HK SFC fines broker for failing to tape calls

The following announcement appeared on the SFC website and shows an more aggressive approach than previously to the issue of brokers properly recording orders from clients.  Broker firms in HK are required to have in place telephone recording systems but some brokers have gotten into a habit of taking orders over their cell phones. 

The SFC announcement was as follows:

Broker disciplined for breaching telephone recording requirement

The Securities and Futures Commission (SFC) has issued a reprimand against Mr Karl Wu Kin Chung, an account executive of Celestial Securities Limited (CSL) , and fined him $40,000 for non-compliance with order recording requirements under the Code of Conduct (Note 1 and 2).

The disciplinary action follows an investigation which found that Wu had been receiving order instructions from a client via his mobile phone and had failed to keep any taped record of the relevant telephone conversations between September and November 2009. The dealing sheets that Wu maintained in relation to the concerned trades did not record the time of receipt of order instructions.

In deciding on the penalty, the SFC took into account that Wu has no previous disciplinary record and his co-operation with the SFC by resolving the disciplinary proceedings.

Order recording is a basic and fundamental requirement expected of licensees and any failure will lead to disciplinary action (Note 3).

End

Notes:
1. Wu is licensed to carry out Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities.
2. Code of Conduct for Persons Licensed by or Registered with the SFC.
3. Please see “Circular to the SFC’s Licensed Intermediaries’’ dated 25 November 2004 for details.

SFC Amends Collateral Requirements for Domestic Synthetic ETFs

On Aug 31, SFC announced additional amendments for domestic synthetic ETFs. This is pretty much a sequel to SFC’s earlier policy to help retail investors distinguish between traditional and synthetic ETFs in November 2010. This time round SFC is keen about eliminating counterparty risks by raising top-up collateral requirements to 100%. To further reduce risks, SFC subjects that collateral in the form of equity securities to a haircut policy of 120% of the related gross counterparty risks exposure. The deadline for compliance is scheduled for October 31 this year.

The new amendments target particularly the fact that ETFs have, in the course of their development history, increasingly evolved to become instruments which defy their original purpose – to replicate index performance. Some synthetic ETFs do not in fact represent what they are supposed to replicate and have become sophisticated leveraging tools for adventurist investors. In this light, existing funds should consider stocking up their capital and enhancing liquidity in order to meet the more stringent collateral requirement.

The Financial Times report on SFC amendment can be found here.

The SFC November Notice can be found here.

The SFC Aug 31 Notice can be found here.

Mr Lam Lok Yin sentenced to community service and fined for manipulating Callable Bull Bear Contracts

On 28 June 2011, the SFC reported that Mr Lam Lok Yin to had been sentenced to 120 hours of community service after he pleaded guilty to manipulating four Callable Bull Bear Contracts (CBBCs) during the pre-opening session (POS) between 18 May and 16 July 2009.

Lam was also ordered to pay a total fine of $89,100 and $60,007 investigation costs to the SFC. The fine amounts to the total net profit earned by him in carrying out the manipulation.

An SFC investigation found that, on four occasions between 18 May and 16 July 2009, Lam raised the indicative equilibrium price (IEP) of four CBBCs by artificially placing auction orders and limit orders at escalating prices during the POS.

Further details are available here.

Smooth transition for SFC authorized funds and Investment-Linked Assurance Schemes

On 27 June 2011, the SFC announced that the transition of the SFC-authorized funds and Investment-linked Assurance Schemes (ILAS) into the new regime has been completed smoothly.

Commencing 25 June 2011, existing SFC-authorized funds and ILAS that will continue to be marketed to the public in Hong Kong are required to provide investors with a Product Key Facts Statement (KFS) and an offering document that satisfies a number of additional disclosure requirements (revised offering document).

Central to the new regime is the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (Handbook), which came into effect on 25 June 2010.

Upon completing the transition, the SFC will embark on a surveillance programme on the KFS and revised offering documents and maintain a close dialogue with fund managers and ILAS issuers where appropriate.

Further information is available here.

SFC issues guidelines on Disclosure of Inside Information

On 22 June 2011, the SFC published a revised draft of the Guidelines on Disclosure of Inside Information (‘guidelines’).

The guidelines reflect public comments and the relevant text of the Legislative Council Brief on the Securities and Futures (Amendment) Bill 2011(‘brief’). The revised guidelines provide assistance on the interpretation and application of the relevant provisions as set out in the bill. The guidelines are intended to help listed corporations to comply with the proposed statutory obligations.

A copy of the revised guidelines and the brief are available using the applicable link.

SFC reprimands Sun Hung Kai Investment Services

On 21 June 2011, the SFC reported that it had issued a reprimand to Sun Hung Kai Investment Services Ltd (SHKIS) and fined it $4.5 million for failings relating to its sale of Lehman Brothers related equity-linked notes (ELNs) to its clients between May and August of 2008.

An investigation by the SFC found that SHKIS had failed to:

• perform adequate due diligence on the ELNs before selling them to clients;
• provide adequate training and guidance for its sales staff, which would enable them to fully understand the nature of ELNs, the risks involved in ELNs, and the suitability criteria; and
• disclose material information, including the product terms and conditions and the risks associated with ELNs, to its clients       

Further details are available here.

SFC to licence credit rating agencies

On 21 April 2011, the SFC announced that it will license and regulate credit rating agencies (CRAs) and their rating analysts from 1 June 2011. The creation of a regulatory regime for CRAs follows a public consultation exercise that was conducted by the SFC in the second half of 2010. In anticipation of the upcoming regulation, both CRAs and their rating analysts intending to provide credit rating services on or after 1 June 2011 must submit applications to the SFC for a Type 10 licence.

Further details are available here

SFC releases Hedge Fund Survey report

On 11 March the SFC released “Report of the Survey on Hedge Fund Activities of SFC-licensed Managers/Advisers”. The report shows that assets under management or advisory (AUM) in Hong Kong increased 14% since March 2009. Some of the highlights of the report are:

• The number of hedge funds managed by the SFC-licensed hedge fund managers in Hong Kong stood at 538 which is 5 times the number in 2004.
• The hedge funds invested mainly in Asia Pacific using equities long/short strategy and multi-strategy.
• Overseas investors continued to dominate, with 92.1% of the investors being from overseas. In terms of type of investors, fund of funds and other institutional clients, such as banks and insurance companies, were the major types.

The full survey report is available on the SFC website at www.sfc.hk

SFC consults on high net worth professional investor requirements

On 23 February 2011, the SFC released consultation conclusions on the requirements for evidencing whether a person qualifies as a high-net-worth professional investor under the Securities and Futures (Professional Investor) Rules (Professional Investor Rules).

Taking a principles-based approach, firms can use any method to prove that an investor qualifies as a high-net-worth professional investor. To enable firms that so wish to continue with existing practices, the current methods for proving that investors qualify as professional investors will be preserved.

Further details are available here

OTC regulation coming to Hong Kong

The following annoucement was made by the HK SFC today.  As expected and despite there being no evidence in Hong Kong of concern in the OTC market, the Hong Kong regulators are aligning themselves with the global movement to regulate the OTC space.  The only good news is timing, the consulation process will not begin till 3Q 2011 and therefore any new legislation is unlikely to be in place until mid 2012.  Having said that it this is sure to mean more cost and more legal expense for those involved.

Regulatory regime for OTC derivatives markets

The Securities and Futures Commission (SFC) welcomes the announcement by the Hong Kong Monetary Authority (HKMA) and Hong Kong Exchanges and Clearing Limited (HKEx) to respectively establish a trade repository (TR) and a central counterparty (CCP) for over-the-counter (OTC) derivatives transactions in Hong Kong (Note 1). These key financial market infrastructures aim at enhancing the transparency of and reducing overall counterparty risk in the OTC derivatives markets.

To provide the legal framework for the development of these market infrastructures, the SFC will work with the Government, the HKMA, HKEx and relevant stakeholders to build a regulatory regime for OTC derivatives markets. The regulatory regime would cover the reporting of OTC derivatives transactions, particularly those which are relevant to the Hong Kong market, to the TR and the clearing of standardised OTC derivatives transactions through an authorized CCP.

At the initial stage, the reporting and clearing requirement will be applied to interest rate swaps and non-deliverable forwards. Consideration will be given to extending the requirement to other appropriate OTC derivatives asset classes after the initial roll out, having regard to local and overseas market developments including any further guidance from international regulatory bodies.

The SFC plans to consult the market on the regulatory regime by the third quarter of 2011, so that there is sufficient time to prepare for the roll out of the TR and the CCP by end 2012 (Note2).

“Establishing a regulatory regime for OTC derivatives markets is an important move for Hong Kong to keep pace with international initiatives on this front,” said Mr Martin Wheatley, the SFC’s Chief Executive Officer. “As the regulation of OTC derivatives markets internationally is still evolving, the SFC will closely monitor overseas developments with a view to bringing the local regulatory regime appropriately in line with those that are taking shape in other major markets.”

The initiatives represent a major step for Hong Kong to implement the commitment agreed by the G20 leaders to regulate OTC derivatives markets.

The SFC will maintain a close dialogue with HKEx regarding the OTC derivatives CCP to ensure that its operations will be orderly, fair and expeditious, and its risks are managed prudently.

End

Notes:

1. Please refer to the press releases today issued by the HKMA and HKEx for details.
2. The September 2009 G20 communique called for (i) all standardized OTC derivative contracts to be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest; and (ii) OTC derivative contracts should be reported to trade repositories.



SFC applies takeover-and-merger framework to REITs

On 25 June The Securities and Futures Commission (SFC) released to press releases in relation to the application of the Codes on Takeovers and Mergers and Share Repurchases (Codes) to SFC-authorised real estate investment trusts (REITs).

The conclusions from the consultation process undertaken in January were also released on 25 June. Consultation Conclusions

Mr Martin Wheatley, the SFC's Chief Executive Officer, said "We believe that the implementation of the proposals represent a significant step forward in establishing a regulatory framework that better protects the investors’ interests and assists the further development of the REIT market in Hong Kong"

The proposed amendments to the Code on REITs (REIT Code) and the Codes include aligning the control structure of REITs with that of listed companies and introducing a set of REIT Guidance Notes. The amendments took effect from Friday, 25 June 2010.

The second release was in relation to amendments to the Codes in relation to pre-vetting of certain takeovers-related matters. The SFC announced that certain routine takeovers-related announcements will no longer be required to be submitted to the Executive (Note 1) for comment prior to publication.

For further information please see Post-Vetting Requirement

HK SFC again takes action in relation to an employee's secret account

The Hong Kong SFC has taken action again in relation to a licensed person not disclosing a personal share dealing account of a relative.

Details on the SFC website were as follows:

SFC suspends Mak Kan Long

The Securities and Futures Commission (SFC) has suspended the licence of Mr Mak Kan Long for four months from 6 May 2010 to 5 September 2010 (Note 1). The disciplinary action follows an SFC investigation which found that from April 2008 to March 2009, Mak had: • failed to disclose his wife’s account to his employer as a staff-related account; • conducted discretionary trading for his wife in that account without his wife’s written authorization or disclosing the discretionary authority to his employer; and • failed to keep an audit trail of order instructions given by his wife. In determining the penalty, the SFC took into account all circumstances, including Mak’s clear disciplinary record and his application for transfer of his licence accreditation was held up because of the SFC’s investigation. The SFC will continue to take action against licensees who do not disclose secret accounts. End Note: 1. Mak was licensed to carry on Type 1 (dealing in securities) regulated activity under the Securities and Futures Ordinance and was accredited to Core Pacific-Yamaichi Securities (HK) Ltd and Core Pacific-Yamaichi International (HK) Ltd at the material time. He is currently not accredited to any licensed corporation.

Martin Wheatley comments on regulatory issues at the Fix Conference

Martin Wheatley, CEO of the Hong Kong SFC, spoke today at the Fix Conference in Hong Kong.  Mr Wheatley covered a variety of issues including those relating to last week's trading glitch on the US exchanges and he highlighted four issues that were receiving regulatory attention in Hong Kong.

The first two, the licensing of credit ratings agencies and additional reporting for hedge funds, were projects already underway at the SFC.  Credit ratings agencies would have to apply to be licensed in Hong Kong and new circulars would be issued to give them guidance as to how they would deal with the conflicts of interest created by their business methods.  Martin did not give a specific time for the annoucement.

Recently IOSCO published guidance for regulators on information that they should seek from hedge funds operating in their jurisdiction.  Martin said that the SFC would soon begin collecting additional information from hedge funds.  While Martin did not give any timing, we know from some events we have recently attended with Stephen Po, the Director of Supervision, that the survey will come out soon so that an IOSCO deadline of October can be met.  Mr Po has discussed the new requirement at a couple of functions that he has recently attended.

Mr Wheatley went onto say that there were two open issues that the Commission was looking at closely that had not yet become policy in Hong Kong and they were the Volcker rule and new rules regarding standardisation and exchange trading of OTC products.  These are apparently issues that the Hong Kong SFC is carefully monitoring to consider whether they should become policy if those issues proceed in the US.

Otherwise the conference went well.  Yours truly spoke on a panel on regional regulation issues.

Market Manipulation Convictions for 2 warrant traders.

On 7 May the SFC reported that the District Court had found Mr Patrick Fu Kor Kuen and Mr Francis Lee Shu Yuen guilty of manipulating the market in various listed derivative warrants issued by Macquarie Bank Ltd (Macquarie Bank) between January 2004 and January 2005.

Fu and Lee were convicted in relation to 40 counts of market manipulation under section 295 of the Securities and Futures Ordinance.

The SFC alleged that Fu and Lee, through accounts at two brokerages, traded between themselves in a pre-determined manner in approximately the same quantities and prices in a repetitive fashion.

The trading was in effect not genuine trading, but a “ping pong” game with the result that the turnover for the Macquarie-issued warrants in question was falsely inflated by 80% or over $450 million in value. As a result, potential investors were misled into thinking these warrants were heavily traded by genuine buyers and sellers when in fact the reverse was the position.

The SFC also alleged Fu and Lee received commission rebates for their trading which was offered by Macquarie Equities (Asia) Ltd (Macquarie Equities). The commission rebate had the effect of reducing transaction costs for investors. The high volume of trading by Fu and Lee meant commission rebates they earned from Macquarie Equities exceeded the transaction costs they incurred in trading, enabling them to earn a net profit of approximately $1 million.

The District Court found that Fu and Lee traded to receive the commission rebates but they also did so to create the appearance of an active market as this would be to their advantage when they came to exit the market.

Hong Kong SFC increases its pressure on Tiger Asia

The Hong Kong SFC has been in the middle of an action against Tiger Asia (a hedge fund manager based in New York) where the SFC claims that Tiger's actions constituted insider dealing when it sold short while in possession of alleged inside information relating to a placement.

The SFC has now made further claims about additional placements and this is reproduced below.

The case is important as it deals with an area not previously targetted by the SFC and also would set several precedents regarding the mechanics of the action if it is successful.

It shows the continued focus on the Enforcement Division at the Commission on activities in the professionals market.

The SFC announcement was:

SFC seeks trading ban against Tiger Asia over alleged insider trading

The Securities and Futures Commission (SFC) is seeking court orders to prohibit New York-based asset management company, Tiger Asia Management LLC (Tiger Asia), from dealing in all listed securities and derivatives in Hong Kong in the light of further insider trading allegations concerning the shares of another bank -- Bank of China Limited (BOC).

This is the first time the SFC has sought orders from a court to exclude any entity from trading in the Hong Kong market.

The SFC has also amended the current proceedings against Tiger Asia and three of its senior officers, Mr Bill Sung Kook Hwang, Mr Raymond Park and Mr William Tomita (collectively referred to as “the Tiger Asia parties”) to include the new allegations and is seeking to freeze an additional amount of up to $8.6 million of Tiger Asia’s assets, equivalent to the notional profit Tiger Asia has allegedly made in one of the new claims.

This is on top of the $29.9 million that the SFC has applied to freeze when it first commenced proceedings in August 2009 against the Tiger Asia parties in relation to dealings by Tiger Asia in the shares of China Construction Bank Corporation (CCB) on 6 January 2009 (Notes 1 and 2).

The SFC alleges that in the case concerning BOC shares:

1. Tiger Asia was given advance notice and was invited to participate in two placements of BOC shares by UBS AG and Royal Bank of Scotland on 31 December 2008 and 13 January 2009 respectively;
2. Tiger Asia was provided with details of both placements after being told and agreeing the information was confidential and price sensitive;
3. Tiger Asia also agreed not to deal in BOC shares after receiving the information;
4. Tiger Asia short sold 104 million BOC shares before the placement by UBS AG on 31 December 2008 making a notional profit of $8.6 million; and
5. Tiger Asia sold 256 million BOC shares before the placement by Royal Bank of Scotland on 13 January 2009 (of which 251 million shares were short sales) making a notional loss of around $10 million.

The SFC contends that these transactions constitute illegal insider trading in shares of BOC.

These allegations will be heard by the court in the same proceedings involving similar allegations against the Tiger Asia parties involving dealings in shares of CCB, at a date yet to be fixed.

In addition, the SFC is also seeking orders to unwind the transactions if the court finds they contravened the Securities and Futures Ordinance and to restore affected counterparties to their pre-transaction positions. The amount of assets that the SFC is seeking to freeze is to ensure there are sufficient funds to satisfy any restoration orders that may be made by the court.

End

Notes:

1. Please see SFC press release dated 20 August 2009.
2. The proceedings were commenced under section 213 of the Securities and Futures Ordinance. Tiger Asia was founded in 2001 and is a New York-based asset management company that specialises in equity investments in China, Japan and Korea. All of its employees are located in New York. Tiger Asia has no physical presence in Hong Kong. Park joined Tiger Asia in April 2006 and, at all times since, his job title has been Managing Director, Head of Trading, and his responsibilities include managing the trading desk, supervising orders and managing broker relationships. Tomita joined Tiger Asia in April 2008 and is charged with supporting the trading activities led by Park. Both Park and Tomita report to portfolio manager, Hwang, whom the SFC alleges made the trading decisions for the CCB and BOC trades. BOC has been listed on the Stock Exchange of Hong Kong Limited since 1 June 2006.

SFC in Hong Kong set to regulate all structured products

The Hong Kong SFC is moving to regulate all structured products by moving the requirements to register a prospectus from the current Companies Ordinance to the Securities and Futures Ordinance.  There are also other changes in the works regarding the definition of professional investors.  The proposed changes can be found in an SFC consultation paper set of conclusions.

The SFC notice is below:

In a set of consultation conclusions released today, the Securities and Futures Commission (SFC) announced that it will proceed with the proposal to transfer the regulation of public offers of structured products from the Companies Ordinance (CO) prospectus regime to the offers of investments regime in Part IV of the Securities and Futures Ordinance (SFO) (Note 1).

The transfer will enable public offers of all unlisted structured products (regardless of their legal form) to be regulated under the SFO. The SFC will publish codes and guidelines for the industry, setting out its regulatory policy on such products (Note 2). Meanwhile, the existing practice for traditional banking products and listed structured products will remain unchanged. The SFC further recommended to include as “securities” retail structured products not in the form of securities, instead of classifying all structured products as “securities” as originally proposed.

“We believe the proposed transfer should be implemented with some adjustments to certain specific proposals," said Mr Martin Wheatley, the SFC's Chief Executive Officer. "By enhancing disclosure and improving product transparency of unlisted structured products under the new Code on Unlisted Structured Investment Products, the existing regulatory regime for retail structured products will be enhanced.”

The SFC received 13 written submissions, mainly from market participants and professional bodies, for its consultation (Note 3) launched on 30 October 2009. Respondents generally supported the proposed transfer with comments on some of the specific proposals.

SFC bans Steve Luk Ka Cheung for life

On April 1 the SFC reported that it had banned Mr Steve Luk Ka Cheung from re-entering the industry for life following a Market Misconduct Tribunal determination that Luk had engaged in market misconduct.

The MMT determined that Luk, a former vice-president and fund manager of JF Asset Management Ltd, and two other parties had engaged in insider dealing. The SFC’s Executive Director of Enforcement Mr Mark Steward said, “Insider dealing undermines the fairness and efficiency of the financial market. Following the MMT’s finding, the SFC is exercising its protective jurisdiction by prohibiting Luk from re-entering the market again as an intermediary and threatening market integrity”                                                                                                                  

For further information please use the following link Luk Banned for Life

SFAT Decision in relation to Mr Hung Chi Wah

On 9 March the SFC reported that the Securities and Futures Appeals Tribunal (SFAT) had affirmed its decision to ban Mr Hung Chi Wah from re-entering the industry for life.

In May 2009 the SFC decided to ban Hung from the industry for life for breaching General Principle 1 of the Code of Conduct after finding he had fraudulently persuaded a client to invest and defrauded other clients using fabricated IPO subscriptions. Hung appealed to the SFAT.

The SFAT appeal was heard before The Honourable Mr Justice Saunders on 5 March 2010.

The SFAT affirmed the SFC's decision and stated that Hung's appeal was "utterly devoid of any merit whatsoever" and that "the investing public deserves to be fully protected from people like Mr Hung and the only way that can be done is to ensure that he should never enter this industry again."

For more details please see Hung SFAT Decision

SFC suspends Yeung Ching Kwong for nine months

On 1 February the SFC reported the following:

The Securities and Futures Commission (SFC) has suspended the licence of Mr Yeung Ching Kwong for nine months from 29 January 2010 to 28 October 2010 (Note 1). The disciplinary action follows an SFC investigation which found that Yeung was the account executive in relation to a number of accounts opened by Mr Ku Kam Lung, a former representative of Core Pacific-Yamaichi Securities (HK) Ltd, in the names of persons whom Ku claimed were not related to him. The SFC found that each of the account holders was related to Ku and Yeung knew that was the case. Yeung then turned a blind eye as to whether the instructions to operate each account came from the account holder or was a device by Ku to operate secret accounts on his own behalf (Note 2). As a licensed representative, Yeung should not have allowed accounts to be opened on a false or misleading basis and he should have alerted his employer to Ku’s activities which were contrary to his employer’s control systems. As a consequence, Yeung was involved in Ku’s misconduct in operating the secret accounts. In determining the penalty, the SFC took into account Yeung’s co-operation in accepting the SFC’s findings. End Notes: Yeung is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities and accredited to Core Pacific-Yamaichi Securities (HK) Ltd, Core Pacific-Yamaichi Futures (HK) Ltd and Core Pacific-Yamaichi International (HK) Ltd. Ku was disciplined by the SFC. For details, please see SFC press release dated 27 October 2008.

SFC and Karl Thomson Agreement on Lehman Minibonds

On 13 January 2010, the SFC announced that it had reached an agreement with Karl Thomson Investment Consultants Ltd (Karl Thomson) to resolve issues arising from the sale of Lehman Brothers Minibonds (Minibonds) by Karl Thomson . Karl Thomson has informed the SFC that it had made repurchase offers voluntarily to the 11 affected clients, and that all these clients have accepted the offers and entered into repurchase agreements. Under the agreement, Karl Thomson has agreed to undertake certain activities including, but not limited to: immediately implementing a special enhanced complaints handling procedure; engaging an independent reviewer, to be approved by the SFC, to review its systems and processes relating to the sale of structured products and to report to the SFC, and committing to the implementation of all recommendations by the independent reviewer; and setting aside $38,453.93, being commission income earned by it from the sale of Minibonds, to be paid to the Hong Kong Securities Institute to meet the costs of a series of seminars and/or training programmes on the subject of compliance with the SFC’s Code of Conduct  regarding the sale of investment products to retail investors. For further information please use the following link Karl Thomson Agreement