ComplianceOne Newsletter - July 2023
The topics discussed in this monthly newsletter are as follows:
SFC launched Type 13 regulated activity for applications from depositaries of public funds
Ensuring compliance when Streamlined Approach (“SLA”) is applied to Sophisticated Professional Investors (“SPIs”)
SFC welcomes IOSCO endorsement of new sustainability disclosure standards
HashKey partnered with Longbridge Whales and Quam Securities to launch First VA Online Trading Solution
SFC and AFRC joined forces to combat misconduct by listed issuers
Court convicted and fined cases for unlicensed activity
SFC banned RaffAello Capital Limited’s former responsible officer over IPO sponsor failures
SFC fined Changjiang Asset Management (HK) Limited $3.4 million for internal control failures
MARKET NEWS
1. SFC launched Type 13 regulated activity for applications from depositaries of public funds
The SFC started accepting applications for carrying on Type 13 regulated activity (RA 13) under a new regime on 27 July 2023 which will bring depositaries of SFC-authorised collective investment schemes under the SFC’s direct supervision.
The new regime will take effect on 2 October 2024. Depositaries operating in Hong Kong need to submit RA 13 applications through WINGS, the SFC’s online submission platform, on or before 30 November 2023.
SIGNIFICANCE:
For reason that starting from 2 October 2024, trustees and custodians (i.e., depositaries) of SFC-authorised collective investment schemes (CISs), unless exempted, will be required to be licensed by or registered with the SFC for Type 13 regulated activity (RA 13) under the SFO. Existing market practitioners are advised to seek guidelines from another Circular posted the same date for details of “who needs to be licensed or registered?”
2. Ensuring compliance when Streamlined Approach is applied to sophisticated professional investors
A joint circular was published on 28 July 2023 by the HKMA and the SFC concerning the introduction of a new category of sophisticated professional investors (“SPI”) who possess higher levels of net worth and knowledge or experience, particularly in relation to the suitability assessment and product disclosure processes applied.
Suitability assessment is a risk-based process that involves intermediaries matching of investment products with the personal circumstances and risk tolerance of their clients. Bearing in mind to clarify the expected standards on how the suitability assessment could be conducted and how product information could be explained and disclosed, intermediaries could tailor point-of-sale procedures to the personal circumstances of SPIs. Detailed guidelines are available from the Annex 1 and Annex 2 of the Circular to facilitate the application of a Streamlined Approach (“SLA”).
In essence, under the Streamlined Approach, the intermediary is not required at a transaction level to match the SPI’s risk tolerance level, investment objectives and investment horizon, or to assess the SPI’s knowledge, experience and concentration risk. Despite of this, intermediaries can also provide any explanation of product characteristics, nature and extent of risks to the SPI beforehand.
SIGNIFICANCE:
Under the new SPI regime with the application of Streamlined Approach, the intermediaries have to ensure the followings are in place with the SPI as a matter of compliance:
(1) The SPI has to specifiy the Product Category within which investment transactions can be executed under the SLA, namely, the Eligible Investment Transactions;
(2) Product Category Information Statement: made available to the SPI explaining the terms and features, characteristics, nature and extent of risks of investment products within the Product Category as defined above;
(3) Streamlined Threshold: the SPI has to specify a maximum threshold of investment, as an absolute amount or a percentage relative to the SPI’s assets under management (“AUM”) with the intermediary;
(4) The intermediaries have to devise designated accounts (or sub-accounts) to consolidate Eligible Investment Transactions of the SPI executed under the SLA, and ensure that the Streamlined Thresholds are strictly observed.
3. SFC welcomes IOSCO endorsement of new sustainability disclosure standards
SFC greeted the endorsement by the International Organization of Securities Commissions (IOSCO) of the IFRS Sustainability Disclosure Standards published by the International Sustainability Standards Board (ISSB).
The SFC will work with relevant government bureaux, other financial regulators and the SEHK to develop a comprehensive roadmap for adoption of the ISSB standards in Hong Kong. SEHK has a proposed disclosure requirements for listed companies, making reference to the ISSB’s draft for climate-related disclosures. The final SEHK requirements will take account of the consultation responses and the final ISSB standards.
SIGNIFICANCE:
These deliberate arrangements are actually in line with what the SFC has been working on the climate-related risk disclosure requirement applicable to the licensed corporations since November last year.
HashKey Group’s SFC-licensed subsidiary, Hash Blockchain Limited, has announced its strategic partnership agreement with Quam Securities and Longbridge Whale to provide virtual asset online trading services to securities firms and their clients through omnibus account and FIX API connection with HashKey’s exchange business HashKey PRO. Brokers and the clients can then seamlessly connect to this liquidity pool and market data to trade VAs anytime and anywhere around the clock!
SIGNIFICANCE:
At the "Far Beyond" Longbridge Whale new product launch event in Hong Kong, the first virtual asset online trade for securities firms had been successfully demonstrated and completed at the event, marking a new chapter for the adoption of virtual assets by local and global brokers.
Long Bridge Whale is the first broker which serves as a BSS Vendor for VA dealing, and Quan Securities is the first client broker which provides VA brokerage, the new partnership of the three marks the benchmark for commencement of a new VA dealing environment more accessible to the general public.
Leveraged up with collaboration from the private sector, the momentum to evolve as a virtual asset financial hub as advocated by the HKSAR government has got started off!
5. SFC and AFRC joined forces to combat misconduct by listed issuers
The SFC and the Accounting and Financial Reporting Council (AFRC) issued the first joint statement on 13 July 2023 as part of their enhanced collaboration in the regulation of the securities and futures markets in Hong Kong.
The joint statement addressed the observable increase in cases of listed issuers channelling a company’s funds to third parties in dubious circumstances under the pretext of loans which were granted without sufficient commercial rationale, and in some cases without adequate risk assessment or due diligence. The listed issuers suffered significant losses when loans were not repaid. In the light of thes findings, the joint statement set out the conduct standards and practices that listed issuers, their directors, audit committees and auditors should adhere to in relation to loans and similar arrangements.
SIGNIFICANCE:
As Ms Julia Leung, Chief Executive Officer of the SFC had said, “The joint statement demonstrates the commitment of the SFC and the AFRC to promoting good corporate governance and maintaining the integrity of the capital market, as well as underscores our collective efforts to establish a more effective regulatory framework to uphold Hong Kong’s reputation as an international financial centre.”
ENFORCEMENT NEWS
6. Court convicted and fined cases for unlicensed activity
The Eastern Magistrates’ Court had convicted Mr Ben Ngai Ping Kuen (on 5 July 2023) and Mr Cheung Wing Hung (on 27 July 2023) separately for holding themselve out as performing a regulated function in relation to dealing in securities as an agent of entities not licensed by the SFC.
It was found that between April 2016 and June 2017, both Ngai and Cheung had enticed three retail investors to invest in so-called “US-listed” shares issued by First Asia Holdings Limited (FAH) and/or First Asia Capital Limited (FAC), and to finance FAH and/or FAC in their preparation for the purported secondary listing of FAH shares in Hong Kong.
The investors were mistakenly represented that if the the secondary listing in Hong Kong was successful, the value of their investment in FAH shares would increase by 100% and that if they intended to realise their investment return, they would have to swap their FAH shares for the shares in a Hong Kong-listed corporation, namely PF Group Holdings Limited (PF). By the time the investors received their PF shares, the price of the PF shares had fallen substantially.
Both of Ngai and Cheung pleaded guilty to the offence and each of them were fined HKD6,000, and paid the SFC for the investigation costs.
7. SFC banned RaffAello Capital Limited’s former responsible officer over IPO sponsor failures
It was published on 11 July 2023 by the SFC that Mr Tsang Kwong Fai, a former responsible officer (RO) and sponsor principal of RaffAello Capital Limited (RaffAello), was prohibited from re-entering the industry for two years from 11 July 2023 to 10 July 2025 for breaching the SFC’s Code of Conduct.
The SFC had found that Tsang failed to discharge his duties as a sponsor principal, RO and member of the senior management of RaffAello to exercise due diligence in handling the listing applications, to supervise his subordinates in carrying out the sponsor work, and ensure appropriate standards of conduct were maintained.
SIGNIFICANCE:
Taking a look of the enforcement news published, it is not hard to find repeated cases of the SFC imposing severe pecuniary penalties on licensed corporations acting as sponsors on their failure to discharge their obligatory and regulatory duties in due course as expected of the SFC. The reason is pretty obvious that IPO is a concern of the investing public at large, protection of investors and maintenance of integrity of the market are of top priority to the SFC.
8. SFC fined Changjiang Asset Management (HK) Limited $3.4 million for internal control failures
On 13 July 2023, the SFC had reprimanded and fined Changjiang Asset Management (HK) Limited (CJAM) $3.4 million for regulatory breaches and internal control failings in relation to segregation of client money and provision of statements of accounts to clients.
The SFC found that between May 2015 and August 2017, CJAM had:
(1) under-segregated client money to the extent of $300 to $1.05 million on multiple occasions;
(2) failed to segregate client money it had received in amounts ranging from $651,518 to $8.5 million within the prescribed time limit on three occasions; and;
(3) failed to immediately notify the SFC after it became aware of its under-segregation of client money.
Furthermore, it was also found that CJAM had breached the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules and the Code of Conduct in issuing inaccurate statements of accounts as well as failing to provide statements of accounts to four clients.
For more details, please click on the title of the topic above.
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