Newsletter – June 2016

Content

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

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

Background

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

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

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

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

Comments

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

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

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

5.  Court rules on appeals over unlicensed activities

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

Background

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

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

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

Comments

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

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

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

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

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

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

Background

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

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

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

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

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

Comments

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

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

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

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

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

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

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

For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR59&appendix=0

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

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

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

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

Background

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

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

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

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

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

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

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

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

Comments

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

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

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

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

For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR61&appendix=0

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

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.