苹果日报访问 – 证监设专责小组查造市
- 证监设专责小组查造市 (2016-10-07)
1. SFC reprimands and fines Morgan Stanley Hong Kong Securities Limited HK$18.5 million over internal control failures
On 24 August 2016, the SFC reprimanded and fined Morgan Stanley Hong Kong Securities Limited (“MSHK”) HK$18.5 million over internal control failures in several areas.
Background
An SFC investigation found that MSHK has failed to comply with the Management, Supervision and Internal Controls Guidelines for Persons Licensed by or Registered with the SFC (“Internal Control Guidelines”), the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code of Conduct”) and its obligation as an exchange participant.
The SFC’s investigations found that MSHK failed to:
Comments
Relevant codes, guidance and obligations
The Code of Conduct, which was revised in March 2016, set out the general principles in considering whether a licensed or registered person satisfies the fitness and properness requirement to remain licensed. The Code is developed and recognized by the International Organization of Securities Commissions and other principles the SFC believes to be fundamental to the undertaking of a licensed person’s business.
The Internal Control Guidelines, which has taken effect since April 2003, provides that key duties and functions shall be appropriately segregated, particularly those duties and functions which when performed by the same individual may result in undetected errors or may be susceptible to abuses which may expose the firm or its clients to inappropriate risks.
Conflicts of interest and client consent
Readers are reminded that, pursuant to paragraph 8 of Appendix to the Internal Control Guidelines, a licensed corporation should avoid apparent and potential conflicts of interest by establishing and maintaining adequate “Chinese Walls”, such as the separation of dealers handling discretionary orders from those handling principal accounts. Further, under General Principles 2 and 6 of the Code of Conduct, it is required to have a separate agency execution and principal trading and to obtain client consent for a facilitation execution.
Documentation of the electronic trading systems
Readers are reminded that, as a licensed corporation that conducts electronic trading of securities is required under paragraph 18 of the Code of Conduct to keep proper records on the design, development, deployment and operation of its electronic trading systems, and have controls that are reasonably designed to ensure its algorithmic trading system and trading algorithms operate in the interest of the integrity of the market.
Further, pursuant to paragraph 3.3.1 of Schedule 7 to the Code of Conduct provides controls should be reasonably designed to monitor and prevent the generation of or passing to the market for execution order instructions from its algorithmic trading system which may interfere with the operation of a fair and orderly market.
Moreover, paragraphs 1.3 and 3.4 of Schedule 7 to the Code of Conduct provide that a licensed corporation should, among other things, keep comprehensive documentation of the design and development of its electronic trading systems and the risk management controls of its systems, and ensure that the design and development of its algorithmic trading system and trading algorithms are documented in writing and that the documentation should show the rationale for the design, development and modification and their intended outcome.
Disclosure of short selling orders
Readers are reminded that pursuant to General Principles 2 and 7 of the Code of Conduct, which require licensed corporation to act diligently and to comply with the applicable regulatory requirements.
Compliance with contract limits
Readers are reminded that a licensed corporation is expected to put primary responsibility on its traders to ensure compliance with the position limits. Being the execution broker, the relevant licensed corporation should have adequate controls to prevent orders that have the effect of exceeding the position limit from being passed to the HKEx and shall not relying primarily on traders to ensure trading will be stopped or the position will be reduced when the limit is approaching.
Reporting of Large Open Positions
Readers are reminded that, as required by the HKEX, any HKFE Participant / Options Exchange Participant holding positions in excess of the reporting level for its own account or for any of client shall file a written report (i.e. Large Open Position report) no later than noon of the next business day after the positions are opened or accumulated, and continue to file a Large Open Position report for as long as the HKFE Participant / Options Exchange Participant holds positions in excess of the reporting level.
Client instructions
Readers are reminded that, under the Guidance Note on Large Open Position Reporting Requirements, a person holding or controlling a reportable position in accounts at more than one Exchange Participant can ask all of its brokerages to report positions in each of the accounts to the HKEx even though positions in the individual accounts may not have reached the reportable level.
Conclusion
In respect to the above-mentioned breaches, MSHK agreed to engage an independent reviewer to conduct a forward looking review of its internal controls. This indicates that the SFC is particularly concerned about compliance with the Internal Control Guidelines.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR83
2. Market Misconduct Tribunal finds Andrew Left of Citron Research culpable of market misconduct
The Market Misconduct Tribunal (“MMT”) has found that Mr Andrew Left of Citron Research disclosed false or misleading information inducing transactions and so engaged in market misconduct under Securities and Futures Ordinance (“SFO”) following proceedings brought by the SFC.
Background
On 21 June 2012, Left published a report on Citron Research’s website (www.citronresearch.com) that contained false or misleading information about Evergrande Real Estate Group Limited (“Evergrande”). The report stated that Evergrande was insolvent and had consistently presented fraudulent information to the investing public.
The Citron report spoke of Evergrande “intentionally and systematically” hiding important financial information from investors, and claimed Evergrande insolvent. Evergrande’s stock price declined by as much as 8.3% in the morning after the report was circulated in the market. Left short-sold 4.1 million Evergrande shares prior to the release of the report and covered the position after the report is released. This caused the SFC to commence an investigation into the case.
Comment
The MMT found that Left used sensationalist language in his report that Evergrande was insolvent and engaged in accounting fraud. It found these allegations were false and misleading and likely to alarm ordinary investors. Left had made these allegations recklessly or negligently with no understanding of the Hong Kong accounting standards that applied and without checking them with an accounting expert or seeking comment from Evergrande.
The MMT will hear from both the SFC and Left as to orders to be imposed on Left on a date to be agreed.
Readers are reminded that pursuant to Section 277 of SFO, a person shall be regarded as having engaged in market misconduct if he discloses, circulates or disseminates false or misleading information as to a material fact which is likely to induce another person to deal in securities in Hong Kong, knowing that, or is reckless or negligent as to whether, the information is false or misleading as to a material fact, or is false or misleading through the omission of a material fact. By publishing false and misleading information in the public domain, Left is alleged to have committed market misconduct within the meaning of Section 277 of SFO.
For a copy of the MMT’s report, please refer to:
http://www.mmt.gov.hk/eng/reports/Evergrande_Report.pdf
For further details, please refer to:
3. Market Misconduct Tribunal finds no insider dealing in Warderly shares
The MMT has decided that the listing matters concerning Warderly International Holdings Limited (“Warderly”) did not involve insider dealing.
Background
The MMT has handed down its decision that Lo Hang Fong, a former Company Secretary of Warderly, and Luu Hung Viet Derrick, a lender and potential investor of Warderly, had not engaged in insider dealing in the shares of Warderly in 2007.
The SFC is studying the report.
Comments
The SFC’s allegations were that Lo and Luu were aware of Warderly being in a perilous financial position with banks withdrawing credit facilities when they sold the company’s shares in 2007 and avoided a total loss of HK$12,564,516 and that Lo and Luu knew the financial crisis facing Warderly was material, highly price sensitive and not generally known to the market.
During the proceedings, the legal issue presented before MMT was to determine whether the concerned events in the case amounted to “relevant information which would if generally known to persons accustomed to or likely to deal in the listed securities of Warderly would be likely to materially affect the price of the listed securities” at the time Lo and Luu dealt in their shares.
The MMT considered reports produced by three different experts among whom one of them deemed the information as relevant while the other two took a contrary view. The MMT however deemed the opinions from the expert who is for the view that the concerned information is relevant as entirely persuasive based on the reasons that he failed to take into consideration various external factors, erred in his calculation and failed to convince the MMT as to the materiality of the information’s effect on price.
Alternatively, the MMT adopted the opinions of the other two experts in that the information regarding the dire financial situation of Warderly was firmly in the public domain given the poor annual report, the poor interim report and the published issue of the writs for non-payment of bank debts. The MMT also acknowledged the opinion that Warderly was seen to be a shell company and its value was to be evaluated as its potential to be reinvested and so rendered the concerned events in the case as entirely superfluous information.
In conclusion, the MMT held that based on the above grounds the concerned events in the case did not constitute relevant information which was if generally known would be likely to materially affect the price of the shares at the time of dealing and decided that no market misconduct had been identified in this case.
For a copy of the MMT’s report, please refer to:
http://www.mmt.gov.hk/eng/reports/Warderly.International.Holdings.Limited.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR77
4. SFC bans Wong Lap Yin for three years
The SFC has prohibited Wong Lap Yin from re-entering the industry for three years from 29 July 2016 to 28 July 2019.
Background
An SFC investigation found that on 30 May 2012, Wong placed a series of unauthorized bid orders for the shares of China Nonferrous Metals Company Limited (“CNFM”) shares via a client’s (“Client A”) account. Each of these orders was placed at a price higher than CNFM’s nominal price and the orders matched exactly with the prevailing best ask price and quantity such that they were executed as soon as they were entered into the market. As a result, the share price of CNFM was artificially raised by 37.3 per cent from HK$0.075 to HK$0.103.
At around the same time, Wong carried out a cross-trade to transfer about 5 million CNFM shares at the price of HK$0.105 from the personal account of another client (“Client B”) to a joint account held by Client B and his wife (“the Joint Account”).
The SFC found that Wong’s purpose in pushing up the share price of CNFM (through the trades in Client A’s account) was to facilitate the subsequent cross-trade between Client B’s personal account and the Joint Account at a higher price to eliminate the debit cash balance in Client B’s personal account.
Comments
The SFC considers that Wong’s conduct was not only unfair to Client A, but was also unfair to other investors because it interfered with the impartiality and objectivity of the normal process of price formation, and might have affected the trading strategy and investment decision of other market participants.
In deciding the penalty, the SFC took into account all relevant circumstances, including that:
Readers are reminded that, under the General Principle 1 (Honesty and fairness) 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 the meantime, under Rule 526(3) of the Trading Rules of the Hong Kong Stock Exchange, the price set for direct business cannot be higher than the best offer in the market. Orders are matched on a strict price and time priority basis, so if Wong had not cleared the ask orders at lower price queues first using Client A’s account, the cross-trade could not have been carried out at HK$0.105.
In order to comply with the rules above, licensed persons are advised to carry out trades in the best interest of their clients. Licensed persons should obtain authorization before trading with clients’ accounts, and cross trades can only be carried out with the reasons stated in 3.10.1 of the Fund Manager Code of Conduct.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
The SFC has fined Quam Capital Limited (“Quam”) HK$800,000 for failing to discharge its duties as a sponsor in relation to the listing of Gayety Holdings Limited (“Gayety”) (now known as Food Idea Holdings Limited) on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (“SEHK”) in July 2011.
Background
The SFC found that Quam breached the SFC’s Code of Conduct and the Corporate Finance Adviser Code of Conduct for its failure to act with due skill, care and diligence when preparing Gayety’s prospectus.
Specifically, the prospectus stated that none of the directors of Gayety had any interest in four of its five largest suppliers during the track record period. However, one of these suppliers was owned by two directors of Gayety who were also its chairman and chief executive officer, respectively.
The prospectus also wrongly represented that none of the key suppliers had ceased supply to Gayety and its group companies when in fact the arrangement with one supplier had discontinued by the end of the track record period.
In preparing the listing application, Gayety had disclosed to Quam the information relating to the ownership of the supplier and the status of the business relationship between Gayety and the supplier. Accordingly, the inaccuracy was not the result of any information withheld by Gayety.
Comments
There is insufficient evidence to establish these matters constitute materially false or misleading statements, in which case, the action taken would have been different with the sponsor facing both criminal and civil responsibility. Nonetheless, these matters are inconsistent with the standards required of sponsors in Hong Kong.
Readers are reminded that sponsors are expected to act in line with the Corporate Finance Adviser Code of Conduct and the Code of Conduct.
For further details, please refer to:
6. SFC suspends Ko Cho Ting for two years
The SFC has suspended Mr Ko Cho Ting for two years from 2 August 2016 to 1 August 2018 for executing suspicious client orders and operating a secret securities account.
Background
The disciplinary action follows an SFC investigation which found that Ko placed suspicious bid orders for the shares of Timeless Software Limited (“Timeless”) for one of his clients. From 1 May to 28 June 2012, the client placed a small order for Timeless shares during the last two minutes of the Continuous Trading Session on 18 trading days and 17 of these late orders were the last order of the day that set a higher closing price for Timeless shares.
Although Ko suspected that the late orders might inflate the closing price of Timeless shares and be considered to be manipulative, Ko acted in accordance with the client’s instructions and made no proper inquiries or took no step to escalate the orders to the management of his firm.
The SFC investigation also reveals that Ko has breached his firm’s employee dealing policy by failing to disclose a personal securities trading account and the securities transactions conducted therein.
Comments
By knowingly placing suspicious orders to the market for his client, Ko is not acting in the best interest of market integrity and his conduct fell short of the standard expected of him.
Readers are reminded that, under the General Principle 1 (Honesty and fairness) 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. Licensed persons are expected to act with integrity and in line with the best interest of their clients at all times.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
The SFC has banned and fined two former representatives of United Simsen Securities Limited (“United Simsen”), for failing to take all reasonable steps to avoid conflicts of interest, and for trading ahead of and on the basis of non-public information about a pending share acquisition of a client.
Background
Lam Chun Yin, former responsible officer of United Simsen, and Yeung Chok Cheong, his subordinate, traded trading shares of Renhe Commercial Holdings Co., Ltd. (“Renhe”) on 31 December 2013. At the material time, United Simsen was engaged by Pacific Plywood Holdings Limited (“Pacific Plywood”) to provide corporate advisory services. Lam and Yeung were responsible for preparing a draft announcement for Pacific Plywood on its acquisition of 80 million Renhe shares on 31 December 2013.
In the morning of 31 December 2013, Lam and Yeung purchased a total of 1.2 million and 392,000 Renhe shares respectively before Pacific Plywood placed its order with United Simsen to buy 80 million Renhe shares. Lam and Yeung sold their Renhe shares during and shortly after Pacific Plywood’s acquisition of the Renhe shares.
Comments
Lam is banned from re-entering the industry for 36 months from 10 August 2016 to 9 August 2019 and Yeung is banned from re-entering the industry for 30 months from 10 August 2016 to 9 February 2019. In addition, Lam and Yeung are fined HK$111,000 and HK$51,830 respectively, which are the profit each of them made from trading shares of Renhe Commercial Holdings Co., Ltd. (“Renhe”) on 31 December 2013.
Readers are reminded that all licensed persons are expected to comply with General Principle 2 (diligence) of the Code of Conduct provides that a licensed person should act with due skill, care and diligence in conducting business activities. In addition, General Principal 6 (conflicts of interest) of the Code of Conduct and paragraph 4 of the Corporate Finance Adviser Code of Conduct provide that a corporate finance adviser/licensed person should try to avoid conflicts of interest.
Readers should also pay attention to section 9.3 of the Code of Conduct which stated “front-running” activities are prohibited.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
8. SFC suspends Ku Yuen Leung for 18 months
The SFC has suspended the licence of Ku Yuen Leung, an account executive of BOCOM International Securities Limited (“BOCOM”), for 18 months from 23 August 2016 to 22 February 2018 for engaging in manipulative activities.
Background
The disciplinary action follows an SFC investigation which found that between 5 and 26 November 2010, Ku created a false or misleading appearance in the market with respect to the shares of Agricultural Bank of China Limited (“ABC”) by placing large-sized bid orders for ABC shares to drive up the prices of five related call warrants.
All the bid orders in ABC shares which were cancelled immediately after Ku sold the related warrants at inflated prices for profit were apparently not driven by genuine demand but intended to influence the market making decision of their liquidity providers.
Ku made a gross profit of HK$15,500 from trading the warrants.
Comments
In deciding the sanction, the SFC is of the view that Ku’s misconduct has undermined the integrity of the market and that he is not a fit and proper person to remain licensed.
Ku, who had applied to the Securities and Futures Appeals Tribunal (“SFAT”) for a review of the SFC’s sanction, was granted leave to withdraw his appeal on 23 August 2016.
Readers are reminded that all corporations (licensed or unlicensed) and licensed individuals are straightly prohibited from market manipulation under section 274 of SFO.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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1. SFC bans Chan Hau Wing for two years
On 13 July 2016, Chan Hau Wing is banned from re-entering the industry for two years by the SFC over unauthorized trades in a client’s account.
Background
The SFC has banned Mr Chan Hau Wing from re-entering the industry for two years from 13 July 2016 to 12 July 2018 for conducting unauthorized trades in a client’s account (“Account”) and acted contrary to the internal policy of Yue Xiu Futures Company Limited (“Yue Xiu Futures“).
The SFC’s investigation found that in the early hours of 8 February 2014, Chan was given a client order to buy 13 futures contracts in crude oil but he mistakenly placed a sell order. Instead of reporting the trading error to the management of Yue Xiu Futures in accordance to the company’s internal policy, Chan sought to reduce the trading loss by trading in the client account without any trading authorization from the client.
Chan did not report the matter to Yue Xiu Futures until the afternoon of 10 February 2014 after the client made enquiries with Yue Xiu Futures about the trades conducted in the Account.
Chan’s conduct, which fell short of the standard set out in the Code of Conduct, cast doubt on his fitness and properness to be a licensed person.
In deciding the sanction, the SFC took into account all relevant circumstances, including that Chan had no previous disciplinary record with the SFC. The affected client had been compensated by Yue Xiu Futures.
Comments
Chan is licensed under the Securities and Futures Ordinance to carry on Type 2 (dealing in futures contracts) regulated activity and was accredited to Yue Xiu Futures until March 2014. Chan is currently not licensed by the SFC nor registered with the Hong Kong Monetary Authority.
Readers are reminded that, under the General Principle 2 (diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), a licensed person should act with due skill, care and diligence in conducting business activities.
Paragraph 7.1 of the Code of Conduct also provides that licensed person should not effect a transaction for a client unless before the transaction is effected the client, or a person designated in writing by the client, has specifically authorized the transaction.
In order to comply with the rules above, licensed persons are advised to obtain client’s approval prior to conduct any trades in client’s account.
For a copy of the statement of disciplinary action, please refer to:
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR68
2. SFC Research paper – Half-yearly Review of the Global and Local Securities Markets
On 15 July 2016, the SFC published the Half-yearly Review of the Global and Local Securities Markets.
Background
The SFC summarises on the major statistics and performances of the Global and Local securities market during the past first half of 2016:
The SFC predicts that the performance of the Hong Kong market will continue to be affected by a combination of risks related to the Mainland and uncertainties in overseas markets.
For a copy of the research paper, please refer to:
http://www.sfc.hk/web/EN/files/SOM/RS%20Paper/EN/RS%20paper%2059.pdf
3. Hong Kong’s fund management business holds steady in 2015
On 22 July 2016, the SFC published the annual Fund Management Activities Survey (FMAS) with findings indicating steadiness in the fund management business in Hong Kong last year.
Background
The SFC released its annual Fund Management Activities Survey which shows that the combined fund management business in Hong Kong decreased slightly by 1.6% year-on-year to HK$17,393 billion as of 31 December 2015.
The survey’s findings indicate that funds sourced from overseas investors accounted for 68.5% of Hong Kong’s fund management business (excluding real estate investment trusts (REITs)). During the year, aggregate private wealth management business including both the private banking business and private client funds, which form part of the asset management and fund advisory business, increased by 4.3% to HK$4,775 billion.
Below is a breakdown of the performance of different market players during 2015:
Some other findings of the survey:
The FMAS report also notes that the SFC is actively pursuing strategies to enhance the market infrastructure for the asset management business in Hong Kong. Following on the implementation of the Mainland-Hong Kong MRF scheme, the SFC will continue to explore similar cooperation arrangements with other jurisdictions. Other initiatives include introducing a new legal and regulatory framework for open-ended fund companies, developing online and alternative fund distribution platforms, and working closely with the industry to broaden the types of fund products.
The FMAS has been conducted annually since 1999 to help the SFC assess the state of the industry for policy and operational planning. This year, a total of 621 institutions responded to the survey on a voluntary basis. They included 555 licensed asset management and fund advisory corporations, 45 registered financial institutions and 21 insurance companies.
Comments
Respondents of this survey fall into three categories: (i) asset management and fund advisory companies licensed under section 116 or 117 of the Securities and Futures Ordinance (“SFO”); (ii) registered institutions under section 119 of the SFO, which are authorized financial institutions as defined in section 2(1) of the Banking Ordinance; and (iii) insurance companies registered under the Insurance Companies Ordinance providing long term business. Readers shall refer to the appendices at the below link for summary of some key findings from the SFC in graphs.
For a copy of the survey, please refer to:
http://www.sfc.hk/web/EN/files/ER/Reports/2015%20FMAS%20Report_English_Final_20160720.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR71
4. SFC commences MMT proceedings against former senior executive of ENN Energy over alleged insider dealing
On 25 July 2016, the SFC announced the commencement of proceedings against former senior executive of ENN Energy in the Market Misconduct Tribunal on alleged insider dealing activities.
Background
The SFC has commenced proceedings in the Market Misconduct Tribunal (“MTT”) against Mr Cheng Chak Ngok, former executive director, chief financial officer and company secretary of ENN Energy Holdings Limited (“ENN Energy”), over alleged insider dealing in the shares of China Gas Holdings Limited (“China Gas”).
On 12 December 2011, ENN Energy and China Petroleum & Chemical Corporation issued a joint Pre-Conditional Voluntary General Offer (“PVGO”) announcement regarding their offer to acquire all of the outstanding shares of China Gas at HK$3.50, representing a premium of 25 per cent to the previous closing price of China Gas’ shares.
The SFC alleges that Cheng, who was aware of the details of the PVGO since mid-November 2011, purchased China Gas’ shares via a nominee account between mid-November 2011 and early December 2011. The shares were sold shortly after the announcement was made at a profit of around HK$3 million.
The SFC also alleges Cheng was aware that the details of the PVGO was information material to the share price of China Gas and was not publicly known before the issue of the announcement.
Comments
The proceedings to be take place at the MMT will determine firstly whether any market misconduct in the nature of insider dealing or otherwise within the meaning of section 270 of Part XIII of the Securities and Futures Ordinance (“SFO”) has taken place and followed by the identity of any person who has engaged in the market misconduct found to have been perpetrated and the amount of any profit gained or loss avoided as a result of the market misconduct found to have been perpetrated.
Readers are reminded that, under section 270(1)(f) of the SFO, a person having received, directly or indirectly, from a person whom he knows or has reasonable cause to believe is contemplating or is no longer contemplating making a take-over offer for the corporation, information to that effect which he knows is inside information in relation to the corporation deals in the listed securities of the corporation or their derivatives, or in the listed securities of a related corporation of the corporation or their derivatives, gives rise to insider dealing.
For a copy of the SFC’s Notice commencing the MMT proceedings, please refer to:
http://www.mmt.gov.hk/eng/rulings/China_Gas_Holdings_Limited_Notice_25072016_e.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR72
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 reprimands and fines Guotai Junan Securities (Hong Kong) Limited HK$1.3 million
On 30 May 2016, Guotai Junan Securities (Hong Kong) Limited (“Guotai Junan”) was reprimanded and fined HK$1.3 million by the SFC for non-compliance with the regulatory requirements in relation to ascertaining client identity.
Background
In July 2014, the SFC requested Guotai Junan to provide details of the ultimate clients of certain transactions it effected for an intermediary client in Korea. Guotai Junan was unable to provide the requested information within two business days of the request pursuant to the Client Identity Rule Policy, due to the intermediary client’s failure to comply with its obligation under its client agreement.
The intermediary client informed the SFC and Guotai Junan on 1 August 2014 that as a matter of Korean law, it could not provide the requested client identity information without its clients’ written consent. It was not until January 2015 that Guotai Junan provided the requested information to the SFC.
Notwithstanding this, Guotai Junan continued to effect more than 8,000 transactions for the intermediary client between August 2014 and January 2015 despite having been reminded by the SFC of its obligation to refuse the business of those who are not prepared to provide ultimate client information to the regulators.
In the circumstances, the SFC found that at the time when Guotai Junan effected those transactions, it could no longer be satisfied on reasonable grounds that it would be able to make available the ultimate client information in relation to such transactions to the SFC on request, which is in contravention of the Client Identity Rule Policy.
In deciding the sanctions, the SFC took into account all relevant circumstances, including, Guotai Junan:
Comments
Guotai Junan is licensed to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance (SFO).
Reader is reminded that, under paragraph 5.4 of the Code of Conduct for Persons Licensed by or Registered with the SFC, the Client Identity Rule Policy explains the client identity rule, and the general approach the SFC will take in enforcing the client identity rule.
Under its client agreement with Guotai Junan, the intermediary client:
(a) agreed to provide ultimate client information to the SFC, the Stock Exchange of Hong Kong and/or the Hong Kong Futures Exchange (“the Regulators”), within two business days of a request; and
(b) confirmed that they and their clients have waived the benefit of any law which prohibited the provision of ultimate client information to the Regulators.
The Client Identity Rule Policy stipulates that a licensed person must refuse the business of those who are not prepared to provide client identity information to the Regulators upon request (paragraph 23). The Client Identity Rule also stipulates that if a licensed person has been put on notice that some intermediary in the chain of intermediaries involved in a transaction might not comply with its agreement in relation to that transaction so that the licensed person could no longer be satisfied on reasonable grounds that the information would be available to the Regulators on request and continued to deal with that intermediary, the SFC would consider taking disciplinary action against the licensed person (paragraph 27).
For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR49&appendix=0
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR49
2. SFC reprimands and fines SynerWealth Financial Limited HK$2.7 million
On 31 May 2016, SynerWealth Financial Limited (“SynerWealth”) was reprimanded and fined HK$2.7 million for internal control failures relating to short selling orders and for failing to report the deficiencies of its trading system to the SFC in a timely manner as required under the SFC’s Code of Conduct.
Background
The SFC’s investigation found that from November 2012 to January 2014, there were at least 65 instances of short sales executed by SynerWealth which resulted from its failure to put in place effective internal control procedures to detect and prevent short selling.
The SFC also found that SynerWealth identified deficiencies in its self-developed trading system as early as January 2013, but it failed to report the material errors or defects of the system to the SFC.
In deciding the disciplinary sanction, the SFC took into account all relevant circumstances of the case, including that:
Comments
SynerWealth is licensed to carry on business in Type 1 (dealing in securities) regulated activity under the Securities and Futures Ordinance (SFO).
Reader is reminded that, under paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the SFC, a licensed or registered person is required to report to the SFC immediately on the happening of any material failure, error or defect in the operation or functioning of its trading, accounting, clearing or settlement systems or equipment.
For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/openAppendix?refNo=16PR50&appendix=0
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR50
3. SFC obtains disqualification orders against former senior executives of China Best Group Holding Limited
On 31 May 2016, the SFC obtained disqualification orders in the Court of First Instance against three former senior executives of China Best Group Holding Limited (“China Best”) for breaching their directors’ duties in handling a proposed acquisition of interests in a coal mine in 2008.
Background
The Court earlier found that that Mr. Wang Jian Hua, former advisor to the board of China Best, had diverted to himself the corporate opportunity of a proposed acquisition of 60% of the equity interest in ChongHou Energy Resources Limited from Asset Rich International Limited (“Asset Rich”), a company ultimately owned by a nominee of Wang and therefore not third parties independent of China Best.
Wang was also found to have devised a scheme to conceal his personal benefit in the proposed acquisition at the expense of China Best and failed to disclose his interest to China Best’s board and in the issue of two false and misleading announcements dated 3 March and 3 December 2008.
The Court also found that Wang’s wife, Ms. Ma Jun Li, former chairman and executive director of China Best, and Mr. Zhang Da Qing, former chief executive officer and executive director of China Best, had failed to make reasonable enquiries in respect of Asset Rich’s and its ultimate beneficial shareholder’s background and connection with Wang and had wrongfully authorized the issue of the two announcements.
The Court has ordered be disqualified Wang from being a director or being involved in the management of any listed or unlisted company in Hong Kong, without leave of the Court, for 10 years. Ma and Zhang were both disqualified for six years.
In making the disqualification orders, the Court considered the gravity of Wang’s misconduct, his role as part of the senior management of the company and the fact that the proposed acquisition was a very substantial acquisition for China Best under the Listing Rules of the Stock Exchange of Hong Kong. The disqualification period imposed for Ma and Zhang took into account their failure to make enquiries and inform themselves about the company’s affairs and to exercise care and diligence in the proposed acquisition.
Comments
Wang was the chairman and an executive director of China Best until he resigned with effect from 25 November 2005. Notwithstanding his resignation, Wang held a position of advisor to the board of China Best and remained part of the senior management at material times. Ma was appointed as an executive director of China Best on 29 August 2003 and was elected as the chairman on 25 November 2005. Zhang was appointed as China Best’s chief executive officer and an executive director on 5 June 2007. Both Ma and Zhang had resigned from China Best with effect from 4 October 2011.
China Best was listed on the Main Board of the Stock Exchange of Hong Kong Limited on 26 March 1996. The principal activities of China Best’s associates and subsidiaries were coal processing, international air and sea freight forwarding and the provision of logistics services as well as trading of securities.
Readers are reminded that, Under section 214 of the SFO, the Court may make orders disqualifying a person from being a company director or being involved, directly or indirectly, in the management of any corporation for up to 15 years, if the person is found to be wholly or partly responsible for the company’s affairs having being conducted in a manner involving defalcation, fraud or other misconduct.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR52
4. SFC issues Restriction Notice to a broker to stop a client from withdrawing shares and transferring money connected with suspected insider dealing
On 3 June 2016, Kingsway Financial Services Group Limited was prohibited from processing shares and cash of a client due to suspected insider dealing in accordance to the Restriction Notice issued by the SFC.
Background
The SFC has issued a Restriction Notice to Kingsway Financial Services Group Limited (“KFS”) prohibiting it from processing cash and shares held in a client account that holds proceeds of suspected insider dealing.
KFS is not subject to the SFC’s investigation into suspected insider dealing and the Restriction Notice does not affect KFS’s operations or its other clients. KFS has rendered full assistance to the SFC during the investigation.
The Restriction Notice prohibits KFS, without prior written consent from the SFC, from processing any instructions from the client (or anyone authorized to operate the account) with respect to the shares of a Hong Kong-listed company, including: (i) withdrawing the shares and/or transferring monies arising from the disposal of the shares; and/or (ii) disposing or dealing with the shares. KFS is also required to notify the SFC upon receipt of any of these instructions.
The SFC considers that the issue of the Restriction Notice, which prevents dissipation of proceeds of suspected insider dealing held in the account, is desirable in the interest of the investing public or in the public interest. Therefore, the investigation is continuing.
Comments
KFS is licensed to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO.
Readers are reminded that, under the Restriction Notice, pursuant to sections 204 and 205 of the SFO, a licensed corporation is prohibited from entering into transactions of a specified description or other than of a specified description, or entering into transactions in specified circumstances or other than in specified circumstances, or entering into transactions to a specified extent or other than to a specified extent, which required the licensed corporation to carry on business in, and only in, a specified manner; and to prohibit the licensed corporation from dealing with any relevant property in a specified manner or other than in a specified manner.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR53
5. Court rules on appeals over unlicensed activities
On 6 June 2016, C.L. Management Services Limited (“C.L. Management”) and its sole owner and director Ms Clarea Au Suet Ming’s appeal was dismissed by the court. At the same time, the SFC’s appeal on a point of law against the decision of the Eastern Magistracy was also dismissed.
Background
On 29 April 2014, C.L. Management and Au were convicted on three counts of holding out charges and acquitted of one count of carrying on a business in advising on corporate finance without a licence. They were fined a total of HK$1.5 million and Au was sentenced to a total of 6 months’ imprisonment suspended for 18 months.
C.L. Management and Au appealed against their conviction. At the same time, the SFC appealed against the decision of the Eastern Magistracy in acquitting them.
Both appeals were dismissed as the Court found that there are no merits in any of the grounds advanced on behalf of them.
Comments
Readers are reminded that under the Securities and Future Ordinance (SFO), advising on corporate finance is a regulated activity which requires a Type 6 (Advising on Corporate Finance) licence from the SFC.
Furthermore, under section 114(1)(a) and 114(8) of the SFO, a person commits an offence when the person, without reasonable excuse, carries/carried on a business in a regulated activity without a licence.
This is well noted from this decision that the offence of carrying on a business of regulated activity without a licence does not require proof of a mental element. Thus, it is important to ensure that the Licensed Corporation and the all its staff members are properly licensed with the relevant licence.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=16PR56
6. SFC reprimands and fines Schroder Investment Management (Hong Kong) Limited HK$1.8 million for disclosure failures
On 15 Jun 2016, Schroder was reprimanded and fined HK$1.8 million over interest disclosure failures which led to breaches of the SFO.
Background
The SFC has reprimanded and fined Schroder Investment Management (Hong Kong) Limited (“Schroder”) HK$1.8 million for failing to disclose all notifiable interests in Hong Kong listed shares.
An SFC investigation found that from August 2005 to January 2013, Schroder failed to disclose to the Stock Exchange of Hong Kong Limited (“SEHK”) and the relevant listed companies all notifiable interests in Hong Kong listed shares held in client portfolios and managed by Schroders plc and certain of its subsidiaries (“Schroder Entities”) where they did not have or were unable to exercise proxy voting rights. Schroder is responsible for preparing and filing the notices disclosing all notifiable interests in Hong Kong listed shares for the Schroder Entities to SEHK and the relevant listed companies.
Although legal advice obtained by Schroder advised that an “interest” in shares was broadly defined and was not confined to the exercise of a voting right, Schroder failed to properly follow the advice.
According to Schroder, it discovered the disclosure failures in November 2012 when it was preparing to implement a new global system for the monitoring and reporting of disclosable interests in shares. In February and March 2013, Schroder filed a total of 236 substantial shareholders notices to the SEHK to correct the disclosure notices filed for the Schroder Entities from July 2010 to January 2013.
In deciding the penalty, the SFC took into account the duration and extent of Schroder’s disclosure failings, Schroder’s self-report to the SFC upon discovery of its disclosure failings, Schroder’s co-operation with the SFC’s investigation and disciplinary process and that it has taken steps to improve its global system for monitoring and disclosing shares in Hong Kong listed companies and its clean disciplinary record.
Comments
Schroder is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising in securities) and Type 9 (asset management) regulated activities.
Schroders plc is a company incorporated in England and Wales which carries on asset management business together with its subsidiaries on a global basis. The Schroder Entities invest directly in Hong Kong listed shares for their clients.
Readers are reminded that, under Section 310(1) of the Securities and Futures Ordinance (“SFO”), a person comes under a duty of disclosure if he/she acquires an interest in or ceases to be interested in shares in the relevant share capital of a listed corporation, or where a change occurs affecting a person’s existing interest in shares in a listed corporation’s share capital in specified circumstances.
Under Section 313(1) of the SFO, those specified circumstances include where the person: (a) first acquires a notifiable interest; (b) ceases to have a notifiable interest; (c) has a notifiable interest but the percentage levels of his interest have changed; (d) has a notifiable interest but the nature of his interest has changed.
According to Section 315 of the SFO, the notifiable percentage level for notifiable interests is 5% and the specified percentage level for changes to notifiable interests is 1%.
Furthermore, under General Principle 7 of the SFC Code of Conduct, a licensed corporation should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market.
Paragraph 12.1 of the Code of Conduct also provides that a licensed corporation should comply with, and implement and maintain measures appropriate to ensuring compliance with, the law and relevant regulatory requirements.
For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR59&appendix=0
For more information about the requirements for disclosure of interests, please refer to:
http://en-rules.sfc.hk/net_file_store/new_rulebooks/h/k/HKSFC3527_4511_VER20.pdf
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR59
7. SFC reprimands and fines State Street Global Advisors Asia Limited HK$4 million over management of Tracker Fund
On 15 June 2016, State Street Global Advisors Asia Limited was reprimanded and fined HK$4 million by the SFC for its failure to comply with the requirements in in the management of Tracker Fund of Hong Kong.
Background
The SFC has reprimanded and fined State Street Global Advisors Asia Limited (“SSGA”) HK$4 million for its failure to comply with regulatory requirements in the management of Tracker Fund of Hong Kong (“Fund”).
An SFC investigation found that from 1 December 2008 to 30 June 2013 (relevant period), the cash balances of the Fund that were deposited with State Street Bank and Trust Company’s (“SSBT”) demand deposit account did not earn any interest because SSBT’s deposit rates on Hong Kong dollars were zero. SSBT was the Fund’s trustee and an affiliate of SSGA. SSGA did not check the rate of interest offered by other banks.
According to the SFC’s investigation findings, the prevailing commercial interest rates on Hong Kong dollars (“HKD”) for a deposit of the same size and term as the Fund’s cash balances were above zero during the Relevant Period.
The SFC considers that SSGA had failed to ensure that interest received on the Fund’s Hong Kong dollar cash balances from its connected person was at a rate not lower than the prevailing commercial rate for a deposit of that size and term as required by the Code on Unit Trusts and Mutual Funds (“UT Code”).
The SFC also found that SSGA’s internal procedures on the management of the Fund’s cash balances were inadequate. By not following the requirements of the UT Code and the Trust Deed when depositing the Fund’s cash balances with SSBT, SSGA had failed to manage and minimise the conflict between the interests of the Fund’s investors and the interests of SSGA/SSBT.
The SFC further found that SSGA had wrongly represented in six interim and annual reports of the Fund that the Fund’s cash balances were placed in a non-interest bearing current account when in fact the cash was deposited with SSBT in an interest bearing account earning zero interest.
In deciding the sanctions, the SFC took into account that SSGA:
Comments
SSGA is licensed to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), and Type 9 (asset management) regulated activities under the SFO.
The SFC concluded that SSGA failed to ensure prevailing commercial interest rates was received from a connected person, unable to maintain internal controls, failed to manage and minimize the conflict of interests, and provided misstatements in annual and interim reports of the Fund.
Readers are reminded that under paragraph 1.2(c) of the of the Fund Manager Code of Conduct, a fund manager is required to maintain satisfactory internal controls and written compliance procedures which address all applicable regulatory requirements; and under paragraph 10.10 of the UT Code, if cash forming part of the scheme’s assets is deposited with the trustee/custodian, the management company, the investment adviser or with any connected person of these companies (being an institution licensed to accept deposits), interest must be received on the deposit at a rate not lower than the prevailing commercial rate for a deposit of that size and term.
Furthermore, under General Principle 4 of the Overarching Principles Section of the SFC Products Handbook, Product Providers, counterparties and service providers should avoid being placed in a conflict of interest position that may undermine the interests of the investors of the relevant product, and Product Provider should avoid situations where conflicts of interest may arise including any actual or potential conflicts that may arise between different parties in respect of a product.
For a copy of the statement of disciplinary action, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR61&appendix=0
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR61
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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