ComplianceOne Newsletter – June 2022
ComplianceOne Newsletter – June 2022
The topics discussed in this monthly newsletter are as follows:
1. SFC reminded investors of risks associated with non-fungible tokens
2. SFC proposed amendments to the Securities and Futures Ordinance (“SFO”) to strengthen enforcement
3. SFC fined China Everbright Securities $3.8 million for breach of anti-money laundering (“AML”) regulatory requirements
4. SFC fined CES Capital International (HK) Co. Limited $3.2 million for failures in managing private funds
MARKET NEWS
1. SFC reminded investors of risks associated with non-fungible tokens
The SFC raised concern to investors of the risks associated with non-fungible tokens (NFTs) which become popular in recent years.
As with the other virtual assets, NFT are exposed to heightened risks of illiquid secondary markets, volatility and opaque pricing. Despite the majority of the NFTs are intended to represent a unique copy of an underlying asset such as a digital image, artwork, music or video; some NFTs have trespassed to the boundary between a simple collectible and a financial asset, say securitized in the form of a collective investment scheme (CIS).
The SFC has expressed that where an NFT constitutes an interest in a CIS, marketing or distributing it may constitute a “regulated activity” which necessitates a license unless an exemption applies.
Significance:
NFTs allow the purchase and ownership of one-time digital assets, with ownership records kept in blockchain. Make it explicitly, the fads of NFTs allow virtual assets to become as collectible and tradeable as real-world works.
Such fancy collectables as NFTs seem to offer some sort of get-rich-quick stampede which evolve even faster than the cryptos counterparts. Investors opting to these fancy stuffs should bear in mind always the inherent risks and their underlying intrinsic values before putting their hard-earned money into the basket.
2. SFC proposed amendments to the SFO to strengthen enforcement
The SFC launched a two-month consultation in June on proposed enforcement-related amendments to the SFO to enable it to take more effective enforcement action.
The amendments would (i) broaden the scope of some SFO provisions to expand the basis for the SFC to apply for remedial and other orders against a regulated person under section 213; and (ii) also enable the SFC to address insider dealing perpetrated in and outside Hong Kong.
Amendments particularly deserve attention include clarifying an exemption such that, unless authorized by the SFC, advertisements of investment products which are intended to be sold only to professional investors may only be issued to professional investors who have been identified in advance as such by an intermediary through its know-your-client and related procedures
Significance:
As exemplified in the speech made by Mr. Ashley, the CEO of the SFC, "effective enforcement is essential to safeguard the integrity of Hong Kong"; the advertisements of investment products which are restricted to professional investors should not be made accessible to investors in general public looks reasonable especially with the overwhelming emergence of derivatives products and cryptos of which the inherent volatilities are mostly beyond the tolerance levels even of any professional investors.
ENFORCEMENT NEWS
3. SFC fined China Everbright Securities for breach of AML regulatory requirement
The SFC has reprimanded and fined China Everbright Securities (HK) Limited (“CESL”) $3.8 million for failures in complying with AML/CFT regulatory requirements.
The SFC found that CESL failed to implement adequate systems and controls to guard against and mitigate the risk of money laundering associated with third party deposits
between January 2015 and February 2017.
CESL also failed to detect suspicious fund deposits in some of the client accounts and make appropriate enquiries despite the presence of identifiable red flags.
4. SFC fined CES Capital Int’l (HK) Co. Ltd for failures in managing private funds
The SFC reprimanded and fined CES Capital International (Hong Kong) Co. Ltd. (“CESHK”) HK$3.2 million over its failure to discharge its duties as an investment manager of two funds between February 2015 and July 2017.
The SFC found that CESHK failed to (i) perform sufficient due diligence and monitoring of the funds' underlying investments and (ii) undertake satisfactory risk management measures to identify, quantify and manage the risks exposed to the funds.
Also, CESHK failed to keep a proper audit trail of the due diligence and monitoring allegedly performed on the funds and their underlying investments.
Significance:
It seems the first time the SFC stepped into how an asset management company managed the funds, and scrutinized the deficiencies in the daily routines for failures to comply with what are supposed to be essential procedures expected from the regulatory bodies.
Given the intention of the SFC to strengthen its enforcement efficiencies as mentioned in news topic #2 above, it is likely to have more cases coming up especially for those asset management companies where the rights of decisions of investments are not explicitly delineated and exercised in compliance with the investment mandates.
Since 15th June, 2021, CESHK has been ceasing business of regulated activities, according to information from its company website.
For more details, please click on the title of the topic above.
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