ComplianceOne Newsletter – September 2022
ComplianceOne Newsletter – September 2022
The topics discussed in this monthly newsletter are as follows:
1. Auditors from the Public Company Accounting Oversight Board (PCAOB) reached Hong Kong on issues of continual listing of Chinese stocks in US
2. SFC-HKMA’s joint product survey shows increasing participation of intermediaries and investors
3. What should investors do if their broker plans to cease operation?
4. SFC suspends a responsible officer for breach of KYC and AML/CFT for eight months
5. Court sets pre-trial review date for unlicensed activities prosecution
6. Court dismisses challenge to SFC’s power of issuing restriction notices
7. SFAT affirms SFC decision to suspend hedge fund manager Christopher James Aarons
8. Thirteen people charged following SFC and Police joint operation against ramp-and-dump syndicate
9. Kindly Reminder: Climate-related Risk Disclosure by Fund Mangers
MARKET NEWS
1. Auditors from the PCAOB reached Hong Kong on issues of continual listing of Chinese stocks in US
A team of auditing experts had arrived in Hong Kong by the end of Sep 2022 with a mission to scrutinize the audit records of the Chinese stocks listed in the US exchanges, following the insistence from Washington that US officials should be given access to the accounts of the Chinese companies listed; or otherwise, these stocks will be forced to delist as early as 2023.
Some important messages required to know:
(1) The US inspectors were sent to Hong Kong with an aim at resolving the long-standing argument over the access to audit records of Chinese companies which are held in China and not accessible for national security reasons.
(2) All the inspectors and investigators are from Public Company Accounting Oversight Board (PCAOB), which will select a couple of companies for inspection with targets like Alibaba, Yum Chin, JD.com etc.
(3) The inspections are conducted in Hong Kong with the necessary documents transferred across the border from China in both paper and electronic forms. However , there are still obstacles to get full access the audit records as some may be deemed as "restricted data" not to be disclosed, especially for those “state owned enterprise” where most data is considered as “state secret”!
Significance:
Beijing and Washington need to reach a consensus on the listing issues as a big stake is involved there. The amount raised through the Chinese companies in the US was around US$85 billion through primary and secondary offerings.
A more subtle issue here is the diverse opinion of interpreting what is considered as “state secret” and “confidential information”. The China Securities Regulatory Commission (CSRC) and the Securities and Exchange Commission (SEC), under the premise that "each is serving its own master", both sides have to hammer out a solution on a sustainable basis for benefits of investors on both sides.
2. SFC-HKMA’s joint product survey shows increasing participation of intermediaries and investors
A joint survey of the SFC and the HKMA show that notwithstanding the continued pandemic and difficult market environment, the number of investors who purchased investment products increased 5% to 770,000. The total number of firms engaged in the sale of investment products increased slightly to 390. Major findings from the survey included:
(1) Structured products ($2,385 billion or 48%) remained the predominant product type sold by firms, followed by collective investment schemes (CIS) ($1,491 billion or 30%) and debt securities ($818 billion or 16%).
(2) The total transaction amount of equity-linked structured products increased by 5% to $1,674 billion; while the sales of authorized CIS helped drive the 5% increase in the overall transactions in CIS to $1,491 billion.
(3) Weighed down by uncertainties in interest rates outlook, the total transaction amount for debt securities dropped 23% to $818 billion.
(4) A total of 70 firms used online platforms to distribute investment products, up 21% from the last survey. CIS remained the most popular product type, accounting for 91% of total online sales.
The survey reveals increased retail participation in the investment market, notwithstanding the difficult market environment, and an increasing trend for firms to use online platforms for distribution,” and provides more useful information for regulators to better serve the interests of the retail investors.
Significance:
The findings reveal the resilience of the HK financial market and the observation that investors become more mature after the painful experience of crucial episodes especially after the 2008 credit default crisis.
From the regulatory aspect, “this joint product survey strengthens the supervisory collaboration between the SFC and the HKMA, and enhances surveillance of the market by the regulators,” as added by Mr. Arthur Yuen, Deputy Chief Executive of the HKMA.
3. What should investors do if their broker plans to cease operation?
Despite the SFC grants licences to intermediaries every year, there are still some licensed intermediaries which are determined to cease operation for their own business reasons. Here below are some useful hints investors concerned are supposed to know.
Under the existing regulatory regime, intermediaries are required to maintain segregated client accounts to separate clients’ assets from their own asset.
If a broker plans to cease operation, it is general practice to give advance notice to its clients of the subsequent arrangements, including things like the date where the services is to be terminated, the procedures of asset withdrawal, and the transfer of money back to designated banks of the clients. Clients should liaise with the broker about transferring the outstanding holding of stocks to any of their accounts maintained with other brokers.
In order to facilitate the process, clients are advised to contact the broker, and to update their contact details such that the broker can keep them abreast of any remedial procedures.
Under the circumstances where the broker cannot reach the its clients, the broker will apply for payment of the clients’ assets into the court under the Trustee Ordinance; and it incurs additional costs in terms of time and money for the broker and the clients themselves.
ENFORCEMENT NEWS
4. SFC suspends a responsible officer for breach of KYC and AML/CFT for eight months
The SFC has suspended Mr. Tang Kai Shing, responsible officer (RO) and managing director of Rifa Futures Limited (Rifa), for eight months from 2 September 2022 to 1 May 2023 for breach of KYC, AML/CFT and other regulatory requirements between May 2016 and October 2018.
The SFC considers Rifa’s breaches were attributable to Tang’s failure to discharge his duties as an RO and a member of senior management. The investigation found that Rifa, without conducting adequate due diligence, was unable to assess the above -mentioned risks associated with allowing its clients to use their client supplied system (CSS) in placing orders.
Besides, Rifa was also found to have failed to conduct adequate ongoing monitoring of clients’ fund movements to ensure they were consistent with the clients’ business nature , risk profile and source of fund.
Significance:
It demonstrates again the fact that intermediaries permitting the clients in using their own CSS poses serious potential regulatory risks to the intermediaries per se. It can be observed that the use of CSS is usually associated with abnormal fund movements and trading pattern differing from the clients’ own risk profile for reason that the ultimate persons who originated the orders cannot be identified under the use of CSS.
5. Court sets pre-trial review date for unlicensed activities prosecution
The Eastern Magistrates’ Court today fixed the pre-trial review date for prosecutions against Mr. Tony Choi Yick Man and Mr. Ma Yau Tim after they pleaded not guilty to charges by the Securities and Futures Commission (SFC) for unlicensed activities.
The SFC commenced criminal proceedings on 30 June 2022 against Choi for carrying on a business in asset management without a SFC licence between 2010 and 2019 and Ma for aiding and abetting Choi’s unlicensed activity. The pre-trial review is scheduled for 27 October 2022.
6. Court dismisses challenge to SFC’s power of issuing restriction notices
The Court of First Instance has dismissed a judicial review application against the SFC relating to restriction notices issued in an ongoing investigation into a suspected “ramp-and dump” scheme; the review was brought by Mr. Tam Sze Leung, Ms. Kong Chan and Ms. Lee Ka Lo, who sought to challenge the restriction notices issued by SFC to freeze their assets in various trading accounts held with certain licensed corporations.
“We welcome the Court’s decision, said by SFC’s Chief Executive Officer, Mr. Ashley Alder; and he further stated that the “restriction notes” were important during the course of investigation to the SFC in carrying out its function under the SFO, and they enable the SFC to take immediate action to protect investors and the public interest.
Significance:
The decision of the Court was justified in the sense that the assets of the suspects might be the proceeds from their “ramp-and-dump” scheme.
And the protection of the statutory power of the SFC entitled from SFO should not be challenged, or otherwise more upcoming judicial reviews will be expected afterwards.
7. SFAT affirms SFC decision to suspend hedge fund manager Christopher James Aarons
The SFC has suspended Mr. Christopher James Aarons, responsible officer (RO) and chief executive officer of Trafalgar Capital Management (HK) Ltd. (Trafalgar), for two years by the Securities and Futures Appeals Tribunal (SFAT) followed administrative proceedings against Aaron in South Korea. The Korean regulatory authorities found that Aarons had breached Korean legislation by dealing in the shares of a securities company listed on the Korea Exchange (KRX) based on material non-public information in circumstances that prohibited such dealing.
The information concerned a block trade of shares of the KRX-listed securities company which Aarons had obtained from a sell-side broker during a “market sounding” call. Aarons was not wall-crossed during the call with the broker, but he arranged a short swap in the company’s shares to take advantage of the information, and derived a profit of KRW337.3 million as a result.
Significance:
As Mr. Ashley Alder, the Chief Executive Officer of SFC, had said: “The SFAT’s determination sends an unmistakable message to the market that both sell-side brokers and buy-side participants have obligations to uphold market integrity by maintaining the confidentiality of non-public information on block trades or private placements during the market sounding process. Misuse of such information and individuals who abuse the process warrant severe sanctions!
8. Thirteen people charged following SFC and Police joint operation against ramp-and-dump syndicate
Thirteen suspects were charged with various criminal offences following an earlier joint operation of the Securities and Futures Commission (SFC) and the Police against a sophisticated ramp-and-dump syndicate. The alleged syndicate members organized and executed “ramp-and-dump” schemes in the shares of two target stocks by using different social media platforms and manipulated the trading of a large volume of those shares through the use of a substantial number of nominee accounts.
Prices of the target stocks were driven up to lure investors to purchase those shares after which the syndicate then disposed of their shares aggressively at a profit, and the prices drastically collapsed as a result of such profit-taking by the syndicate.
Significance:
It is obvious that such “ramp-and -dump” scheme to lure investors into purchasing the target stocks, together with the drastic plunge afterwards can never to tolerated in the eyes of the SFC, particularly from which the public interests of the general investors were adversely and severely jeopardized; and more importantly, the integrity and fairness of the financial market status of Hong Kong must be upheld at all times!
A Kindly Reminder:
Climate-related Risk Disclosure by Fund Mangers
With amendment of the Fund Manager Code of Conduct, Fund Managers are required to take the climate-related risks into consideration in constructing their investment and risk management process, and make appropriate disclosure according and commensurate to nature of their funds.
Key elements are as below:
I. Governance
II. Investment Management
III. Risk Management
IV. Disclosure
Fund Managers have to bear in mind of the following timelines:
(1) Submission in AUG 2022: for LARGE Fund Managers with AUM>HKD8 billion
(2) Submission in NOV 2022: for Fund Managers with less AUM size
Apart from Baseline Requirements, the LARGE Fund Managers have to comply with additional “Enhanced Standards” with respect to Risk Management and Disclosure.
Fund Managers are supposed to follow the guidelines published by the SFC in fulfilling their obligations in climate-related risk disclosure while bearing in mind the following key hints:
(1) Is the fund managed delegated with investment discretion, and the extent of discretion entitled to the Fund Manager
(2) Are climate related risks “relevant and material” to the fund? Relevancy and Materiality determine how far and to what extent the Fund Manager has to comply with the applicable requirements
(3) Is the Fund Manager “responsible for overall operation of the fund” (ROOF)?
For more details, please click on the title of the topic above.
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