SFC reprimands and fines Credit Suisse Securities (Hong Kong) Limited $1.6 million for regulatory breaches

11 Jun 2013

Credit Suisse has also agreed to engage an independent reviewer, to be approved by the SFC, to review its systems and controls for ensuring compliance with the Securities and Futures (Contracts Limits and Reportable Positions) Rules (Rules).

The disciplinary action follows an SFC investigation into the holdings of Credit Suisse and Credit Suisse International of open positions in Industrial and Commercial Bank of China Limited stock options (ICBC Option) in breach of the prescribed position limit of 50,000 contracts on 27 October 2011, 14 December 2011 and 15 December 2011 (Notes 2, 3, 4 & 5).

The SFC also found that Credit Suisse failed to put in place effective internal controls to ensure that all open positions in stock options contracts in which extensions were granted were in compliance with the prescribed position limits.

In particular, the SFC found that at the material time, Credit Suisse had a system in place to ensure compliance with the Rules which generated regular reports including a warning report to signal when positions reached 75% of the available limit. However, excess position limits approved by the Stock Exchange of Hong Kong Limited and the expiry dates of the approved excess limits were not shown in the warning report and traders had to rely on their memories in monitoring compliance with the Rules. At the relevant time, three stock options classes had previously been the subject of applications for extensions.

The three position limit breaches with respect to the ICBC Option in October and December 2011 were caused by the traders’ mistaken belief that an approved excess limit which had expired in June 2011 remained available.

The warning report was introduced in April 2011. The traders raised issues about the limitations of the warning report with Credit Suisse but no steps to rectify them were taken until after the position limit breaches in December 2011.

In deciding the penalty, the SFC took into account Credit Suisse’s clear disciplinary record, the fact that it has now strengthened its internal controls for monitoring compliance with the prescribed position limits and its full co-operation with the SFC in the investigation.

End

Notes:

1. Credit Suisse is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.  
2. Rule 4(1) of the Rules provides that no person, except persons authorized by the SFC or the Hong Kong Exchanges and Clearing Limited, may hold or control futures contracts or stock options in excess of the prescribed limit.
3. Section 5(b) of the Rules provides that the limit on the number of contracts that may be held or controlled, in the case of stock options contracts, is specified in Schedule 2 of the Rules.
4. Schedule 2 of the Rules provides that the prescribed limit for stock options contracts on shares listed on the Stock Exchange of Hong Kong Limited is 50,000 open contracts per option class in any one market direction for all expiry months combined.
5. The positions in ICBC Option held by Credit Suisse and Credit Suisse International are under the same control and are therefore aggregated for the purpose of applying the prescribed position limit.
6. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

SFC proposes to enhance professional investor regime, client agreement requirements

15 May 2013

The Securities and Futures Commission (SFC) has today begun a three-month consultation on proposals concerning the professional investor regime and the client agreement requirements in the Code of Conduct (Note 1).

The key proposals are as follows:

• requiring intermediaries to comply with all Code of Conduct requirements (including the Suitability Requirement (Note 2)) when dealing with all investors who are individuals, including their wholly owned investment vehicles and family trusts;
• streamlining the criteria under the Code of Conduct in assessing the knowledge and experience of corporate professional investors by removing specific tests (eg, the 40 transactions per annum requirement); and
• requiring (i) that the Suitability Requirement be incorporated in all client agreements as a contractual term, (ii) that client agreements should not contain provisions which are inconsistent with the Code of Conduct, and (iii) that client agreements should accurately set out in clear terms the actual services to be provided to the client.

We are not proposing any change to the laws concerning access to private placements of investments by those who fulfil existing wealth criteria.

"Our consultation aims to identify those investors who, we believe, require full protection under our Code of Conduct, and those who don't.  The Suitability Requirement is a cornerstone of investor protection which is why we believe that no individuals, regardless of wealth, should be classified as Professional Investors under the Code, depriving them of this vital safeguard," said the SFC's Chief Executive Officer, Mr Ashley Alder.

"The proposals also seek to align the contents of client agreements used by intermediaries with the services actually agreed to be provided to customers.  This is intended to keep intermediaries "honest", as is our proposal to embed the Suitability Requirement in the client agreement," he added.

The public is invited to submit their comments to the SFC on or before 14 August 2013.  Written comments may be sent on line via the SFC website (www.sfc.hk), by email to pi_client_agreement@sfc.hk, by post or by fax to 2284 4660.

End

Notes:

1. The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission
2. The Suitability Requirement refers to the requirement to ensure the suitability of a recommendation or solicitation for a client is reasonable in all circumstances.

Ex-staff of securities firm ordered to serve three years in jail for accepting $1.1m bribes 10 May 2013

A former investment representative of a securities firm, charged by the ICAC, was today (Friday) ordered by the Court of Appeal (CA) to serve three years in jail for accepting over $1.1 million in bribes from a businessman after the Department of Justice (DoJ) sought a review of his sentence. Andy Pau Chin-hung, 37, formerly employed by KGI Hong Kong Limited (KGI Hong Kong), was earlier found guilty at the District Court of two counts of agent accepting an advantage, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance, and sentenced to perform 220 hours of community service and pay over $1.1 million as restitution to KGI Hong Kong. The DoJ subsequently made an application for a review of Pau's sentence. In allowing the DoJ's application, Mr Justice Peter Cheung Chak-yau of the CA remarked that meting out a non-custodial sentence to Pau convicted of bribery offences was wrong in principle. Meanwhile, the CA also dismissed Pau's application for leave to appeal against his conviction. The applications of the DoJ and Pau were today heard by Mr Justice Cheung of the CA, and Madam Justice Barnes and Mr Justice Derek Pang Wai-cheong, both judges of the Court of First Instance. The court heard that at the material times, Pau was employed by KGI Hong Kong as an investment representative working for KGI Asia Limited (KGI Asia). He was responsible for opening securities accounts and conducting stock trading for clients of KGI Asia. In early 2007, Pau came to know Derrick Luu Hung-viet, a businessman, through the introduction of Johnny Tang Ka-siu, with whom Pau had become acquainted when he worked in the insurance sector five or six years earlier. Tang told Pau that Luu wanted to sell his shares of Warderly International Holdings Limited (Warderly) through the securities accounts of other persons in KGI Hong Kong. Pau then helped his mother-in-law, a mainlander and a company associated with Luu open securities accounts with KGI Asia. The court heard that between April 3 and 4, 2007, Pau sold 30 million shares of Warderly for Luu through the securities accounts of the mainlander and the company. After receiving $13 million from the sale of the shares, Tang caused over $650,000 to be given to Pau. In mid April 2007, Pau used the securities account of his mother-in-law to sell another 20 million shares of Warderly on behalf of Luu for over $9.3 million. Out of the sales proceeds, five per cent or over $460,000 was given to Pau, the court was told. The prosecution was today represented by Deputy Director of Public Prosecutions William Tam and Senior Public Prosecutor Sheroy Tam, assisted by ICAC officer Ten Cheng.

The Securities and Futures Commission (SFC) has banned Mr Ma Tin Luk from re-entering the industry for three years from 24 April 2013 to 23 April 2016 for fabricating telephone order recordings and providing false and misleading information to the SFC to conceal the lack of records on a short selling order he executed for a client in November 2009 (Note 1).

An SFC investigation found that:

• Ma had requested his wife to pretend to be his client and created two false telephone order recordings; and
• Ma informed the SFC that the telephone order recordings recorded the telephone conversations between him and his client, even though he knew that the conversations were in fact between himself and his wife.

In deciding the sanction, the SFC took into account all relevant circumstances, including:

• Ma’s misconduct was seriously dishonest;
• providing false and misleading information to the SFC could jeopardise the efficiency of its investigation and a deterrent message needs to be sent to the market that such conduct is not acceptable; and
• Ma has no previous disciplinary record.

End

Notes:

1. Ma was licensed as a representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 4 (advising on securities) regulated activities and was accredited to Phillip Securities (Hong Kong) Limited and Phillip Commodities (HK) Limited between 26 March 2007 and 1 January 2011. He is currently not a licensed person.
2. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

New statutory regime for inside information drives increase in disclosures

The new statutory regime on disclosure of inside information, which aims to cultivate and encourage an enduring culture of disclosure by listed companies, has spurred a significant increase in corporate announcements on inside information, according to the Securities and Futures Commission (SFC). The total number of corporate announcements on inside information in the first three months of 2013 was up 43% compared to that of the corresponding period last year (Note 1).

The SFC has been working closely with Hong Kong Exchanges and Clearing Limited in monitoring the compliance of listed companies with the new statutory regime, including reviewing companies’ disclosures, raising pertinent issues with companies, and giving guidance where disclosure appears to be inadequate or anomalies are detected.

Most enquiries handled by the SFC’s consultation service have been general in nature and they are generally processed within the same day. The questions covered a broad range of issues such as the interpretation of inside information, the application of safe harbours and confidentiality requirements, the liability provisions and other general administrative matters (Note 2).

As part of the SFC’s continued effort to help listed companies better understand the provisions of the new statutory regime, Frequently-Asked-Question (FAQ) addressing particular issues will be published.

The FAQ issued today advises listed companies not to use the heading “Voluntary Announcement” to disclose information but to use a heading that accurately reflects the substance of the information concerned, and clarifies the statutory obligation of dually listed companies under the new regime in relation to “overseas regulatory announcements”.

"We believe the new statutory regime on disclosure of inside information has certainly raised awareness among listed companies of the importance of making disclosures to the investing public in a timely manner. We will nevertheless continue to maintain rigorous monitoring of listed companies’ compliance with the regime, with a view to promoting enhanced disclosure, fostering a positive change in corporate culture and facilitating more timely regulatory actions on cases involving non-compliance," the SFC’s Chief Executive Officer Mr Ashley Alder said.

End

Notes:

1. Under the new regime, which came into operation on 1 January 2013, listed corporations are required to disclose inside information to the public in a timely manner.
2. The SFC started providing consultation service to listed corporations from 1 December 2012 on application of provisions of the statutory disclosure regime.