to more than HK$2.5 million; and
  • sold securities in five client accounts without their authorization and transferred the sale proceeds to other client accounts.

Chow’s misconduct calls into question his fitness and properness to be a licensed person. In deciding the penalty, the SFC took into account that Chow’s conduct was gravely dishonest and seriously jeopardised the interests of Wocom’s clients and the integrity of the market.

Comments

Readers are reminded that General Principle 1 of the Code of Conduct requires a relevant individual to act honestly, fairly, and in the best interests of its clients, when conducting the business of regulated activities. Chow’s conduct was dishonest and thus breached General Principle 1 (honesty and fairness) of the Code of Conduct.

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=16PR9&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR9

4.  SFC issues third-quarter report

On 18 January 2016, the SFC published its third Quarterly Report for financial year 2015-16 covering the period from 1 October to 31 December 2015.

Background

The SFC published its Quarterly Report summarising key developments from October to December 2015.

Highlights this quarter included a revamp of the SFC’s authorization process for new public investment fund applications which aims to reduce overall processing time.

During the quarter, the SFC issued consultation conclusions on client agreement requirements, proposing changes which provide fairer terms of business for investors. Consultations were also launched on a proposal to extend the short position reporting requirements to all securities that can be short sold under stock exchange rules and on proposed updates to the guidelines for the regulation of automated trading services.

The SFC received 1,916 licence applications this quarter, up 12.3% from the same period last year. Under the dual filing regime, 48 listing applications were vetted during the quarter, up 50% year-on-year.

On the enforcement front, four licensed corporations were disciplined, resulting in total fines of HK$34 million.

Comments

In terms of enforcement actions, readers should note that there has been an increase in the number of licensed corporations and licensed representatives being disciplined and sanctioned compared to the previous quarter.

According to the SFC, from 1 October to 31 December 2015, 4 licensed corporations were disciplined during this quarter resulting in total fines of HK$34 million while 8 licensed representatives were sanctioned.

In the previous quarter, from 1 July to 30 September 2015, 3 licensed corporations were disciplined resulting in total fines of HK$19.9 million and 3 licensed representatives were sanctioned.

For a copy of the quarterly report, please refer to:

http://www.sfc.hk/web/EN/files/ER/Reports/QR/201510-12/Eng/00_full.pdf

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR11

 

5.  SFC bans Alice Yim Ping for three years

On 22 February 2016, Alice Yim Pang was banned by the SFC for three years following investigation of her conducting unauthorized trades thus breaching the Code of Conduct.

Background

The SFC has banned Ms Alice Yim Ping from re-entering the industry for three years from 20 February 2016 to 19 February 2019.

The disciplinary action follows an SFC investigation which found that between October 2009 and June 2011, Yim conducted trades for a client without obtaining his authorization while she was managing his securities account at KGI Asia Limited on a non-discretionary basis.

Yim also used the client’s password to access his securities account to conduct trades for him and did not maintain any records of his instructions for the orders she placed in his securities account.

The SFC is of the view that Yim’s failure in seeking her client’s authorization before conducting trades for him amounted to a breach of the Code of Conduct, and called into question her character, reliability, and fitness and properness to be a licensed person.

Yim’s conduct in the handling of the securities account by accessing it with her client’s password and her failure in maintaining records of client’s instructions demonstrated her failure to act with due skill, care and diligence and in the best interests of the client.

In deciding the penalty, the SFC took into account all relevant circumstances, including Yim’s abuse of the trust that her client placed in her and her otherwise clean disciplinary record.

Comments

Readers are reminded that, under paragraph 7.1 of the Code of Conduct, a licensed person should not effect a transaction for a client unless before the transaction is effected, the client, or a person designated by the client, has specifically authorized the transaction.

In addition, under General Principle 2 of the Code of Conduct, a licensed person is required to act with due skill, care and diligence, in the best interests of his clients and the integrity of the market when conducting his business activities.

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=16PR13&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR13

 

6. SFC bans Jia Zhen for 10 months

On 24 February 2016, Jia Zhen was banned by the SFC for 10 months for entering private arrangement with client and conducting unauthorized trades thus breaching the Code of Conduct.

Background

The SFC has banned Mr Jia Zhen, a former account executive of China Merchants Securities (HK) Co., Limited (CMSHK), from re-entering the industry for 10 months from 20 February 2016 to 19 December 2016 for breach of the SFC’s Code of Conduct.

The SFC found that between February 2010 and June 2011, Jia entered into a private arrangement with a client and effected transactions in the client’s account on a discretionary basis without obtaining the client’s written authorization.

The SFC considers that the client’s interests were prejudiced as Jia’s failure deprived the client from the firm’s protection on discretionary account. As the client’s securities account was not designated as a discretionary account by the firm, the operation of the client’s securities account could not be properly monitored and supervised by the firm.

Comments

Readers are reminded that, under paragraph 7.1 of the Code of Conduct, a licensed person should not effect a transaction for a client unless before the transaction is effected, the client, or a person designated by the client, has specifically authorized the transaction.

As a licensed representative, Jia had a duty to ensure that the Client signed a written authorization before conducting trades in his securities account on a discretionary basis under paragraph 7.1(a) of the Code of Conduct. Jia’s explanation that the Client declined to sign the authorization is not a valid excuse for his failure to do so.

Jia also had a duty to ensure that the Client’s securities account was designated as a discretionary account, and to obtain senior management’s approval of his operation of the Client’s securities account under paragraphs 7.1(c) and (d) of the Code of Conduct.

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=16PR14&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR14

 

7. SFC concludes on expanding scope of short position reporting

On 24 February 2016, the SFC published the consultation conclusion in relation to the expansion of the scope of short position reporting and on corresponding amendments to the Securities and Futures (Short Position Reporting) Rules (SPR Rules).

Background

The SFC published conclusions to a consultation to expand the scope of short position reporting and on corresponding amendments to the Securities and Futures (Short Position Reporting) Rules (SPR Rules).

After considering market feedback, the SFC has concluded that short position reporting will be expanded to cover all securities that can be short sold under the rules of The Stock Exchange of Hong Kong Limited. The reporting threshold for stocks will remain unchanged, while the threshold for collective investment schemes will be set at HK$30 million.

The proposed amendments to the SPR Rules will be submitted to the Legislative Council for negative vetting. To give the market a reasonable lead time for preparation, the SFC plans for the amended rules to come into effect on 15 March 2017, subject to the legislative process. The SFC will make further announcements regarding operational reporting arrangements for the expanded regime in due course.

Comment

On 27 November 2015, the SFC released a consultation to expand the scope of short position reporting and on the corresponding amendments to the Securities and Futures (Short Position Reporting) Rules. The consultation ended on 31 December 2015.

The SFC concluded that, since there were no substantive comments on the text of the proposed amendments to the SPR Rules, they will adopt the amendments as proposed in the Consultation Paper.

The current reporting threshold for stocks is the lower of 0.02% of the stock’s market capitalisation, or HK$30 million. The SFC considered that an early build-up of large short positions would not be detected if the reporting threshold is set at a high level. Therefore, the SFC has decided to set the reporting threshold at the current level.

A list of Designated Securities which can be short sold is published on the website of Hong Kong Exchanges and Clearing Limited. (http://www.hkex.com.hk/eng/market/sec_tradinfo/stkcdorder.htm)

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

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=15CP6

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

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=15CP6

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR12

8. Arrest warrant issued for alleged insider dealer

On 25 February 2016, the Court issued an arrest warrant for alleged insider dealer who failed to appear at Court regarding insider dealing charges laid by the SFC.

Background

The Eastern Magistrate’s Court issued an arrest warrant for Ms Tang Xian, a Mainland resident, who did not appear at Court to answer three insider dealing charges laid by the SFC.

On 18 May 2011, China Wireless Technologies Limited (China Wireless) issued a profit warning announcement.  On 19 May 2011, China Wireless’ share price fell 28.9%.

The SFC alleges that Tang, a then manager of the finance department of Yulong Computer Telecommunication Scientific (Shenzhen) Co Ltd, a wholly owned subsidiary of China Wireless, knew that China Wireless recorded a significant decline in profit earnings for the months of January, February and March 2011.

The SFC alleges that, between 11 March and 27 April 2011, Tang traded whilst she knew of information that was price sensitive and was not public until China Wireless disclosed it.  Tang made a total profit of about HK$130,000 from the exercise of 48,000 share options and from the subsequent sale of the converted shares and also avoided a loss of about HK$192,000 from the sale of 140,000 China Wireless shares she already owned.

The SFC told the Court that Tang resides in the Mainland and that she had not returned to Hong Kong since 26 November 2011 after the SFC’s investigation started.

Upon the SFC’s application, Mr Chu Chung Keung, Magistrate of the Eastern Magistracy, issued an arrest warrant against Tang.

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR16

 

9. SFC reprimands and fines Yuanta Securities (Hong Kong) Company Limited HK$4 million

On 29 February 2016, Yuanta Securities was reprimanded and fined HK$4 million for failing to set out actual execution prices to clients and disclose its gains adequately.

Background

The SFC has reprimanded and fined Yuanta Securities (Hong Kong) Company Limited (Yuanta Securities) HK$4 million for failing to disclose the actual execution price and properly and adequately disclose the financial gains it made whilst handling bond transactions for its clients.

An SFC investigation found that from 1 July to 31 December 2012, Yuanta Securities, acting as its clients’ agent, made approximately HK$3.1 million in commission by marking-up or marking-down the execution prices in some of the 256 bond transactions for 96 clients without making proper and accurate disclosure to the clients.

After receiving a client’s buy order, Yuanta Securities’ financial product team would buy the product through a counterparty and mark-up the trading price before passing it to the sales team which would further mark-up the price before selling it to a client. The same approach was used in executing sell orders by marking down the trading prices.

Whilst some of the clients appeared to be aware of the amount of the commission the sales team earned from the trades, such commission was not always properly disclosed in the trading instruction form and was not mentioned in the daily statements sent to the clients. Furthermore, the clients were charged additional fees by Yuanta Securities without their knowledge and consent since they were not informed of the financial product team’s mark-up/mark-down.

The SFC concluded that Yuanta Securities failed to:

  • properly avoid and disclose conflicts of interest and treat its clients fairly or act in their best interests;
  • provide accurate information to the clients regarding the actual execution price and the full extent of the fees or charges it made in respect of the transactions; and
  • set out the actual execution price and the commission and charges in the daily statements sent to clients as required under the law.

Comments

Yuanta Securities is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contract), Type 3 (leveraged foreign exchange trading), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.

Readers are reminded that, under section 5(1) of Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules, licensed corporations which enter into securities transactions with or on behalf of clients are required to prepare and provide contract notes to the clients. Such contract notes must include the information as stipulated under sections 5(3) and (4) of the Rules, including the price of the securities, the rate or amount of commission and charges payable in respect of the transaction.

The SFC stressed that it is a fundamental duty of a licensed person to act in the best interests of its clients and to treat clients fairly by providing them with relevant material information about their transactions. Yuanta Securities failed to provide accurate information to its clients regarding the trading price and its commission charges when trading debt securities for its clients. Its practices of making undisclosed financial gains from the bond transactions at the clients’ expense were unfair to the clients.

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=16PR17&appendix=0

For further details, please refer to:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR17

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

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Speech in LegCo Bills Committee on Securities and Futures (Amendment) Bill 2016 (Agenda) 21 March 2016

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Regulatory News (Mar 2016)

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