ComplianceOne Newsletter – May 2023
The topics discussed in this monthly newsletter are as follows:
Virtual Asset Trading Platforms licensing regime has come into effect on 1st June, 2023
HashKey and Hundsun Ayers signed MOU for Strategic Cooperation in Virtual Asset Market
Reminder to Licensed Corporations regarding the (1) Revised Financial Return form, (2) Analysis of client assets and (3) Audit questionnaire
SFC commenced MMT proceedings against former bank employee over alleged insider dealing
SFC reprimanded and fined China on Securities Limited $6 million for failures as share placement agent
MARKET NEWS
1. Virtual Asset Trading Platforms licensing regime has come into effect on 1st June, 2023
The SFC released the Consultation Conclusions on the Consultation Conclusions on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the SFC.
A significant majority of respondents agreed to the proposal to allow licensed trading platform operators to serve retail investors, given the conditions that a number of robust measures should be implemented by the SFC for protection of these retail investors, including the prerequisite of suitability in onboarding new clients, governance, enhanced token due diligence, admission criteria and disclosure obligation.
As Ms Julia Leung, CEO of the SFC, said: “providing clear regulatory expectations is the key to fostering responsible development”, and she further reiterated the principle of “same business, same risks, same rules”, demonstrating the standpoint of the SFC to uphold investor protection and risks management as the key issues.
Since the Guidelines for Virtual Asset Trading Platform Operators (the “VATP Guidelines”) has come into effective on 1 June 2023. The VATP Guidelines set out, among others, safe custody of assets, segregation of client assets, avoidance of conflicts of interest and cybersecurity standards and requirements expected of licensed trading platforms. And more additional guidance on the new regulatory requirements, licence application procedures, as well as information about the transitional arrangements had been posted on 31 May 2023 just before the new Guidelines are in effect.
SIGNIFICANCE:
Apart from the above VATP Guidelines, there is also another corresponding Guidelines on AML/CFT (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) (the “VASP Guidelines”) under the AMLO VASP regime for non-security virtual assets. With the deliberation to ensure business continuity of the licensed VATP under SFO regime amid any characteristic changes in defining a specific virtual asset, it is of the SFC’s view that VA trading platform providers should abide a “dual license arrangement” to be licensed in both the SFO VATP regime and AMLO VASP regime. Interested applicants can seek reference to the FAQ of VA licencing conditions regarding “Competence requirements for individuals” for details of the pragmatic approach SFC has adopted in RO eligibilities.
There are also some key takeaways in the Consultation Conclusions:
The SFC has removed the requirement to submit legal advice from VATP on admission of a new token (which would not amount to a security token) to be made available for trading to the retails;
The coverage of the compensation arrangement has been lowered to a threshold of 50% for client virtual assets held in cold storage (subject to the condition that 98% of the client virtual assets are already held in cold storage), while tightening the condition to less than 2% should only be held in hot storage of which is more vulnerable to hacking risk;
Despite the availability of accesses to retail investors, it should be noted that the onboarding requirements applicable to individual professional investors will be the same as those applicable to retail investors under the new regulatory regime;
The licensed VATP should establish a token admission committee to enhance governance. It is the intention of the SFC that the committee should consist of members from senior management who are “principally responsible for” managing the key business line, compliance, risk management and information technology of whom are also the corresponding managers-in-charge (MICs) of the platform operator for reason of augmenting the accountability of senior management of the VATP;
The disclosure obligations in the VATP Guidelines to require platform operators to take all reasonable steps to ensure the product specific information they disclose is not false, biased, misleading or deceptive.
2. HashKey and Hundsun Ayers signed MOU for Strategic Cooperation in Virtual Asset Market
On 4 May 2023, Hash Blockchain Limited (“HashKey”) and Hundsun Ayers Technologies Limited (“Ayers”) jointly made an announcement of their decision of signing a Memorandum of Understanding (“MOU”) to explore strategic cooperation in the field of virtual assets and financial services.
HashKey is the operator of HashKey PRO, as one of the two licensed VATPs under the SFO regime to operate a virtual asset trading platform under the Type 1 (Dealing in securities) and Type 7 (Providing automated trading service) license.
Under the MOU, Ayers and HashKey will collaborate on various initiatives aimed at enhancing the respective product offerings and exploring new business opportunities. This strategic partnership aims to leverage the strengths of both parties to provide customers with innovative and cutting-edge solutions in the financial and virtual asset markets.
SIGNIFICANCE:
The fabulous encounter of HashKey and Ayers is definitely to make a catalyst in the economies of scale and transferability of technologies in the industry, given the pioneer status of being one of the first two licensed VATP of HashKey, with the partnership of Ayers, which is also one of the most popular broker supplied systems vendors in Hong Kong, would undoubtedly pose an absolute advantage on exploring, marketing new products, providing customised solutions to catch up with the ever-changing prevailing regulatory regime, and maximizing the market shares of the two stakeholders.
On 25 May 2023, the SFC published revised versions of: (i) the financial return form which is required to be submitted by licensed corporations under section 56 of the Securities and Futures (Financial Resources) Rules; (ii) the analysis of client assets for associated entity which is required to be submitted by associated entities of an intermediary under section 3(3) of the Securities and Futures (Accounts and Audit) Rules; and (iii) the audit questionnaire completed by auditors of licensed corporations for submission to the SFC; all pertaining to the period ending on or after 1 December 2023,
(i) Financial return form
- the electronic version of the revised financial return form should be used for submitting a return, superceding the existing version of the form;
- mainly with the inclusion of virtual assets items in the excel forms.
(ii) Analysis of client assets for associated entity
- the revised version of analysis of client assets for associated entity should be used for submitting an analysis of client assets as at the end of the financial year for an associated entity of an intermediary;
- the reason for this is that associated entity of the VATP is subject to the host of private key management and custody requirements under the VATP Guidelines with respect to client virtual assets.
(iii) Audit questionnaire
- mainly with the inclusion of virtual assets items in the questionnaire
ENFORCEMENT NEWS
4. SFC commenced MMT proceedings against former bank employee over alleged insider dealing
The SFC had commenced proceedings in the Market Misconduct Tribunal (MMT) against Mr Wu Kam Shing, a former executive deputy general manager of China CITIC Bank International Limited (CITIC Bank), for alleged insider dealing in the shares of Bloomage BioTechnology Corporation Limited (Bloomage).
In possession of inside information about the privatisation, Wu purchased a total of 10,000 and 1,265,000 Bloomage shares via the securities accounts of himself and his spouse respectively between 22 May and 15 June 2017, and later sold 10,000 and 1,007,500 shares of Bloomage for a profit of about $3 million; while the remaining shares of Bloomage in Wu’s spouse securities account were cancelled pursuant to the privatisation.
The SFC had reprimanded and fined China On Securities Limited (China On) $6 million over its failures as the placing agent in a share placement between 25 November and 6 December 2019.
On 25 November 2019, China On was appointed as the placing agent by the then majority shareholder (Vendor) of Hon Corporation Limited (Hon Corp) to procure placees to subscribe up to 45% for the shares of Hon Corp.
The SFC’s investigation found that upon identifying six placees for the placement, China On failed to ensure that it acted within the scope of the Vendor’s authority and adequately safeguard the Vendor’s assets by:
- entering into bought and sold notes relating to the shares on the Vendor’s behalf with the placees, but the transaction prices therein were inconsistent with the placing price agreed with the Vendor;
- transferring the shares to the placees without first requiring payment of the purchase price or the certainty that they would be able to make payment of the placing price to the Vendor; and
- executing a purported instruction by a third party for part of the shares to be transferred to one of the placees for free without verifying the instruction with the Vendor.
SIGNIFICANCE:
In the Statement of Disciplinary Action, it was stated as the view of the SFC that China On was grossly negligent, if not reckless, in its disregard of its fundamental duties to safeguard its client’s assets and ensure that it was acting under its client’s instructions and authorities.
In particular, China On’s conduct constituted breaches of the following provisions:
i) not properly safeguarding client assets;
ii) failing to satisfy itself on reasonable grounds that the steps it took in effecting a transaction (of the bought and sold notes) for the Vendor were authorised;
iii) to act with due skill, care and diligence in the best interest of the Vendor.
For more details, please click on the title of the topic above.
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