Newsletter – February 2016
Content
- SFC publicly censures Goldman Sachs for breaches of the Takeovers Code
- HKMA and SFC release conclusions on introducing mandatory clearing and expanding mandatory reporting for OTC derivatives market
- SFC bans Chow Chi Keung for life
- SFC issues third-quarter report
- SFC bans Alice Yim Ping for three years
- SFC bans Jia Zhen for 10 months
- SFC concludes on expanding scope of short position reporting
- Arrest warrant issued for alleged insider dealer
- 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:
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:
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:
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:
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.
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.
To subscribe, update your email address or unsubscribe, please email [email protected]