Newsletter – July 2015
- Takeovers Panel sanctions Chow Yei Ching, Oscar Chow Vee Tsung and Joseph Leung Wing Kong for breach of Takeovers Code
- SFAT affirms SFC decision to reprimand and fine The Pride Fund Management Limited for failing to enter into mediation managed by the Financial Dispute Resolution Centre
- SFC suspends Tai Nga Chun for operating secret account
- SFC bans Laura Kiang Mang Yi for three years for misconduct
- SFC proposes changes to financial resources rules
- Fund management business reached record high in 2014
- EY’s appeal over audit working papers discontinued
- SFC commences MMT proceedings against AcrossAsia Limited, its Chairman and CEO for late disclosure of inside information
1. Takeovers Panel sanctions Chow Yei Ching, Oscar Chow Vee Tsung and Joseph Leung Wing Kong for breach of Takeovers Code
On 2 July 2015, The Takeovers and Mergers Panel (“Takeovers Panel”) imposed Cold Shoulder Orders against Mr Chow Yei Ching (“Mr Chow Y.C.”), Mr Oscar Chow Vee Tsung (“Mr Oscar Chow”) and Mr Joseph Leung Wing Kong (“Mr Leung”) and publicly censured them for breach of the Code on Takeovers and Mergers and Share Repurchases (“Takeovers Code”).
Background
On 20 November 2013, the Securities and Futures Commission (“SFC”) Takeovers Executive commenced disciplinary proceedings before the Takeovers Panel against Mr Chow Y.C., Mr Oscar Chow and Mr Leung over a serious breach of the Takeovers Code. The SFC’s allegations were that the three actively co-operated to assist the late Ms Nina Kung (“Ms Kung”) to obtain or consolidate control of ENM Holdings Limited (“ENM”) and avoid the triggering of a mandatory general offer under the Takeovers Code. At the relevant time, Ms Kung was the largest shareholder of ENM. She was also the chairwoman and the sole beneficial owner of the Chinachem Group.
Between 2000 and 2002, Mr Chow Y.C. acquired a total of 160 million shares of ENM (approximately 9.69% of ENM’s issued share capital) on Ms Kung’s behalf and at her request. Mr Chow Y.C. paid for the purchase of the ENM shares and was subsequently reimbursed by Ms Kung. The reimbursement was handled by Mr Oscar Chow and Mr Leung. Mr Chow Y.C. held the ENM shares under four British Virgin Island (“BVI”) companies he owned through the issuance of bearer shares until December 2009. To comply with the changes to BVI law requiring greater transparency in the ownership of bearer shares, Mr Chow Y.C. arranged for the ownership of the 160 million ENM shares to be split equally between one of his daughters and Mr Oscar Chow in December 2009.
The Takeovers Code treats persons acting in concert as being the equivalent of a single person and aggregates their shareholdings. Therefore, Mr Chow Y.C.’s acquisitions increased the collective shareholding of the concert group in ENM from 34.64% to 44.33%, thus triggering a mandatory general offer obligation under the Takeovers Code. However, none of the share acquisitions in ENM by Mr Chow Y.C. on Ms Kung’s behalf were publicly disclosed and remained undisclosed for a protracted period. This “warehousing” arrangement enabled Ms Kung to secretly hold the ENM shares and avoid an obligation under the Takeovers Code to make a general offer. As a result, ENM shareholders were deprived of their fundamental right to receive a general offer to buy their shares. Mr Chow Y.C. brought the matter to the SFC’s attention after receiving a letter in late April 2012 from the joint administrators of Ms Kung’s estate making enquiries about shares of ENM that belonged to the estate.
The Cold Shoulder Order
The Cold Shoulder Order against Mr Chow Y.C. denies him direct or indirect access to the securities markets for 10 years from 2 July 2015 to 1 July 2025. Mr Oscar Chow and Mr Leung are denied direct or indirect access to the securities markets for two years from 2 July 2015 to 1 July 2017. The Takeovers Panel published its written decision on 16 April 2015 setting out the reasons for finding them in breach of the abovementioned mandatory offer requirement under the Takeovers Code when they acted in concert with Ms Kung to obtain and consolidate control over ENM Holdings Ltd through the acquisition of voting rights and failed to make the required general offer.
Comment
Rule 26 is the overriding rule in the Takeovers Code and provides the circumstances in which a mandatory general offer must be made. This reflects General Principle 1 of the Takeovers Code and underpins the requirement for equal treatment of shareholders. Failure to make an offer that is required to be made under Rule 26.1 constitutes a serious breach of the Takeovers Code.
Pursuant to Rule 26.1, which came into force in December 2000, a mandatory general offer is required to be made for all the shares in the company if a person or group of persons acting in concert acquired shares resulting in either:
- the person or concert group collectively holding 35% or more of the voting rights (known as the “trigger”). The trigger threshold was reduced to 30% on 19 October 2001; or
- the person or concert group collectively holding between 35% and 50% of the shares and then going on to acquire, either individually or as a group, more than 5% in any 12 month period (known as the “creeper”). The creeper threshold was reduced to 2% on 19 October 2001.
In particular, the Takeovers Code defines persons acting in concert as comprising persons who, pursuant to an agreement or understanding, actively co-operate to obtain or consolidate control of a company through the acquisition by them of voting rights of the company.
For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR70
2. SFAT affirms SFC decision to reprimand and fine The Pride Fund Management Limited for failing to enter into mediation managed by the Financial Dispute Resolution Centre
On 2 July 2015, the SFC reprimanded and fined The Pride Fund Management Limited (“Pride Fund Management”) HK$400,000 over its failure to enter into mediation with an eligible claimant under the Financial Dispute Resolution Scheme (“FDRS”) administered by the Financial Dispute Resolution Centre (“FDRC”).
Background
The above disciplinary action follows a review of the SFC’s decision to sanction Pride Fund Management by the Securities and Futures Appeals Tribunal (“SFAT”). This is the first time the SFC has enforced obligations of intermediaries to comply with the FDRS under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”).
The FDRS, which is administered by the FDRC, is an important part of Hong Kong’s regulatory framework under which banks and brokers are obliged to enter into mediation and potentially arbitration proceedings to resolve certain financial disputes with clients or persons who have been provided with financial services. The SFC states that Pride Fund Management refused to mediate a dispute with an eligible claimant despite requests by FDRC staff, even after FDRC issued a Notice of Non-Compliance to Pride Fund Management in June 2013. It was only after the SFC commenced disciplinary proceedings against Pride Fund Management that it eventually agreed to enter into mediation with the claimant.
Pride Fund Management claimed it had not understood that it was required to comply with the FDRS. However, the Hon Mr Justice Hartmann NPJ, Chairman of the SFAT, who upheld the SFC’s decision but varied the fine from HK$700,000 to HK$400,000, found that Pride Fund Management’s non-compliance was deliberate and that although the obligations under the FDRS may not be generally understood, after consideration of the SFAT’s reasons in this case and public reprimand, there can be no further excuse “on the part of members of the financial industry for a lack of understanding, at least, of the scheme’s basic architecture”. The Hon Mr Justice Hartmann also warned that “sterner penalties can be expected in the future”.
Comment
The FDRC was set up in November 2011 to administer the FDRS, an independent financial dispute resolution scheme which requires financial institutions who are its members to resolve monetary disputes with their customers through mediation and, failing which, arbitration. Other than firms which carry on Type 10 (providing credit rating services) regulated activity under the SFO, financial institutions or financial service providers authorized by the Hong Kong Monetary Authority or licensed by the SFC are to be members of the FDRS. In particular, the FDRC facilitates the resolution of monetary disputes between individual customers and financial institutions in Hong Kong.
The SFC takes non-compliance with the FDRS seriously and has stated that it will continue to take action against SFC-licensed intermediaries who fail to comply with the scheme. Specifically, paragraph 12A of the Code of Conduct requires a licensed person to comply with the FDRS for managing and resolving disputes administered by the FDRC in full and be bound by the dispute resolution processes provided for under the FDRS. Paragraph 12.6 of the Code of Conduct further requires a licensed person to render all reasonable assistance to the FDRS.
For further information, please refer to the Reasons of Determination issued by the SFAT:
http://www.sfat.gov.hk/english/determination/AN-2-2015-Determination.pdf
For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR71
3. SFC suspends Tai Nga Chun for operating secret account
On 13 July 2015, the SFC suspended Ms Tai Nga Chun (“Ms Tai”) for eight months from 10 July 2015 to 9 March 2016.
Background
The disciplinary action follows an SFC investigation which found that from January to June 2013, Ms Tai operated a secret account and conducted 85 personal trading activities through the account, in breach of her employer’s internal control policies with regard to employee dealings. At the time, Ms Tai was employed by Kingston Corporate Finance Limited.
The SFC considers Ms Tai’s conduct was dishonest and made it impossible for her employer to identify and monitor her trading activities, without which licensed corporations would not be able to detect potential malpractices arising from staff trading.
The SFC looked into the trading in Ms Tai’s account and found no sign of any other misconduct. The SFC has therefore reduced the period of suspension taking into account that Tai has expressed remorse for her misconduct.
Licensed persons are required to follow the employee dealing procedures implemented by their employers in accordance with the Code of Conduct, because such controls are not purely internal to their employers but constitute an integral part of the regulatory system, as they seek to ensure integrity in the manner in which employees conduct personal trading.
Comment
Pursuant to Paragraph 12.2 of the Code of Conduct, a licensed or registered person must have a written policy issued to employees specifying whether or not they can deal or trade for their own accounts in securities or futures contracts. If employees are permitted to deal or trade, the policy should specify the following matters:
- the conditions on which employees may do so;
- that employees should identify all related accounts and report them to senior management (“related accounts” refers to accounts of minor children and all accounts in which employees have a beneficial interest.);
- that employees should generally be required to deal through the licensed or registered person or its affiliates;
- that if employees are allowed to deal in securities and/or futures contracts on a recognized stock or futures market respectively or in their derivatives, through other licensed or registered persons, the licensed or registered person (principal) and the employees should arrange for duplicate trade confirmations and statements of account to be provided to the senior management of the licensed or registered person (principal);
- that any transactions covered by this section should be separately recorded and identified in the licensed or registered person’s records;
- that transactions on employees’ and related accounts should be reported to and actively monitored by senior management, who should ensure that there are no irregularities and that the transactions are not prejudicial to the interests of clients; and
- that a licensed or registered person should not knowingly have another licensed or registered person’s employee as a client without the written consent of that employee’s principal.
If the employee breaches his/her employer’s policies issued under Paragraph 12.2 of the Code of Conduct, this may reflect negatively on his/her fitness and properness to remain licensed. This could lead to suspensions or revocations of licenses.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR74
4. SFC bans Laura Kiang Mang Yi for three years for misconduct
On 13 July 2015, the SFC banned Ms Laura Kiang Mang Yi (“Ms Kiang”) from re-entering the industry for three years from 13 July 2015 to 12 July 2018.
Background
Ms Kiang joined Bank Julius Baer & Co. Ltd (“BJB”) in July 2013 and represented to her employer that she had obtained a master’s degree from New York University (“NYU”) in 2008. In fact, she had only studied at the University but did not complete all the requirements to be awarded a master degree.When asked to provide evidence to support her academic qualification, rather than telling the truth, Ms Kiang obtained a fake diploma purporting to have been issued by NYU and submitted it to BJB.
Ms Kiang knowingly made a false representation to her former employer about her academic qualification and her misconduct was aggravated by the manufacture of the fake diploma.
The SFC considers Ms Kiang’s conduct called into question her fitness and properness to be a regulated person.
Comment
Pursuant to General Principle 1 of the Code of Conduct, A licensed or registered person “should act honestly, fairly and in the best interests of its clients and the integrity of the market”. As Ms Kiang’s behaviour is not acting honestly and fairly, it reflects adversely on her fitness and properness to remain as a regulated person.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR75
5. SFC proposes changes to financial resources rules
On 17 July 2015, the SFC released a consultation paper on proposed changes to the Securities and Futures (Financial Resources) Rules (“FRR”) relating to capital and other prudential requirements for licensed corporations engaged in over-the-counter derivatives activity. The consultation paper also proposes certain changes to non-over-the-counter derivatives-related FRR requirements. The three-month consultation ends on 16 October 2015.
Background
The proposals aim to ensure that licensed corporations maintain their capital and liquidity at levels which are commensurate with the risks they undertake pertaining to derivative businesses as well as to encourage them to adopt more advanced risk management standards. The proposed FRR treatments can be calibrated to permit different capital approaches for different levels of over-the-counter derivatives activity.
The SFC proposes a small number of changes to FRR treatments applicable to licensed corporations which do not engage in over-the-counter derivatives activity. These include lowering the haircut percentages for certain types of shares and funds and introducing measures to better facilitate third-party clearing by general clearing brokers.
“The proposed changes aim to enhance our prudential regulatory regime to better align with recent developments in international capital standards for investment intermediaries. This will help maintain Hong Kong’s position as an international financial centre,” said Mr Ashley Alder, the SFC’s Chief Executive Officer.
In summary, the consultation paper’s proposals cover seven key areas:
- minimum capital requirements for licensed corporations engaging in over-the-counter derivatives activity;
- capital treatments for market risks of over-the-counter derivatives and other proprietary trading positions;
- capital treatments for counterparty credit risks arising from over-the-counter derivatives transactions;
- introduction of an internal models approach to calculate the capital requirements for market risk for proprietary investments and counterparty credit risk arising from over-the-counter derivatives transactions;
- measures to address operational risks of licensed corporations engaging in certain types of regulated over-the-counter derivatives activities or opting into certain capital approaches;
- notification and reporting requirements related to over-the-counter derivatives activity; and
- miscellaneous technical changes to other areas of the FRR.
Following the consultation, the SFC plans to further consult the public on subsidiary legislation which sets out the proposed changes. The public is invited to submit their comments to the SFC by 16 October 2015. Written comments may be sent online via the SFC website (www.sfc.hk), by email to [email protected], by post or by fax to 2523 4598.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR76
6. Fund management business reached record high in 2014
On 21 July 2015, the SFC released its annual Fund Management Activities Survey (“FMAS”) which shows that the combined fund management business in Hong Kong sustained another year-on-year increase to reach a record high of HK$17,682 billion, up 10.5%, as of the end of 2014.
FMAS indicate that Hong Kong remained a preferred platform for international investors, who contributed an historic high of HK$12,404 billion and accounted for 71% of the fund management business. Assets managed in Hong Kong increased by nearly 18% to a record level of HK$6,856 billion.
“The latest survey underscored the trend of sustained growth in assets managed in Hong Kong, driven by our role as an intermediary for capital between the Mainland financial markets and the rest of the world,” said Ms Julia Leung, the SFC’s Executive Director of Investment Products. “The launch of the Mainland-Hong Kong Mutual Recognition of Funds scheme on 1 July will further encourage growth in this area and promote Hong Kong as a fund domicile and investment management centre.”
All market players recorded strong performance during 2014.
- The aggregate business of licensed asset management and fund advisory corporations amounted to HK$12,920 billion at the end of the year, up 9.6% and once again representing the largest proportion of the combined asset management business.
- Registered institutions recorded an 11.6% increase in their aggregate asset management and other private banking businesses, which reached HK$4,104 billion.
- Insurance companies reported a 24.2% increase in their assets under management to HK$452 billion.
Some other findings of the survey are set out below:
- Non-REIT (real estate investment trust) asset management business increased by 11.9% to HK$12,770 billion, of which HK$6,856 billion (or 53.7%) was managed in Hong Kong.
- 72.5% of the assets managed in Hong Kong were invested in Asia.
- Other private banking business increased by 12.5% to HK$3,095 billion.
- Fund advisory business decreased by 3% to HK$1,611 billion.
- The market capitalisation of SFC-authorized REITs increased by approximately 16.4% to HK$206 billion.
The FMAS report notes that a robust regulatory regime is fundamental to Hong Kong’s development as an international asset management centre. In this connection, the SFC will continue to work closely with Mainland and overseas regulators as well as stakeholders to maintain an effective and progressive regulatory framework for the benefit of both the financial industry and investing public.
The FMAS has been conducted annually since 1999 to help the SFC assess the state of the industry for policy and operational planning. This year, a total of 587 institutions responded to the survey on a voluntary basis. They included 519 licensed asset management and fund advisory corporations, 47 registered financial institutions and 21 insurance companies.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR77
7. EY’s appeal over audit working papers discontinued
On 23 July 2015, EY has discontinued its appeal against court orders compelling production to the SFC of specified accounting records in its possession.
Background
On 23 May 2014, the Court of First Instance (“CFI”) ordered EY to produce specified accounting records relating to its work as the reporting accountant and auditor for Standard Water Limited (“Standard Water”) to the SFC. In 2012, the SFC brought proceedings against EY to compel the production of these documents after EY failed to provide them as part of an SFC investigation into the proposed listing of Standard Water. EY claimed it was not in possession of the papers and that they could not be produced because of restrictions under PRC law. In the judgment, the CFI rejected EY’s arguments and ordered EY to produce the required material to the SFC finding that EY had “deliberately withheld from SFC information in its knowledge”.
Since the decision of the Court of First Instance was handed down, the specified accounting records have been produced by EY to the SFC. The SFC is satisfied that all requested records have been produced and EY has complied with the court orders and agrees that the appeal is now academic.
The SFC now reminds Hong Kong audit firms that accounting or audit working papers relating to work carried on by Hong Kong accounting firms should be produced to the SFC in response to requests made under the SFO. This will be the case even if the requested documents/records are held on behalf of Hong Kong auditors by their Mainland affiliates or agents, subject to clearance by the Mainland authorities. Further, the obligation to identify records held in the Mainland and to seek their clearance lies with the auditor.
The SFC states that Hong Kong auditors should cooperate fully with the SFC in the investigation of suspected corporate wrongdoing, and that EY could have avoided litigation by conducting proper searches of its own offices here in Hong Kong and, where necessary, cooperating with the Mainland authorities to seek clearance of records created by its affiliate firms on the Mainland.
Comment
Under section 183 of the SFO, the SFC is empowered to request information from persons whom it believes may have information relevant to an investigation. If a person fails to comply with such a request without a reasonable excuse, the SFC can bring proceedings under section 185 of the SFO which empowers the CFI to inquire into the circumstances of non-compliance. The court can order the person to comply with the SFC’s request if it is satisfied that the person does not have any reasonable excuse for not complying.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR79
8. SFC commences MMT proceedings against AcrossAsia Limited, its Chairman and CEO for late disclosure of inside information
The SFC has commenced proceedings in the Market Misconduct Tribunal (“MMT”) against AcrossAsia Limited (“AcrossAsia”) for failing to disclose highly sensitive inside information as soon as reasonably practicable.
Background
The SFC has also commenced proceedings in the MMT against Mr Albert Saychuan Cheok (“Mr Cheok”), the Chairman of AcrossAsia, and Mr Vicente Binalhay Ang (“Mr Ang”), the Chief Executive Officer of AcrossAsia, for their reckless or negligent conduct causing the alleged breach by the company of the provisions of the statutory corporate disclosure regime.
This is the first set of proceedings in the MMT brought by the SFC in relation to the disclosure obligations imposed on listed companies under the Securities and Futures Ordinance since they became effective on 1 January 2013.
The SFC’s allegations arise from the litigation in Indonesia between AcrossAsia and its subsidiary, PT First Media Tbk (“PT First Media”). At dispute was the failure of AcrossAsia to repay the money owed to PT First Media. The litigation led to enforcement proceedings by PT First Media against AcrossAsia, including insolvency-related proceedings in Indonesia against AcrossAsia by way of a petition dated 20 December 2012 and a summons dated 28 December 2012. These proceedings sought, among other things, to suspend AcrossAsia’s obligation for payment of debts temporarily to enable a composition plan to be presented to PT First Media and to appoint an Indonesian judge and administrators to manage AcrossAsia’s assets.
Copies of the court documents, which were in Bahasa Indonesian, were received by AcrossAsia’s Hong Kong office on 2 January 2013, and their English translations were circulated to Mr Cheok and Mr Ang on 4 January 2013. However, AcrossAsia did not disclose such information to the public until 17 January 2013 after the Indonesian court made these insolvency-related orders against AcrossAsia on 15 January 2013. AcrossAsia sought a suspension of trading on 15 January 2013 and when trading resumed on 22 February 2013, the share price fell by 22.5%.
The SFC alleges that the issue of the insolvency-related proceedings in Indonesia together with their contents were specific information regarding AcrossAsia, highly price sensitive and not generally known to the public at the material time because these proceedings threatened AcrossAsia with loss of control of its major asset, including its stake in PT First Media in Indonesia, and could lead to AcrossAsia being put into liquidation.
For further details, please refer to:
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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Newsletter – June 2015
- SFC statement on Hanergy Thin Film Power Group Limited
- SFC reprimanded BNP Paribas Securities (Asia) Limited HK$11 million for failing to report cross trades to the Stock Exchange
- SFC banned Yu Chun Chieh for life for misappropriating client’s money
- SFC concluded consultation on supervisory assistance to regulators outside Hong Kong
- SFC reprimanded and fined Phillip Securities (Hong Kong) Limited HK$1 million over mis-selling of investment product
- Lo Chun Lam convicted of unlicensed futures contracts business
- Former licensee given community services and cold shoulder order for false trading
- SFC statement on the SEHK’s draft proposal on weighted voting rights
1. SFC statement on Hanergy Thin Film Power Group Limited
On 28 May 2015, the Securities and Futures Commission (“SFC”) issued a statement on Hanergy Thin Film Power Group Limited in accordance with the SFC’s Disclosure Policy given the public interest following reports denying such measures have been taken.
The SFC wishes to clarify that a formal investigation into the affairs of Hanergy Thin Film Power Group Limited has been active and is continuing.
The SFC will make no further comment about the investigation.
For details, please refer to:
2. SFC reprimanded BNP Paribas Securities (Asia) Limited HK$11 million for failing to report cross trades to the Stock Exchange
On 1 June 2015, the SFC reprimanded and fined BNP Paribas Securities (Asia) Limited (“BNP”) a total of HK$11 million for its failures to report its direct business transactions (“cross trades”) to The Stock Exchange of Hong Kong Limited (“SEHK”) over a 10-year period.
Background
The SFC’s investigation found that BNP failed to report a total of 4,443 pairs of cross trades to the SEHK involving a total of over HK$6 billion worth of shares conducted by BNP from December 2002 to January 2013. BNP’s reporting failures breached the trading requirements of the SEHK and the Code of Conduct.
As a licensed corporation, BNP also failed to employ effectively resources and procedures needed for the proper performance of its business, including the failure to provide the dealers responsible for the reporting at BNP with sufficient resources to enable them to discharge their reporting duties. The SFC considered that BNP’s failures were particularly serious as they lasted for an extended period of time and involved a large number of trades.
Mr. Mark Steward, the Executive Direct of Enforcement of the SFC, said, “This case demonstrates that reporting failures cannot be taken lightly. This is because market transparency and displaying accurate information to the investing public are essential not only to aid informed investment decisions but also to maintain a fair and orderly market.”
Comment
Readers should note that pursuant to General Principle 7 and paragraph 12.1 of the Code of Conduct, a licensed person should comply with all regulatory requirements applicable to the conduct of its business, including the rules of any exchange of which it is a participant.
In this case, the relevant rules applicable to BNP includes Rule 526 of the Rules of the Exchange, which requires Exchange Participants to report cross trades to the SEHK within specific timeframes. Furthermore, pursuant to General Principles 2 and 3 of the Code of Conduct, licensed persons or corporations are required to conduct their business activities with due skill, care and diligence, in the best interests of its clients and the integrity of the market, employ adequate resources and adopt effective procedures which are needed for the proper performance of its business activities. Paragraph 4.2 of the Code of Conduct also requires licensed corporations to supervise diligently persons employed by it to conduct business on its behalf. Failure to comply with the abovementioned rules may reflect adversely on the fitness and properness of the licensed individual or corporation to remain licensed, and could lead to suspension or revocation of a license. Therefore, readers may find it beneficial to consult external compliance firms to ensure that such rules are complied with.
For details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR57
3. SFC banned Yu Chun Chieh for life for misappropriating client’s money
On 2 June 2015, the SFC banned Mr Yu Chun Chieh (“Mr Yu”), a former licensed representative, from re-entering the industry for life for misappropriating an investor’s money and misleading him with false account statements.
Background
In around May 2013, Mr Yu persuaded a Taiwan-based investor to deposit money for fund investment into Mr Yu’s private bank account in Hong Kong on the false basis that a bank account in Hong Kong was needed to open a securities account with his employer, a licensed corporation. Mr Yu claimed that he will return the money to the investor after the securities account is opened.
The investor subsequently transferred around HK$3.9 million into Mr Yu’s bank account which Mr Yu then misappropriated by transferring the money to another private account in Taiwan. None of the moneys were used to open any securities account or to acquire securities for the investor. To cover up his misconduct, he falsified account statements with his firm’s letterhead to mislead the investor into believing that the money was invested in the funds as agreed. The SFC considers that Mr Yu’s dishonest conduct calls into serious question his fitness and properness to be a licensed person and decided to ban him for life.
Comment
General Principle 1 of the Code of Conduct states that a licensed or registered person “should act honestly, fairly and in the best interests of its clients and the integrity of the market.” Specifically, representations and information to clients should be accurate and not misleading. Failure to adhere to the Code of Conduct could call into question the person’s fitness and properness to remain licensed, and could lead to suspension or revocation of a SFC license.
Furthermore, such conduct could be charged as theft under section 9 of the Theft Ordinance (Cap. 210), which is a criminal offence. Upon conviction, a person who commits theft could be liable to imprisonment for up to 10 years.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR58
4. SFC concluded consultation on supervisory assistance to regulators outside Hong Kong
On 5 June 2015, the SFC released consultation conclusions on proposed amendments to the Securities and Futures Ordinance (“SFO”) for providing assistance to regulators outside Hong Kong.
Background
On 19 December, the SFC issued the Consultation Paper on Proposed Amendments to the Securities and Futures Ordinance for Providing Assistance to Overseas Regulators in Certain Situations for public consultation until 16 January 2015.
After considering the comments of all the respondents, the SFC has decided to propose legislative changes to enable the SFC to provide a particular form of supervisory assistance to regulators outside Hong Kong upon request by making enquiries and obtaining certain records and documents from licensed corporations or their related corporations. These proposed amendments relate to sections 180 (in respect of supervisory powers of the SFC) and 186 (in respect of assistance that may be provided by the SFC to regulators outside Hong Kong) of the SFO. The proposed supervisory assistance will be subject to both existing and new legislative safeguards.
These proposals will also enhance the SFC’s ability to enter into reciprocal supervisory arrangements with regulators outside Hong Kong that will include two-way exchanges of relevant supervisory information. The proposed amendments will give the SFC discretion to provide supervisory assistance to a regulator outside Hong Kong but will not impose an obligation to do so. Information obtained in this manner may only be used for non-enforcement purposes. It should also be noted that while the proposals are incremental to the SFC’s existing information gathering powers, they do not alter existing positions regarding legal professional privilege or privilege against self-incrimination.
Comment
The purpose of the proposed amendments are to enable to the SFC to adhere more closely to international regulatory standards, and to perform more effective supervision of licensed corporations which operate in multiple jurisdictions. Global supervisory cooperation is considered very important among international regulators as it assists regulators to better assist the financial and regulatory risks of industry participants and their likely effects on investors.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR60
5. SFC reprimanded and fined Phillip Securities (Hong Kong) Limited HK$1 million over mis-selling of investment product
On 16 June 2015, the SFC reprimanded and fined Phillip Securities (Hong Kong) Limited (“Phillip Securities”) HK$1 million for failings over its sale of a fund to four clients
Background
An SFC investigation revealed that Phillip Securities sold the American Pegasus Fixed Income Fund – Series II Segregated Portfolio to the four clients around August 2004, involving transaction amount of approximately HK$819,000. The fund was liquidated in July 2011 and the clients have not been able to recover their investment. The American Pegasus Fixed Income Fund – Series II Segregated Portfolio is a viatical settlement which invested in senior life settlement insurance policies issued by investment grade insurance companies in the United States. It is not a product authorised by the SFC. In June 2010, investors were notified that the fund would be wound up as it did not have sufficient value to continue to pay life insurance policy premiums until the expected maturity of the life settlement policies held by it. The fund was placed into official liquidation under Cayman Islands law in July 2011.
The SFC therefore found that Phillip Securities had failed to:
- conduct adequate due diligence on the fund before selling it to clients;
- provide adequate training and/or sufficient product information to its sales staff to ensure they fully understand the nature of the fund, risks involved, and for which types of investors the fund would have been suitable; and
- implement sufficient measures to ensure that its sales staff had assessed the suitability of the fund to clients, and to monitor and review the selling process.
In addition to the fine, Phillip Securities has also agreed to repurchase the fund from the clients at the principal amount less dividends plus interest if the amount had been invested in a 12-month fixed term deposit over the same period of time.
In deciding the sanction, the SFC took into account that Phillip Securities had co-operated with the SFC in resolving the disciplinary proceedings.
Comment
Pursuant to General Principles 2 and 5, and paragraphs 3.4 and 5.2 of the Code of Conduct, licensed corporations are required to ensure that, through the exercise of due diligence, their investment recommendations are based on thorough analysis and are reasonable in all the circumstances, and relevant material information was disclosed to clients.
Furthermore, General Principle 7 and paragraphs 4.3 and 12.1 of the Code of Conduct require licensed corporations to implement and maintain measures appropriate to ensuring compliance with relevant regulatory requirements and internal control procedures to protect their clients from financial losses arising from professional misconduct or omissions. Paragraph 4.2 of the Code of Conduct supplements this by requiring a licensed corporation to ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed by it to conduct business on its behalf. Therefore, it may be useful to consult external compliance firms to implement comprehensive checks and procedures to ensure such requirements and always complied with.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR65
6. Lo Chun Lam convicted of unlicensed futures contracts business
On 17 June 2015, the Eastern Magistrates’ Court convicted Mr. Lo Chun Lam (“Mr. Lo”) of carrying on a business of advising futures contracts when he was not licensed by the SFC to do so.
Background
The court found that between May and August 2013, Mr Lo gave advice on futures contracts in the name of “Cat Sir” or “Trader Cat” to subscribers who had paid to join private discussion groups he had set up in Facebook and LINE, a smartphone application. Subscribers paid fees of HK$3,750 in order to access the private discussion groups for three months. Mr Lo, who pleaded guilty, was fined HK$7,500 and was ordered to pay the SFC’s investigation costs.
Comment
According to section 114 of the a person who carries on a business in a regulated activity or holds himself out as carrying on a business in a regulated activity commits an offence unless he has obtained a license from the SFC. Readers who are unsure of how to apply for licenses and which license to apply for should consult external compliance firms specializing in licensing.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR62
7. Former licensee given community services and cold shoulder order for false trading
On 19 June 2015, the Kowloon City Magistrates’ Court sentenced Mr Wong Chun (“Mr Wong”) to a statutory maximum of 240 hours of community service and imposed a cold shoulder order against him for two years for false trading in the shares of Sino-Tech International Holdings Limited (“Sino-Tech”).
Background
On 27 May 2015, the Eastern Magistrates’ Court convicted Mr. Wong of false trading in respect of the shares of Sino-Tech. Between December 2010 and January 2011, Mr Wong created a false or misleading appearance of active trading in shares of Sino-Tech, using matched trades and some wash trades between his own account and the accounts of two other investors he was able to control to grossly inflate trading volume by more than 400%. As a result, the securities accounts controlled by Mr Wong were able to off-load more than 200 million shares, making a gross profit of more than HK$2 million that he would otherwise not be able to do so
Mr. Wong was remanded in custody pending the sentencing on 19 June 2015, after he was found guilty. The Court also ordered Mr. Wong to pay to the SFC’s investigation costs.
Comment
Under section 303(2)(b) of the SFO, where a person is convicted of an offence under the SFO, the court may, in addition to any penalty, make an order that the person shall not, without the leave of the court, in Hong Kong, directly or indirectly, in any way acquire, dispose of or otherwise deal in any securities, futures contract or leveraged foreign exchange contract, or an interest in any securities, futures contract, leveraged foreign exchange contract or collective investment scheme for the period (not exceeding five years) specified in the order. Such order may last for up to 5 years. Persons who are subject to cold shoulder order will be registered on the SFC website under “Current Cold Shoulder Orders”.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR67
8. SFC statement on the SEHK’s draft proposal on weighted voting rights
On 25 June 2015, the SFC issued the statement in relation to the SEHK draft proposal on weighted voting rights (“WVR”).
Background
The SEHK’s Consultation Conclusions on WVR published on 19 June 2015 outlined some of the relevant features of the draft proposal for a second stage consultation on WVR. The SFC has considered a more detailed version of the proposal.
The Board of the SFC has unanimously concluded that it does not support the draft proposal for primary listings with WVR structures.
The Board of the SFC’s views are set out below.
Eligible applicants would be required to have a very high expected market capitalization:
- Size offers no assurance that a company would treat its shareholders fairly. Any corporate misconduct by an issuer with a large market capitalisation will likely affect more investors and have a greater impact on our markets. For example, these issuers are more likely to become index components which will compel index funds and other types of “passive” institutional investors (which invest public money) to buy and hold their stocks even if fund managers disagree with their WVR structures.
The SEHK would expect eligible applicants to have certain features relating to their businesses and the contribution of their founders as identified in a set of “enhanced suitability” criteria:
- The SFC has significant concerns about these proposals that require regulators to assess compliance with the criteria for companies to be eligible for WVR (for example, whether the applicant has some unique features that cannot be easily replicated and are likely to provide a sustainable competitive advantage, as well as the contribution of the founder or founders). Such criteria can only be applied subjectively and are therefore inherently vague. A regime that relies on the subjective judgement of regulators to determine which listing applicants are eligible for WVR would give rise to regulatory uncertainty and could result in inconsistent and unfair decision-making. The SFC is opposed to proceeding on this basis.
WVR structures would be permitted for new listing applicants only (with appropriate anti-avoidance measures):
- The SFC is of the view that Hong Kong’s securities markets and reputation would be harmed if WVR structures became commonplace. Among other things, the SFC considered whether the draft proposal justifiably restricts the extent to which WVR structures would be permitted and whether there were effective measures to prevent circumvention of these restrictions by ineligible applicants.
- For example, the draft proposal limits WVR structures to new applicants only. This means that existing listed companies and future issuers that list without WVR structures would not be permitted to adopt such structures. For this feature to work, there must be effective measures to prevent ineligible issuers from bypassing the limitation through arrangements such as spin-offs, assets transfers or other forms of corporate restructuring. The SFC has significant concerns regarding the effectiveness of anti-avoidance provisions proposed by the SEHK.
- It is insufficient to look only at controlling the number of WVR issuers. The SFC is concerned, for example, with the potential impact of acquisitions of existing listed assets by WVR issuers. Unrestricted, post-listing transactions could over time result in the transfer of a significant proportion of existing listed businesses and assets to WVR structures. In the SFC’s view, such a development would be detrimental to our markets and the interests of the investing public generally.
- Separately, the draft proposal does not explain how many proposed safeguards and conditions (for example, whether a founder remains actively involved in management) can be monitored on an ongoing basis and what actions can be taken either by regulators or by public shareholders if they are not complied with.
A focus of the discussion to date on WVR has been competition from the United States for the listing of Mainland China businesses. Hong Kong’s business and competitive environment is affected by many factors and can change significantly within a relatively short period. In carrying out its regulatory functions, the SFC considers both long term and short term objectives and seeks to uphold the core principles of fairness and transparency which underpin Hong Kong’s reputation as an international financial centre.
The Board of the SFC has noted the extensive local and international public debate on and widespread coverage of the WVR issue over many months and has discussed the importance of Hong Kong’s reputation as an international financial centre. Against this background, the Board decided that it is in the public interest to issue this statement.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=15PR69
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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Regulatory News (July 2015)
- SFC reprimands and fines Nomura International (Hong Kong) Limited HK$4.5 million for regulatory breach
- SFC commences MMT proceedings against AcrossAsia Limited, its Chairman and CEO for late disclosure of inside information
- EY’s appeal over audit working papers discontinued
- Fund management business reached record high in 2014
- SFC proposes changes to financial resources rules
- New event synopsis: Mainland-Hong Kong Mutual Recognition of Funds Symposium
- SFC bans Laura Kiang Mang Yi for three years
- SFC suspends Tai Nga Chun for operating secret account
- SFC hosts Mainland-Hong Kong Mutual Recognition of Funds Symposium
- SFAT affirms SFC decision to reprimand and fine The Pride Fund Management Limited for failing to enter into mediation managed by the Financial Dispute Resolution Centre
- Takeovers Panel sanctions Chow Yei Ching, Oscar Chow Vee Tsung and Joseph Leung Wing Kong for breach of Takeovers Code