按年份存檔： 2014

Newsletter – July 2014

1. Court froze HK$1.2 billion Hisense Kelon of shares in Greencool proceedings
2. Joint HKMA-SFC consultation on mandatory reporting and related record keeping rules for OTC derivatives market
3. SFC launched corporate regulation newsletter
4. Ping An of China Securities (Hong Kong) Company Limited reprimanded and fined HK$6 million over internal control failures
5. SFC revoked license of Yip Wan Fung and banned her for life
6. SFC banned Fa Kwan Lun for 12 months
7. SFC suspended Wu Li Jun for six months
8. Hong Kong Fund management business continued to grow in 2013

1. Court froze HK$1.2 billion Hisense Kelon of shares in Greencool proceedings

On 18 July 2014, the Court of First Instance (CFI) granted an application by the Securities and Futures Commission (SFC) for an interim freezing order over a total of 107,290,000 shares in Hisense Kelon Electrical Holdings Limited (Hisense Kelon), up to a sum of HK$1.2 billion, which the SFC alleges is held for the benefit of Gu Chujun, the former chairman and chief executive officer of Greencool Technology Holdings Limited (Greencool).

Background and allegations

Greencool was listed on the Growth Enterprise Market of the Stock Exchange of Hong Kong Limited 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.

In June 2014, the SFC instituted proceedings in both the CFI and the Market Misconduct Tribunal (MMT) against former chairman and chief executive officer, Mr. Gu Chujun, and other senior executives of Greencool, alleging market misconduct involving grossly overstating the company’s financial accounts for the years ended 31 December 2000 to 2004, contravening section 277 of the Securities and Futures Ordinance (SFO).

The SFC further alleged that Gu directed the massive fraud and should be ordered to compensate the minority shareholders who were induced to acquire Greencool shares on the strength of the distorted financial results

Interim order

On 18 July , An interim injunction was granted by the CFI to preserve assets allegedly held for the benefit of Gu pending trial in the section 213 proceedings in which the SFC is seeking remedial orders for more than 1,300 minority shareholders who purchased Greencool shares during the period the SFC alleges Greencool’s disclosed financial position was grossly overstated.

Gu is prohibited from dealing in or disposing of any of those Hisense Kelon shares personally or through a nominee or agent unless he has already maintained within Hong Kong assets exceeding HK$1.2 billion and he only deals in those of his assets in excess of HK$1.2 billion.

The Hon. Mr. Justice A Chan also ordered Gu to disclose to the SFC, by an affidavit, all of his assets whether within or outside Hong Kong at a value of HK$50,000 or more within 14 days of the service of the order on him.

The SFC is seeking an interim order to freeze up to HK$1.59 billion of Hisense Kelon shares allegedly held by or on behalf of Gu. The order freezes those Hisense Kelon shares for up to HK$1.2 billion and the court has asked for more information on the estimation of both the sum that the MMT may order to be disgorged from Gu and the sum that the court may eventually order Gu to pay to the minority shareholders in these proceedings.

A return date of the interim injunction was fixed on 8 August 2014 when the court will review the interim injunction.

Comment

Readers are reminded that Sections 277 and 298 of the SFO prohibit the distribution of materially false or misleading information that is likely to induce another person to subscribe for or buy securities or deal in futures contracts. Both Sections 277 and 298 are market misconduct provisions.

Readers should also take note that under section 213 of SFO, the Court of First Instance may grant an interim injunction to freeze assets of any person who contravened the SFO on the application of the SFC.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR89

2. Joint HKMA-SFC consultation on mandatory reporting and related record keeping rules for OTC derivatives market

On 18 July 2014, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) began a one-month consultation on the detailed requirements relating to the mandatory reporting and related record keeping obligations under the new over-the-counter (OTC) derivatives regime.

Background

In line with global efforts, the HKMA and SFC have been developing a regulatory regime for the OTC derivatives market in Hong Kong. Subsequent to two consultation exercises (in October 2011 and July 2012), the Securities and Futures (Amendment) Ordinance 2014 was enacted in April 2014. The new legislation, which has yet to come into effect, provides a framework for introducing mandatory reporting, clearing, trading and record keeping obligations in respect of OTC derivative transactions in Hong Kong.

The precise ambit of these obligations, and their related details, will be set out in rules to be made by the SFC with the HKMA’s consent and after consultation with the Financial Secretary. The consultation paper issued on 18 July is the first in a series of consultations on such obligations and details. It sets out the HKMA’s and SFC’s detailed proposals for the mandatory reporting and related record keeping obligations.

Following consultation, the proposed detailed requirements will be set out in subsidiary legislation to be made under the new regime.  The requirements aim to enhance financial market stability by increasing transparency in the OTC derivatives market. The proposals have been developed in line with similar reform efforts in other major financial markets, and with input from the industry.

The proposal

The proposal will cover six key main areas, these include:

• which types of transactions will have to be reported
• who will be subject to reporting and in what circumstances
• what exemptions and reliefs may apply
• reporting timeframes and applicable grace periods
• the form, manner and contents of reports
• related record keeping obligations

Consultation period

The consultation period will end on 18 August 2014. The joint consultation paper can be downloaded from the HKMA website or the SFC website. Interested parties are invited to submit their comments to the HKMA or the SFC on or before the deadline.

For details, please refer to the SFC article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR88

Consultation paper on the Securities and Futures (OTC Derivative Transactions – Reporting and Record Keeping) Rules:

http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=14CP6

3. SFC launched corporate regulation newsletter

On 9 July 2014, the Securities and Futures Commission (SFC) published the first issue of its Corporate Regulation Newsletter as part of an initiative to improve the quality of disclosures by listed companies and listing applicants.

Corporate Regulation team

The SFC’s renewed emphasis on corporate behavior is coordinated by the new Corporate Regulation team, which leads the SFC’s oversight of listed companies from their IPOs onwards. Focusing on disclosure and corporate misconduct, the team works to identify behavior that is prejudicial to the interests of shareholders and the interest of the investing public.

Increase in the number of listed companies’ announcements

The SFC welcomes the increase in the number of listed companies’ announcements to the market since the introduction of the new statutory disclosure regime and it is now looking to shift the focus to making those announcements more meaningful, the newsletter relates. For example, profit alerts and warnings should be price-sensitive by definition, but in 2013 only 14% of such profit alerts and warnings resulted in share price movements. If companies provided clearer, more structured disclosures, announcements would be more meaningful for the market.

Meaningful disclosures

The newsletter also reminds listing sponsors to look critically at what constitutes meaningful disclosures and not take a mechanical box-ticking approach. In particular, sponsors should ensure listing documents provide sufficient risk disclosure for investors to assess a company’s prospects. Sponsors are also reminded to look critically at the opinions of experts engaged on technical matters. Including unreasonable or inaccurate opinions in listing applications could result in the suspension of the vetting process or other sanction.

The newsletter is available on the SFC website. Members of the public may subscribe by filling out the form available under the “Subscribe” link.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR85

Corporate regulation newsletter (July):

http://www.sfc.hk/web/files/ER/Reports/CRN/CR_20140704.pdf

4. Ping An of China Securities (Hong Kong) Company Limited reprimanded and fined HK$6 million over internal control failures

On 9 July 2014, the Securities and Futures Commission (SFC) has reprimanded Ping An of China Securities (Hong Kong) Company Limited (Ping An) and fined it HK$6 million over serious internal control deficiencies and other matters.

Background

Ping An is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.

Lack of internal controls on AML

An SFC investigation found that, between 1 August 2010 and 30 April 2011 (Relevant Period), Ping An failed to establish anti-money laundering internal control procedures. Ping An also failed to actively identify and report to the SFC and the Joint Financial Intelligence Unit suspicious transactions in a timely manner. Furthermore, there was a lack of properly formulated internal AML policies at Ping An and, as Ping An did not provide AML training to members of staff, its staff were unaware of any internal requirements on AML during the Relevant Period.

These failures were in breach of paragraphs 4.2, 9, 10 and 11 of the AML Guidance as well as paragraph 5.4, General Principle (GP) 2, GP3 and GP7 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).

Handling client assets

The SFC also found during the investigation that there was a lack of internal policies on the handling of third party payments at Ping An. For all the 37 third party payments effected during the investigation period, Ping An did not conduct any assessment on the reasons for making the third party payments.

In addition, Ping An did not obtain identity proof of payment recipients for 23 of these third party payments.

Moreover, in some cases, third party payments were effected by Ping An without having received proper written directions from the relevant client.

There was also an occasion where Ping An effected a third party payment to its employee. It concerned a payment made from a client’s account into the account of the client’s daughter, who was then a customer service officer at Ping An.

The manner in which Ping An handled client assets and its lack of policy and control in relation to third party payments during the Relevant Period was in breach of sections 5(1)(b) and 5(3) of the Securities and Futures (Client Money) Rules, paragraphs 2 and 3 of the Suggested Control Techniques and Procedures for Enhancing a Firm’s Ability to Comply with the Securities and Futures (Client Securities) Rules, paragraph 9 under Part VII of the Management, Supervision and Internal Control Guidelines for Persons Licensed By or Registered with the SFC (Internal Control Guidelines), as well as GP2, GP3, GP8, paragraphs 4.3 and 11.1 of the Code of Conduct.

Staff dealing policies

Ping An failed to ensure compliance with its staff dealing policies, which were designed to help minimize conflicts of interests.

Ping An employees are required to declare their personal account(s) upon joining the firm by way of filling in an employee declaration form. However, two of the 15 employees who joined Ping An during and prior to the Relevant Period did not submit the relevant employee declaration forms until after 12 and 19 months upon joining respectively.

Ping An did not have a set of staff dealing policy that was clearly formulated, communicated to its employees and enforced by compliance or senior management, nor did it provide adequate training to ensure staff awareness on conflicts of interests and compliance during the Relevant Period. This is in breach of paragraphs 2 and 3 under Part III of the Internal Control Guidelines, and paragraph 12.2, GP2, GP6 and GP7 of the Code of Conduct.

Account opening procedures

During the Relevant Period, 15 client accounts were opened without valid address proof. Although Ping An had in place a set of account opening procedures, it had failed to diligently enforce such procedures. Ping An was in breach of paragraph 1 under Part VII of the Internal Control Guidelines, and paragraph 5.4, GP2 and GP7 of the Code of Conduct.

Lack of compliance function

The above internal control deficiencies reflect the inadequacy of Ping An’s compliance function during the Relevant Period.  In particular, between mid-October 2010 and March 2011, Ping An had no independent designated compliance officer. The then responsible officer of Ping An at the material time took up the responsibility of overseeing the compliance function at Ping An. However, she did little to discharge her responsibilities.

The SFC considers that Ping An did not have an effective compliance function during the Relevant Period, in breach of Part V of the Internal Control Guidelines and paragraph 12.1, GP2, GP3 and GP7 of the Code of Conduct.

Disciplinary actions

The SFC is of the view that there is a need to send a clear message to the market on the importance of effective internal controls and procedures. The SFC publicly reprimanded Ping An, pursuant to section 194(1)(b)(iii) of the Securities and Futures Ordinance (SFO) and imposed on Ping An a financial penalty of a total of HK$6 million, pursuant to section 194(2)(b) of the SFO.

Comment

This enforcement action is highly relevant to licensed corporation particularly fund managers to remind them that they should check their AML compliance program is in compliance with the relevant SFC and regulatory requirements.

Licensed corporations should have in place proper systems and controls for the identification and reporting of suspicious transactions. The first and foremost step is to gain sufficient knowledge about a customer’s business and financial circumstances (through customer due diligence and ongoing monitoring) to recognize that a transaction, or a series of transactions, is unusual. There should also be procedures in place for reporting internally by escalation to senior management and reporting externally to the Joint Financial Intelligence Unit of any suspicious transactions.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR87

5. SFC revoked license of Yip Wan Fung and banned her for life

On 3 July 2014, the Securities and Futures Commission (SFC) has revoked the license of Ms. Yip Wan Fung and prohibited her from re-entering the industry for life.

Background

Yip is a licensed representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) regulated activity and accredited to Global Credit Securities Limited. She is a responsible officer of Global Credit Securities Limited.

Between late July of 2005 March 2006, Yip conspired to defraud OG Development Company Limited (OGD) and Hing Yip Holdings Limited (Hing Yip ) by dishonestly causing and permitting OGD to enter into a contract with Greatson Corporation Limited (Greatson) whereby OGD agreed to buy machinery at a purchase price of approximately HK$ 153 million.

In October 2010, Yip was sentenced to imprisonment of six years by the District Court following conviction of four criminal offences, including conspiracy to defraud, publishing a false statement and conspiracy to deal with the proceeds of an indictable offence. Yip was also disqualified from becoming directors of companies for eight years without leave of the court. Yip subsequently filed for an appeal. In March 2014, the Court of Final Appeal dismissed Yip’s application.

Disciplinary action

The SFC considers Yip is not a fit and proper person as a result of her convictions. Yip was subsequently prohibited from re-entering the industry for life.

Comment

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). Paragraph 7.1 of the Fit and Proper Guidelines provides that a person may not be fit and proper if that person was found to be of poor reputation, character or reliability, lacking in financial integrity, or dishonest, which may be evidenced by that person’s being found by a court for fraud, dishonesty or misfeasance, or by his being convicted of a criminal offence which is of direct relevance to fitness and properness.

Readers should also note that SFC’s disciplinary actions against Yip are empowered by sections 194 to 196 of the Securities and Futures Ordinance, 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 article:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR83

6. SFC banned Fa Kwan Lun for 12 months

On 7 July 2014, the Securities and Futures Commission (SFC) has banned Mr. Fa Kwan Lun from re-entering the industry for 12 months from 4 July 2014 to 3 July 2015.

Background

Fa was licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 3 (leveraged foreign exchange trading) regulated activities and was accredited to BOCI Securities Limited between May 2006 and December 2012.

The disciplinary action follows an SFC investigation which found that between March 2007 and December 2012, Fa, who was an account executive at the material time, concealed from his employer his beneficial interest in, and his personal trading activities conducted through, the securities account of his mother-in-law. In particular, such interest and personal activities in the account were not disclosed in his declarations of investments and investment accounts made to his employer.

The SFC also found that Fa had handled client money by transferring funds for four clients to their trading accounts through his personal bank account between June 2011 and July 2012. By letting his clients’ money mingle with his money in his bank account, he failed to ensure that his clients’ assets are properly safeguarded.

Disciplinary action

Fa’s concealment of his beneficial interest in and personal dealings through his mother-in-law’s account was dishonest and amounts to a breach of General Principle 1 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). His misconduct had made it impossible for BOCI to actively identify and monitor his trading activities and detect any potential conflict of interest situations and/or other malpractices arising from such activities.

Fa also failed to act with due skill, care and diligence in managing his clients’ accounts and in the best interests of his clients in contrary to General Principles 2 of the Code of Conduct. By letting his clients’ money mingle with his money in his bank account, Fa has also breached General Principles 8 of the Code of Conduct for his failure to diligently ensure that his clients’ assets are properly safeguarded.

The SFC considers Fa’s misconduct called into question his fitness and properness to be a licensed person. Fa was subsequently banned by the SFC from re-entering the industry for 12 months from 4 July 2014 to 3 July 2015.

Comment

Readers are 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 (the “Code of Conduct”).   General Principle of the Code of Conduct requires licensed persons to act honestly, fairly, and in the best interests of their clients and the integrity of the market, in conducting their business activities.

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best interests of its clients.

For details, please refer to the SFC articles:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=14PR86

7. SFC suspended Wu Li Jun for six months

On 3 July 2014, the Securities and Futures Commission (SFC) suspended Ms. Wu Li Jun, a former employee of China Merchants Securities (HK) Co., Limited (China Merchants Securities), for six months from 3 July 2014 to 2 January 2015.

Background

Wu was licensed as a representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and was accredited to China Merchants Securities (HK) Co., Limited and China Merchants Futures (HK) Co., Limited between 25 January 2006 and 14 January 2014.

The disciplinary action follows an SFC investigation which found that between September and December 2011, Wu made nine deposits in the total sum of HK$15,831,032 for various clients to China Merchants Securities’ segregated accounts for holding client monies. Wu knew that China Merchants Securities did not permit her to make cash deposits on behalf of her clients in their absence. She nevertheless disregarded the requirement and deliberately circumvented its internal control procedures governing the ways in which client deposits should be made to China Merchants Securities by disguising the deposits as if they were made by the clients themselves.

Wu also failed to properly and adequately safeguard client assets as she had put her clients’ interests at risk by allowing her clients to deposit their monies into her personal bank account or a third party’s bank account before the monies were deposited into China Merchants Securities’ segregated accounts.

Disciplinary actions

The controls against depositing money directly into bank accounts of account executives are measures to prevent fraud and misappropriation of client assets. As a licensed representative, Wu was required under General Principle 8 of the General Principles of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) to ensure that assets received from clients, including their monies, are properly accounted for and adequately safeguarded. By allowing her clients to deposit monies into her personal or a third party’s bank account before she deposited the monies into CMS’ Accounts, she has put her clients’ interests at risk, in breach of General Principle 8 of the Code of Conduct.

The SFC considers that Wu’s conduct called into question her fitness and properness to be a licensed person.  She was subsequently suspended for six months from 3 July 2014 to 2 January 2015.

Comment

Readers should take note that safe custody of client assets is a fundamental obligation of licensed corporations. It is also the duty of a licensed person to abide by the Code of Conduct. A licensed person should exercise due skill, care and diligence and to act in the best 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=14PR82

 

8. Hong Kong Fund management business continued to grow in 2013

On 8 July 2014, the Securities and Futures Commission (SFC) released the annual Fund Management Activities Survey (FMAS) which shows that the combined fund management business in Hong Kong hit another record high of HK$16,007 billion as of the end of 2013, representing year-on-year growth of 27.2%.

The FMAS

The FMAS has been conducted annually since 1999 to help the SFC assess the industry’s state of affairs for policy setting and operations planning. This year, a total of 555 institutions responded to the survey on a voluntary basis. They included 488 licensed asset management and fund advisory corporations, 47 registered financial institutions and 20 insurance companies

A preferred platform for international investors

The latest survey indicates that Hong Kong continued to be a preferred platform for international investors to invest in Asia. Contributions from overseas investors reached a historic high of HK$11,382 billion, 72% of the total fund management business in 2013.

“The record high assets under management (AUM) of our combined fund management business at the end of 2013 ranks us among the top asset management hubs in Asia ex Japan.  Significant inflows of overseas capital underscore the value and attractiveness of our open markets and our role as an international asset management center,” said Mrs. Alexa Lam, the SFC’s Deputy Chief Executive Officer and Executive Director of Investment Products, International and China.

Performance of different market players

Licensed asset management and fund advisory corporations continued to contribute the largest proportion of the combined asset management business.  Their aggregate asset management and fund advisory businesses amounted to HK$11,788 billion at the end of 2013, up 28.4% from end-2012.

Registered institutions recorded a 27.8% increase in their aggregate asset management and other private banking businesses to HK$3,678 billion at end-2013.

Insurance companies reported a 1.7% increase in their assets under management to HK$364 billion at end-2013.

Highlights of the survey

Non-REIT (real estate investment trust) asset management business has increased by 38.5% to HK$11,417 billion in 2013.  Of this amount, HK$5,827 billion worth of assets (or 51.0%) was managed in Hong Kong and 74.6% of these assets managed in Hong Kong were invested in Asia. Other private banking business increased by 2.7% to HK$2,752 billion in 2013. Fund advisory business grew by 11.6% to HK$1,661 billion in 2013.

The market capitalization of SFC-authorized REITs has increased by approximately 1.7% to HK$177 billion in 2013.

Center for creation and development of renminbi assets and products

The FMAS report notes that Hong Kong is committed to maintain its lead as the center for creation and development of Renminbi assets, products and services.  At the same time, as the number of Mainland-related financial institutions establishing operations in Hong Kong continues to increase, they have brought new opportunities to the Hong Kong market.

SFC’s role in facilitating market development

Furthermore, the report notes that the SFC continues its efforts to facilitate market development and safeguard investor interests through launching various facilitative measures and regulatory initiatives. The SFC is also committed to investor education and the ongoing monitoring of investment products.

“The SFC will continue to follow through with the Mainland regulatory authorities on arrangements in relation to the mutual recognition of funds between Hong Kong and the Mainland. This initiative will help promote Hong Kong domiciled funds. Increased AUM will further develop the ancillary professional service sectors engaged in the product development, investment management and distribution of sales of funds. We need to take positive steps to ensure that we have a robust and attractive platform with sufficient expertise to capture the ever-growing opportunities in the region, with China as one of the key driving forces of economic growth,” Mrs. Lam said.

For details, please refer to the Fund Management Activities Survey:

http://www.sfc.hk/web/EN/files/ER/Reports/2013%20FMAS%20Report.pdf

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

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1. SFC proposed to amend exemptions for disclosure obligations
2. SFC proposes greater flexibility for dissemination of prices and net asset values by authorized funds
3. Delta Asia Securities Limited reprimanded and fined HK$4 million for failing to safeguard clients’ securities
4. SFC banned Christopher Ma Chun Leung for ten years and Wong Man Chung for two years
5. Ernst & Young produces audit working papers in Hong Kong and appeals order over Mainland papers
6. SFC commenced proceedings against Greencool’s former chairman and seeks to freeze HK$1.59 billion of his assets to compensate investors
7. Court maintained sentence of market manipulator
8. Broker acquitted of illegal short selling
9. SFAT affirmed SFC decision to suspend Jenny Chan Pik Ha
10. Pacific Sun Advisors Limited and its director convicted of issuing advertisements without SFC authorization
11. 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:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=14PR70

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

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