Newsletter – June 2014
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- SFC proposed to amend exemptions for disclosure obligations
- SFC proposes greater flexibility for dissemination of prices and net asset values by authorized funds
- Delta Asia Securities Limited reprimanded and fined HK$4 million for failing to safeguard clients’ securities
- SFC banned Christopher Ma Chun Leung for ten years and Wong Man Chung for two years
- Ernst & Young produces audit working papers in Hong Kong and appeals order over Mainland papers
- SFC commenced proceedings against Greencool’s former chairman and seeks to freeze HK$1.59 billion of his assets to compensate investors
- Court maintained sentence of market manipulator
- Broker acquitted of illegal short selling
- SFAT affirmed SFC decision to suspend Jenny Chan Pik Ha
- Pacific Sun Advisors Limited and its director convicted of issuing advertisements without SFC authorization
- SFC banned Li Tak Wa for 15 months
1. SFC proposed to amend exemptions for disclosure obligations
On 18 June 2014, the Securities and Futures Commission (SFC) began a one-month consultation on proposals to amend the Guidelines for the Exemption of Listed Corporations from Part XV of the Securities and Futures Ordinance (Disclosure of Interests) (the Guidelines).
Background
On 10 April 2014, the SFC and the China Securities Regulatory Commission (CSRC) jointly announced Shanghai-Hong Kong Stock Connect, a pilot program for establishing mutual stock market access between Shanghai and Hong Kong. The Shanghai Stock Exchange (SSE) and The Stock Exchange of Hong Kong Limited (SEHK) will enable investors in each market to trade eligible shares listed on the other market through local securities firms or brokers.
Amendments
The amendments would provide two additional categories for exemption under the Guidelines to cover participants of the SEHK as well as clearing participants of a recognized clearing house that are themselves clearing houses.
Under Shanghai-Hong Kong Stock Connect, orders from eligible Mainland investors will be routed to SEHK via a securities trading service company established by the SSE in Hong Kong. In addition, China Securities Depository and Clearing Corporation Limited (ChinaClear) will provide Mainland investors with clearing, settlement, custody and nominee services for SEHK-listed shares.
The securities trading service company and ChinaClear will each come under the existing disclosure obligations under Part XV of the Securities and Futures Ordinance (SFO) if they hold at least a 5% interest in an SEHK-listed company, but would be eligible for exemptions under the proposed amendments. The securities trading service company will be admitted as a participant of SEHK and China Clear will be admitted as a participant of Hong Kong Securities Clearing Company Limited (HKSCC).
Services provided by the securities trading service company are similar to those provided by an SEHK participant who is an SFC-licensed person while services provided by ChinaClear are similar to those provided by HKSCC. SEHK participants who are SFC-licensed persons and HKSCC are currently exempted from the Part XV disclosure requirements if certain conditions are met.
Submitting comments to SFC
The public is invited to submit their comments to the SFC on or before 17 July 2014. Written comments may be sent on line via the SFC site (www.sfc.hk), by email to [email protected], by post or by fax to 2810 5385.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR72
2. SFC proposes greater flexibility for dissemination of prices and net asset values by authorized funds
On 24 June 2014, the Securities and Futures Commission (SFC) began a one-month consultation on proposals to amend the Code on Unit Trusts and Mutual Funds (the Code).
Amendments
The proposals give collective investment schemes greater flexibility in determining the means for making public their offer and redemption prices, net asset values (NAVs) and notices of dealing suspension. More frequent dissemination of prices and NAVs would also be required.
The proposals take into account recent developments in information technology and existing market practices as well as regulatory requirements in major overseas markets.
Submitting comments to SFC
The public is invited to submit their comments to the SFC on or before 23 July 2014. Written comments may be sent on line via the SFC site (www.sfc.hk), by email to [email protected], by post or by fax to 2877 0318.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR76
3. Delta Asia Securities Limited reprimanded and fined HK$4 million for failing to safeguard clients’ securities
On 4 June 2014, the Securities and Futures Commission (SFC) issued a reprimand to Delta Asia Securities Limited (Delta Asia) and fined it HK$4 million for failing to reasonably ensure that client securities were properly safeguarded.
Background
Delta Asia is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 3 (leveraged foreign exchange trading) and Type 4 (advising on securities) regulated activities. Delta Asia is also a participant of the Central Clearing and Settlement System (CCASS) of the Hong Kong Securities Clearing Company Limited (HKSCC) and it maintains a number of stock accounts in CCASS.
During the course of a limited review of Delta Asia’s operation conducted by the SFC’s Intermediaries Supervision Division (ISD) in April 2013, Delta Asia reported to ISD that there had been 35 incidents of settlement shortfalls between 17 March 2010 to 20 February 2013, with the shortfall temporarily covered by other shares or by purchase of the relevant shares on the next day. The SFC conducted an investigation into the activities of Delta Asia, including but not limited to its internal policies and controls in relation to trade settlement. In the course of the investigation, Delta Asia reported three additional incidents of settlement shortfalls to the SFC.
The SFC found that the settlement shortfalls reported by Delta Asia arose as a result of late delivery of physical script for settlement/ late registration of physical script delivered for settlement, or as a result of overselling due to a mistake made by the client/ by Delta Asia’s sales staff.
Use of client securities to settle the transactions of other clients
Between January 2010 and February 2013, Delta Asia used shares belonging to clients and held in segregated client accounts at the Central Clearing and Settlement System (CCASS) to settle transactions for its other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. This occurred without the consent or authorization of the clients, whose shares were used for settlement, contravening the Securities and Futures (Client Securities) Rules on 36 occasions during the period.
In addition, the SFC found that on 2 occasions during the period, Delta Asia had transferred shares belonging to clients and held in the CCASS segregated client accounts to its CCASS clearing account, with a view to settle the transactions for Delta Asia’s other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. However, the transferred shares were eventually not sent to the HKSCC for settlement purpose as a result of the netting of Delta Asia’s positions in the same security on the same day. This occurred without the consent or authorization of the clients whose shares were transferred and were in breach of the Securities and Futures (Client Securities) Rules notwithstanding that the transferred shares were eventually not used for settlement purpose.
Internal Control and Supervisory Failures
The SFC also found that Delta Asia did not have adequate internal controls and procedures in place in relation to the handling of shortfalls during the settlement process, thus allowing the practice of using client assets to settle other clients’ transactions to have gone unchecked for at least 3 years.
Although Delta Asia had a Stock Short Summary Report which identified the short positions of its clients, neither the management nor the compliance function reviewed this report. The settlement staff was left to review, and resolve issues arising out of, the report with little, if any, guidance and supervision from management. This shows that Delta Asia’s management took no active steps to supervise or monitor the operation of the settlement functions, and they simply relied on the settlement staff to identify and report any settlement issues to them.
Comment
Readers are reminded that Sections 6 and 10 of the Securities and Futures (Client Securities) Rules specify the circumstances in which intermediaries may withdraw or otherwise deal with client securities received or held on behalf of clients. The rules require intermediaries to take reasonable steps to ensure that client securities are not deposited, transferred, etc, except in the manner specified.
Readers are further reminded that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients. A licensed person should also have in place and implement proper internal control procedures in relation to the handling of settlement shortfalls.
Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. Any transgression of this obligation, even if the relevant clients are made whole again, cannot be tolerated. In the present case, Delta Asia had clearly breached this fundamental obligation and prejudiced the interests of its clients.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR65
4. SFC banned Christopher Ma Chun Leung for ten years and Wong Man Chung for two years
On 9 June 2014, the Securities and Futures Commission (SFC) banned Mr. Christopher Ma Chun Leung and Mr. Wong Man Chung from re-entering the industry for ten years from 28 May 2014 to 27 May 2024 and two years from 30 May 2014 to 29 May 2016 respectively.
Background
Ma was licensed as a representative 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 was accredited to Morgan Stanley Asia Limited, Morgan Stanley Hong Kong Futures Limited, and Morgan Stanley Hong Kong Securities Limited from July 1999 to May 2011.
Wong was licensed as a representative under the 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 was accredited to Morgan Stanley Asia Limited, Morgan Stanley Hong Kong Futures Limited, and Morgan Stanley Hong Kong Securities Limited (collectively Morgan Stanley) from June 1995 to November 2011.
SFC’s Investigation
The disciplinary actions follow an SFC investigation which found that Ma, the supervisor of a program trading desk, and Wong, a trader under Ma, had acted against the interests of clients and taken advantage of executions of orders of institutional clients in stocks traded on The Stock Exchange of Hong Kong Limited (SEHK). It was found that Ma and Wong had cancelled the trades executed on the SEHK for the clients and re-filled the client orders with trades at stock prices less advantageous to the clients. The cancellations and reallocations involved over 2,500 trades in 20 stocks which caused the institutional clients to pay a total of about HK$8 million more for their shares in 2009 and 2010.
In addition, Ma provided false or misleading information to his employer by altering the trading records which Morgan Stanley relied upon in making the submission to SFC during its investigation. Ma deleted and changed the time stamp and purchase quantity of the executed trades with a view to cover up the cancellation and re-allocation of the executed trades with stock prices less advantageous to the clients.
Disciplinary actions
The SFC considers that the misconduct of Ma and Wong seriously calls into question their fitness and properness to be licensed. Ma and Wong were banned for ten years from 28 May 2014 to 27 May 2024 and two years from 30 May 2014 to 29 May 2016 respectively.
Ma sought to review the SFC’s decision at the Securities and Futures Appeals Tribunal (SFAT) but eventually withdrew his application before the SFAT hearing.
Comment
Readers are reminded once again that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). General Principle 1 of the Code of Conduct requires licensed persons to act honestly, fairly, and in the best interests of its clients and the integrity of the market, when conducting regulated activities.
Readers should also note that SFC’s disciplinary actions against Ma and Wong are empowered by sections 194 to 196 of the Securities and Futures Ordinance (SFO), which provide that the SFC may revoke the license of a regulated person if he is found to be guilty of misconduct or is not fit and proper to be or to remain the same type of regulated person.
For details, please refer to the SFC articles:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR67
5. Ernst & Young produces audit working papers in Hong Kong and appeals order over Mainland papers
On 20 June 2014, Ernst & Young (EY), reporting accountants and auditors of Standard Water, filed a Notice of Appeal in respect of a court order to produce documents held by its Mainland affiliate, EY Hua Ming (EYHM) in relation to an SFC investigation into the proposed listing of Standard Water.
Background
Standard Water applied for listing to the Stock Exchange of Hong Kong (SEHK) on 9 November 2009. In March 2010, EY informed the SEHK of its resignation as reporting accountants and auditors of Standard Water upon discovery of certain inconsistencies in documentation provided by the company. Shortly afterwards, Standard Water also withdrew its listing application. During an SFC investigation into the proposed listing of Standard Water, EY failed to provide the specified accounting records to the SFC citing they could not be produced as EY was not in possession of the records and that they could not be produced because of restrictions under PRC law.
The SFC subsequently brought the proceedings against EY in 2012 to compel the production of the specified records. The Court of First Instance rejected the cited arguments of EY and ordered them to produce the required material to the SFC. EY produced a disc of documents it held in Hong Kong and subsequently filed a Notice of Appeal in respect of the court order to produce documents held by its Mainland affiliate, EYHM.
The disc of documents produced to the SFC were found by EY on various hard drives in its Hong Kong office on the eve of the trial in this case, in March 2013, when production of the documents were refused by EY on the basis that the hard drives belonged to EYHM.
The SFC is investigating the materials contained in the disc produced to determine whether EY has fully complied with the court order and whether any further action needs to be taken against EY.
EY now informs the SFC that it needs another five weeks to complete its search of the hard drives in its Hong Kong office to find additional documents required to be produced to the SFC.
No date has been set for the hearing of EY’s appeal.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR78
6. SFC commenced proceedings against Greencool’s former chairman and seeks to freeze HK$1.59 billion of his assets to compensate investors
On 23 June 2014, the Securities and Futures Commission (SFC) has instituted proceedings in both the Court of First Instance (CFI) and the Market Misconduct Tribunal (MMT) against former chairman and chief executive officer, Mr Gu Chujun, and other senior executives of Greencool Technology Holdings Limited (Greencool), alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004.
Background
Greencool was listed on the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong Limited (SEHK) on 13 July 2000. On 1 August 2005, trading in Greencool shares was suspended and Greencool was subsequently delisted on 18 May 2007. On 5 March 2010, Greencool was struck off the register of non-Hong Kong companies by the Registrar of Companies of Hong Kong.
SFC’s investigation
The proceedings before the CFI have been commenced under section 213 of the Securities and Futures Ordinance against Gu, seeking, among other things, an injunction to freeze assets beneficially owned by Gu up to the value of about HK$1.59 billion, and an order for damages to compensate more than 1,300 minority shareholders. The SFC is alleging that Gu directed the fraud and should be ordered to compensate the minority shareholders who were led to acquire Greencool shares on the strength of the distorted financial results.
In the MMT proceedings, the SFC alleges Gu and eight other former senior executives of Greencool, and its former company secretary, were involved in gross overstatements of Greencool’s sales, profit, trade receivables, bank deposits, overstating Greencool’s net asset value and severely understating its bank loans, in annual reports and results announcements released between 2001 and 2005.
The SFC alleges that as a result of the overstatement of bank deposits and the non-disclosure of the bank loans, the net asset value of Greencool for the financial years ended 31 December 2000 to 2004 was overstated by approximately figures between RMB487 million and RMB1,062 million, which represent 43% to 80% of Greencool’s total net assets in these years.
The SFC has identified assets in Hong Kong, namely shares in other Hong Kong listed companies, which the SFC alleges are held for the benefit of Gu by nominees. The SFC is seeking interim orders freezing these shares for the purposes of facilitating compensation orders, if such orders are made by the CFI in the section 213 proceedings. The amount that the SFC is seeking to freeze, up to HK$1.59 billion, is the estimated losses suffered by minority shareholders together with accrued interest, the estimated gains received by Gu as a result of his alleged market misconduct together with accrued interest, and other costs that the CFI or the MMT may require Gu to pay in connection with both proceedings.
For details, please refer to the SFC articles:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR77
7. Court maintained sentence of market manipulator
On 17 June 2014, the Eastern Magistrates’ Court maintained the original sentence of Mr. Chan Wing Fai after considering the Securities and Futures Commission’s (SFC) application to review his sentence.
Background
Between 21 September 2009 and 2 December 2009, Chan bought single board lots of shares of Sonavox International Holdings Limited (Sonavox) and PacMOS Technologies Holdings Limited (PacMOS), causing the price of Sonavox and PacMOS to increase by as much as 80% and 28%, respectively. The SFC alleged that Chan did not have a genuine intention to acquire the two companies’ shares through his single-board-lot bid orders, except for the purpose of marking up the share price of Sonavox and PacMOS.
Chan faced eight charges of creating a false or misleading appearance with respect to the price for dealings in the securities of Sonavox and PacMOS, contrary to section 295 of the Securities and Futures Ordinance (SFO).
Upon trial, Deputy Magistrate Mr. Winston Leung Wing Chung of the Eastern Magistrates’ Court found that the prosecution had failed to prove, beyond reasonable doubt, Chan’s manipulative intent. Chan was acquitted on all charges on 13 January 2012.
An appeal was made by the SFC. On 23 January 2014, the Court of First Instance agreed that the decision to acquit Chan was based on legal errors and subsequently allowed the SFC’s appeal of acquittal.
On 11 April 2014, the Eastern Magistrates’ court convicted Mr. Chan Wing Fai on seven counts of false trading. Chan was sentenced to one month’s imprisonment
Application to review sentence
The SFC was concerned that the court had not taken into account the fact that Chan had relevant prior convictions, having been convicted on 12 summonses of false trading in 2008, which merited a more serious penalty. An application to review sentence was filed by the SFC to the Magistrate.
The Deputy Magistrate Winston Leung Wing Chung, however, considers the original sentence is sufficient to punish the defendant and reflect the nature of Chan’s wrongdoing. The original sentence was maintained.
Comments
Market manipulation commonly includes the release of false or misleading information; the taking up of wash sales from one another within a certain trading period to increase the turnover of the stock or distort the actual share price; the placing of purchase orders at slightly higher prices or sale orders at lower prices to drive up or suppress the price of the securities when the market just opened (marking the open) and the drying up of stocks supply to exert undue upward price pressure on the stocks (cornering shares).
False trading takes place when a person does anything or causes anything to be done with the intention to create a false or misleading appearance of active trading in securities or futures contracts traded on a relevant recognized market, or by means of authorized automated trading services.
Readers should note that false trading is a form of market manipulation. It is a criminal offence and is a category of market misconduct under the Securities and Futures Ordinance (SFO) subject to severe punishment.
Readers are reminded that under section 274 of the SFO, unless the transaction in question is an off-market transaction, a person who directly or indirectly enters into or carries out any transaction of sale or purchase of securities that does not involve a change in the beneficial ownership is also considered to be intentionally creating a false or misleading appearance.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR71
8. Broker acquitted of illegal short selling
On 4 June 2014, the Eastern Magistrates’ Court, on 30 May 2014, found Mr. Wong Hung not guilty of illegal short selling five stocks in January 2012.
Background and allegation
Wong is licensed as a representative under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) regulated activity. He was accredited to Hung Sing Securities Limited at the material time and is currently accredited to KGI Asia Limited.
The Securities and Futures Commission (SFC) alleged that between 6 and 20 January 2012, Wong sold shares of five listed companies through his securities account when the total of all the shares he sold was more than the shares he held, contrary to section 170 of the SFO.
Acquittal
Magistrate Mr. David Chum Yau-fong found that since Wong placed a lot of orders each day, he could not exclude the possibility that Wong was careless about whether he was selling more shares than he held when placing the sell orders. Furthermore, the Magistrate found that the prosecution had failed to prove the case beyond reasonable doubt. Accordingly, Wong was acquitted of all charges.
Comment
Readers are reminded that the sales of securities when the person does not have a presently exercisable and unconditional right to sell them is strictly prohibited under Section 170 of the SFO.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR66
9. SFAT affirmed SFC decision to suspend Jenny Chan Pik Ha
On 10 June 2014, the Securities and Futures Commission (SFC) suspended Ms. Jenny Chan Pik Ha for four months from 9 June 2014 to 8 October 2014 following the determination of the Securities and Futures Appeals Tribunal (SFAT) to uphold the SFC’s decision to suspend her license but reducing the period of suspension from six months to four months.
Background and investigation
Chan is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to ICBC International Securities Limited and ICBC International Futures Limited between 20 May 2011 and 20 October 2011. Chan is currently accredited to KGI Asia Limited and KGI Futures (Hong Kong) Limited.
An SFC investigation found that between June 2011 and October 2011, Chan, who was then an account executive of ICBC International Securities Limited (ICBCI Securities), had failed to record and maintain proper audit trail of the orders placed by her clients. She failed to keep any written and/or telephone records in relation to a number of orders placed by her clients, and some of her dealing tickets were either not time stamped or time stamped only after the market had closed. Chan also accepted trade instructions from a third party without obtaining written authorization from her clients as required by ICBCI Securities. Furthermore, Chan deposited HK$300,000 from her personal bank account to a client’s account to settle a trade and verified on ICBC’s internal documentation that the deposit was from the client’s own funds.
Penalty and application for review
The SFC concluded that Chan’s conduct called into question her fitness and properness as a licensed person as Chan had failed to comply with the order recording requirements, and had failed to act with due skill, care and diligence in managing her clients’ accounts. Subsequently, the SFC suspended Chan for a period of six months. On 11 November 2013, Chan filed an application to the SFAT for a review of the penalty.
SFAT’s ruling
The SFAT upheld the SFC’s ruling to suspend Chan’s license but reduced the suspension period from six months to four months, taking into account that Chan’s application for transfer of accreditation after she left ICBCI Securities was delayed for about four months while the SFC’s investigation into her conduct was pending.
Comment
The SFAT’s ruling highlights that internal controls prescribed by licensed corporations, insofar as they seek to ensure competency and integrity in the manner in which employees carry out their dealing responsibilities, are not purely private guidelines between employers and employees, but constitute an integral part of the regulatory system that governs the securities industry.
In this case, the SFAT accepted that a breach of such internal controls may be the subject of disciplinary action of a public nature, as the breach constitutes a failure to comply with the public principles-based regulations governing intermediaries imposed by the SFC.
Readers are once again reminded that it is the duty of a licensed person to abide by the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). General Principle 2 demands that a licensed dealer must act with necessary skill and diligence, doing so in the best interests of clients and the integrity of the market.
For details, please refer to the SFC articles:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR68
10. Pacific Sun Advisors Limited and its director convicted of issuing advertisements without SFC authorization
On 10 June 2014, Pacific Sun Advisors Limited (Pacific Sun) and its director Mr. Andrew Pieter Mantel were convicted at the Tsuen Wan Magistrates’ Court on four charges of issuing advertisements to promote a collective investment scheme without the authorization of the Securities and Futures Commission (SFC). Pacific Sun was fined HK$20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months.
Background
Pacific Sun is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. Mantel, who is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities accredited to Pacific Sun, is a responsible officer of Pacific Sun.
Pacific Sun and Mantel were charged with issuing advertisements, between November and December 2011, promoting a collective investment scheme called “Pacific Sun Greater China Equities Fund” (the Fund) without first obtaining the SFC’s authorization for the advertisements. They were also charged with issuing an advertisement regarding the launch of the fund to the public by email on or around 2 and 3 November 2011 without the authorization of the SFC.
Pacific Sun and Mantel were initially acquitted in March 2013 after arguing that the advertisements fell within an exemption that applied to sales limited to professional investors. The SFC, on the other hand, submitted that the exemption did not permit advertisements that had not been authorized by the SFC to be issued to the public and that in this case there was no evidence the interests in the Fund were only intended or had only been sold to professional investors.
Appeal
The SFC filed for an appeal against the acquittal. In January 2014, The Court of First Instance issued a ruling clarifying that the advertisements in question did not fall within the exemption and ordered the case to be returned to the Magistrates’ Court for reconsideration. The Court of First Instance made it clear that the exemption only applies where the advertisement states on its face that the terms of the offer are limited to professional investors.
This ruling protects retail investors from the risks of direct marketing of inappropriate or risky investment products. Pacific Sun was fined HK$20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months.
Comments
Readers should take note that under section 103 of the Securities and Futures Ordinance (SFO), a person commits an offence if he issues, or has in his possession for the purposes of issue, an advertisement, invitation or document for an investment scheme or financial product without first receiving authorization from the SFC under section 105
Readers are also reminded that under section 103(3)(k) of the SFO, an advertisement does not need SFC authorization when the advertisement is in respect of securities, structured products or interests in a collective investment scheme that are or are intended to be disposed of only to professional investors.
For details, please refer to the SFC article:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR69
11. SFC banned Li Tak Wa for 15 months
On 18 June 2014, the Securities and Futures Commission (SFC) banned Mr. Li Tak Wa from re-entering the industry for 15 months from 18 June 2014 to 17 September 2015.
Background and investigation
Li was licensed as a representative under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to Kaiser Securities Limited and Kaiser Futures Limited between 12 March 2004 and 30 November 2012.
The SFC’s investigation into Li’s conduct stemmed from a client complaint received by Kaiser Securities Limited. Upon investigation, the SFC found that Li had, among other things, conducted unauthorized trading in his client’s accounts at Kaiser and the client had suffered losses as a result.
The client was introduced to Li through a mutual friend and opened her accounts at Kaiser on 21 December 2009. Li was her account executive and he handled her account opening process. Li knew that the client owned and operated a toy manufacturing factory and was not married. He however allowed the client’s account opening forms to state that she was a housewife even though he knew that such information was incorrect. After the client opened her accounts at Kaiser, she verbally authorized Li to trade in her accounts on a discretionary basis. Li admitted that during the period from January 2010 and March 2012, he conducted trades in the client’s accounts on a discretionary basis without obtaining written authorization from the client.
The operation of discretionary accounts was not allowed at Kaiser Securities, and was discouraged at Kaiser Futures. According to a responsible officer of Kaiser Futures, special procedures had to be followed and approval had to be obtained before a discretionary account could be opened. Kaiser Futures had never received any formal request to open a discretionary account and did not know the Client authorized Li to operate her account on a discretionary basis.
Disciplinary action
Although there was evidence that the client verbally authorized Li to trade in her accounts on a discretionary basis, the absence of written authorization avoided monitoring and supervision by Li’s employer. Li also ignored the specific requirements in the Code of Conduct which required him to obtain the client’s prior written approval when conducting more than two day trades and opening short options positions in the client’s futures account, and deprived the client of an opportunity to make an informed decision before such transactions were conducted on her behalf.
The SFC considers Li’s conduct to have demonstrated a preparedness to ignore important safeguards and calls into question his fitness and properness to be a licensed person. Subsequently, Li was banned from re-entering the industry for 15 months from 18 June 2014 to 17 September 2015.
Comment
A “day trade” is a transaction whereby a licensed person executes in the same day an order to buy and an order to sell futures or options contracts on the same market in the same futures contract month, option series or currency contract type for the same client.
Readers should take note that under Paragraph 4 of Schedule 4 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), a licensed person should not accept, carry or initiate on behalf of a discretionary account more than two day trades in the futures market or open short options positions in a discretionary account, unless it has obtained from the client prior written approval specifically authorizing such transactions.
For details, please refer to the SFC article:
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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