ComplianceOne Newsletter – October 2024
The topics discussed in this monthly newsletter are as follows:
1. Dr Kelvin Wong appointed as new SFC Chairman
2. New Public Fund Depositaries Regime effective from 2 October 2024
3. New Listing Application Process in Hong Kong is streamlined
4. SFC launches a new Fund Authorization Simple Track (“FASTrack”) to bolster Hong Kong market appeal
5. e-IP application/ submission system on WINGS to be fully adopted in November
6. SFC concludes consultation on Enhanced REIT and Market Conduct regimes
7. SFC sets out vision to foster Fintech ecosystem in Hong Kong
8. Common Red-flags of suspicious transactions from using Customer Supplied System (CSS) observed in SFC investigations[1]
9. Tycoon Dickson Poon is alleged to be involved in Insider Dealing
10. SFC disqualifies former CFO of Fujian Nuoqi
11. SFC suspends former employee of Julius Baer for several regulatory breaches
12. First jail sentence for Unlicensed Activity with compensation order
The topic involves multiple enforcement news.
Market News
1. Dr Kelvin Wong appointed as new SFC Chairman
On 14 Oct 2024, the SFC made a welcome announcement on appointment of new Chairman Mr Kelvin WONG Tin-yau effective 20 October 2024 who will succeed the existing Chairman Mr Tim LUI.
A snapshot summary of the welcome speeches from various key figures regarding the appointment.
Mr Tim LUI said: “Kelvin has a wealth of knowledge and experience in the development and regulation of capital markets, in particular, being Chairman of the Accounting and Financial Reporting Council, which the SFC works closely with to uphold the quality and maintain the integrity of Hong Kong’s capital markets and its reputation as an international financial centre.” And Mr LUI also added that as Kelvin been a Non-Executive Director of the SFC and Chairman of the then Investor Education Centre, Kelvin is well-versed in the policy objectives, its strategic priorities and its operation of the Commission.
Mr WONG himself said: “I am honoured to be appointed as Chairman of the SFC, a leading global securities regulator. I look forward to working cohesively with the Board, CEO Julia, and the management team, many of whom I closely partnered with in my previous role as a Non-Executive Director.”
Ms Julia LEUNG, the SFC’s Chief Executive Officer, said: “I would like to extend a warm welcome to Kelvin and express my deep gratitude to Tim for his exemplary leadership and invaluable guidance in steering the SFC through the many difficult challenges while continuing our mission in pursuing market integrity, transparency and resilience. We now have a set of very clear strategic priorities which would enable the SFC to continue its firm commitment in safeguarding the integrity of our markets and continuing to foster market development.”
SIGNIFICANCE:
As reflected in the speeches above that given the prior co-working experiences of Mr WONG with the Commission and its high-ranked officials, together with his vast experiences and familiarity with the policies and core missions from previous role as Non-Executive Director of the Commission, it can be expected of a smooth, consistent transition, and continuation of the mission and vision of the Commission in preserving the market integrity in Hong Kong as an international financial centre.
2. New Public Fund Depositaries Regime effective from 2 October 2024
The SFC has updated its codes and guidelines to implement the new Type 13 regulated activity (“RA 13”) regime for public fund depositaries, which will be effective from 2 October 2024.
To ease the transition, the SFC will grant RA 13 licences or registrations to 19 depositaries under major banking or insurance groups in Hong Kong and over 300 staff members on the launch date.
Under the new regime, depositaries of SFC-authorised collective investment schemes (“CISs”) must be licensed or registered with the SFC to conduct RA 13 activities. They must also comply with conduct and regulatory requirements similar to those for other regulated activities.
SIGNIFICANCE:
"Integrating CIS depositaries under the RA 13 regime is crucial to the SFC's strategy to enhance public fund regulation, align with international practices, and boost investor protection." said Ms Julia Leung, CEO of the SFC.
3. New Listing Application Process in Hong Kong is streamlined
On 18 October 2024, the SFC and the Stock Exchange of Hong Kong Limited (the “Exchange”) jointly announced the launch of an enhanced timeframe for the New Listing application process (“Enhanced Application Timeframe”) to further elevate Hong Kong’s attractiveness as the leading international listing venue in the region.
Over the years, the SFC and the Exchange have been endeavouring to enhance the application process for New Listing applications; and the Exchange has already published a Guide for New Listing Applicants in preparing the listing.
Key Highlights:
Current Regulatory Framework - Under the current structure for reviewing applications, the SFC plays the roles as statutory regulator in administering the Securities and Futures (Stock Market Listing) Rules (“SMLR”) and the Securities and Futures Ordinance (SFO); the Exchange as a frontline regulator in administering the listing rules and suitability of the listing; while the Listing Committee decides if the application is approved or rejected.
Enhanced Application Timeframe - The Enhanced Application Timeframe will provide greater clarity and certainty to the timeline for reviewing New Listing applications by the SFC and the Exchange.
Applications that fully meet the requirements - Where an applicant and its sponsor submit a New Listing application that meet all applicable requirements and guidance under the SFO, the SMLR and/or the Listing Rules (“Applications Fully Meeting Requirements”), the SFC and the Exchange will individually assess if there are any regulatory concerns (“Regulators’ Assessment”) after a maximum of two rounds of comments; and the time taken will be no more than 40 business days, and 60 business days to satisfactorily address regulator’s comments. Upon confirmation of no material regulatory concern, the Exchange will finalise the disclosure in the listing document, which then forwarded to the Listing Committee Hearing. The entire application process expected to take around 6 months.
Accelerated Timeframe for Eligible A-share Listed Companies - If an existing A-share listed company meets the following criteria when submitting a New Listing application: (a) have a minimum market capitalisation of HKD10 billion; and (b) it can confirm, with support of legal advisor’s opinion, that it has complied with all laws and regulations, throughout the two full financial years immediately before listing application, then the A-share listed company is eligible for an accelerated timeframe for the New Listing application process (“Accelerated Timeframe”).
Under the Accelerated Timeframe, if an eligible A-share listed company submits an Application Fully Meeting Requirements, the Regulators’ Assessment will be completed after one round of regulatory comments; and each regulator will take no more than 30 business days to complete the Regulators’ Assessment (saving 10 business days than before).
If material regulatory concerns arise, longer process may require, involving a more intensive and detailed assessment.
SIGNIFICANCE:
The SFC and HKEX believe this initiative will support Hong Kong’s listing journey by enhancing transparency and efficiency, to further elevate Hong Kong’s attractiveness as the leading international listing venue in the region.
Please refer to the above summarized table in the Appendix for your reference.
4. SFC launches a new Fund Authorization Simple Track (“FASTrack”) to bolster Hong Kong market appeal
On 21 October 2024, the SFC announced the launch of the Fund Authorization Simple Track (“FASTrack”) on 4 November 2024. Under the FASTrack, SFC aims to grant fund authorisations within 15 business days after receiving complete and quality submissions from applicants. The new approach will cover simple funds from jurisdictions which have mutual recognition of funds (“MRF”) arrangements with the SFC.
The SFC has issued a pamphlet detailing the new features and a circular explaining the new authorisation process.
Introductory Note
(1) The SFC currently processes new fund applications under a two-stream approach where applications are classified as standard (with average processing time of 1.5 months) or non-standard (of 2.5 month) which are in line with SFC targets.
(2) The SFC has entered into mutual recognition of funds arrangements with jurisdictions outside Hong Kong (“MRF Jurisdictions”) which comprise of regulatory regimes providing comparable investor protection for retail investment funds similar to Hong Kong; and there is room to further expedite the authorization process.
(3) A new FASTrack has been launched for simple funds domiciled and regulated in MRF Jurisdictions applying for authorization.
(4) The FASTrack aims to grant fund authorizations within 15 business days from applications so as to promote efficiency and maintain competitiveness of Hong Kong.
Eligible funds under FASTrack
(1) A simple fund from an MRF Jurisdiction will be processed under FASTrack (“FASTrack Fund”) if the following criteria are satisfied:
(i) Type of funds: either (i) an equity, bond or mixed fund; (ii) an exchange-traded fund or unlisted fund tracking an index or a plain vanilla index; or (iii) a feeder fund; and the funds is NOT a derivative fund.
(ii) The management company of the fund is located in an MRF Jurisdiction;
(iii) The investment delegate is either (a) located in an MRF Jurisdiction; or (b) is an affiliate of the management company or is currently managing other SFC-authorised funds.
(2) FASTrack Funds are not expected to contain novel features, have material issues or bear wider policy implications.
Processing time and performance pledges
(1) FASTrack Funds are intended to cover simple funds which are already subject to home regulators’ supervision, and the SFC aims to grant authorization within 15 business days upon receipt of complete and quality submissions from the applicants.
(2) Under the expected timeframe for FASTrack, the SFC will either: take up or refuse to take up an application within 5 business days upon receiving it; or grant authorization within 10 business days from the take-up date.
(3) Post-vetting will be conducted by SFC to ensure the applicable authorization conditions are complied with.
Implementation
(1) FASTrack will take effect on 4 November 2024 (Effective Date) with a six-month pilot period ending on 4 May 2025.
(2) Applications meeting the above criteria received on or after the Effective Date will be processed under FASTrack; or otherwise with the previous two-stream approach.
(3) Relevant Information Checklist and FAQ have been updated to smoothen the launch.
(4) The SFC will monitor the FASTrack during the pilot period ending on 4 May 2025.
Obligations of applicants
(1) Applicants must discharge their responsibility and ensure that their SFC-authorised funds comply with prevailing regulatory requirements. The SFC will take action against any non-compliance cases.
SIGNIFICANCE:
Ms. Christina Choi, SFC’s Executive Director of Investment Products, noted that FASTrack will provide clarity and certainty for fund launches in Hong Kong, enhancing the city’s competitiveness as a premier asset management hub.
5. e-IP application/ submission system on WINGS to be fully adopted in November
On 24 October 2024, the SFC announced an extension of the parallel run period of its new online application/submission system for investment products, e-IP, by one month to 29 November 2024.
Following the circular dated 8 July 2024, the SFC had launched the e-IP on its WINGS portal on 29 July 2024 to streamline and enhance the efficiency of processing new product applications, post-authorization/ registration submission to Investment Product Division (“IPD”).
An initial three-month period of parallel run was in schedule while applications and submission were also accepted via the existing channels whereas the SFC has been monitoring the e-IP and gathering feedbacks from industry participants. Since new features and more advanced settings were introduced, and to facilitate these enhancements, the SFC decides to extend the parallel run period by one month to 29 November 2024.
SIGNIFICANCE:
Starting 30 November 2024 after the parallel run period, applications and submissions of investment products administered by IPD must be submitted via e-IP. And the current submission from IPD via the IP E-submission system will be integrated into the e-IP, including reporting of net asset values, large redemptions and suspensions of dealing.
6. SFC concludes consultation on Enhanced REIT and Market Conduct regimes
On 8 Oct 2024, the SFC released consultation conclusions on proposals for a statutory scheme of arrangement and compulsory acquisition mechanism for real estate investment trusts (“REITs”) and the enhanced market conduct regime for listed collective investment schemes (“CIS”) under the Cap. 571 (“SFO”).
The REIT Scheme Proposal allows REITs to conduct privatisation and corporate restructuring in an orderly manner with investor safeguards akin to those under the Companies Ordinance. The Listed CIS Proposal aims to extend SFO market misconduct rules, including insider dealing and market manipulation, to listed CIS, enhancing market integrity.
SIGNIFICANCE:
The proposals received general support. Ms Christina Choi, SFC’s Executive Director of Investment Products, emphasized that these measures will provide transparency, consistency, and greater investor protection. The legislative process is underway to implement these proposals.
7. SFC sets out vision to foster Fintech ecosystem in Hong Kong
In the Fintech Week 2024, the SFC announced its vision for fostering a healthy and robust fintech ecosystem in Hong Kong by outlining several major areas of its initiatives to balance market development and investor protection.
In a speech delivered by Dr Eric Yip, the SFC’s Executive Director of Intermediaries, he elaborated the details of the initiatives to further develop and scale up the Hong Kong’s virtual asset market.
Key Initiatives:
Swift Licensing for VATPs: The SFC is implementing a swift licence approval process for handling deemed-to-be-licensed VATP applicants, and expects the first batch of formal licences to be granted to deemed-to-be-licensed VATP applicants by the end of this year.
Consultative Panel: To support licensed VATPs’ development of sustainable business models, a consultative panel will be launched in early 2025 for all licensed VATPs with their representative and also other stakeholders, feedbacks will be collected for SFC’s forthcoming white paper on the virtual asset industry.
Regulatory Development: The SFC is working with the HKSAR Government and other regulatory bodies to develop proposals for regulating the provision of virtual asset trading services, and the provision of virtual asset custody services.
Tokenisation and Project Ensemble: The SFC is a core member of the Architecture Community of Hong Kong Monetary Authority’s Project Ensemble, co-leading tokenisation initiatives for the asset management industry; the Project Ensemble plays a crucial role in establishing the necessary infrastructure for Hong Kong’s tokenisation ecosystem.
SIGNIFICANCE:
SFC demonstrates its commitment in moulding itself as a pioneer in the virtual assets regime, and navigating Hong Kong toward the destination. Dr Eric Yip emphasized the SFC's commitment to balancing market development with investor protection through proactive monitoring and collaboration with other agencies.
Enforcement News
8. Common Red-flags of suspicious transactions from using Customer Supplied System (CSS) observed in SFC investigations
During the previous month of OCT 2024, a couple of SFC investigations were found to be related to AML/CTF breaches arising from the use of Customer Supplied System (“CSS”) by the clients instead of the official Broker Supplied System (“BSS”) provided by the futures brokers.
Three brokers, namely, CSC Futures (HK) Limited ("CSC"), Xinhu International Futures (Hong Kong) Co., Limited ("Xinhu") and Zheshang International Financial Holdings Co., Limited ("ZIF"), were reprimanded and fined by the SFC, and there are similar red-flags to be alerted from the three cases taking a look at the Statement of Disciplinary Action.
In retrospect of the previous quarters, there were occasional investigation cases related to use of CSS, the following observations from the case studies above are as below.
Summary of the COMMON red-flags of clients using CSS:
(1) The Relevant Periods covered the investigations by the SFC were similar ranging from 2016 to 2019.
(2) The CSS used by the clients was the same trading software of Xinguanjia (“XGJ” or “信管家” ) which allowed the clients (the users) to create sub-accounts for the authorized users in XGJ under the clients’ own accounts maintained with the futures brokers.
(3) The brokers failed to conduct proper due diligence on the CSS, namely the XGJ, used by their clients instead of the official BSS provided by the brokers.
(4) The brokers failed to conduct proper due diligence on the CSS authorized users whom operated under the sub-accounts within the XGJ system.
(5) The internal monitoring system and control policy were not sufficient to effectively detect suspicious transactions with the findings of large number of self-matched trades executed by the same client account (with sub-accounts behind). As a result, the broker failed to ensure compliance with the AML/CTF Ordinance, the AML Guidelines and Code of Conduct required by the SFC.
(6) The large size and number of deposits made by the client accounts (with suspicious transactions) were incommensurate with the declared financial status of the clients with regard to the information provided upon account openings.
(7) The follow-up enquiries conducted by the brokers were not sufficient to address the observations of abnormal large deposits made by the client accounts concerned
SIGNIFICANCE:
The use of CSS has long been a loophole which allows client users to create sub-accounts to hide the authentic identities of the order originators and to circumvent the ongoing monitoring by the brokers. Brokers should be alert and adopt a conservative approach when granting the use of CSS to their clients if the brokers themselves do not have effective monitoring devices for detecting suspicious transactions, and the due diligence procedures are not so effective in assessing the compliance risk behind the veil of CSS.
9. Tycoon Dickson Poon is alleged to be involved in Insider Dealing
The SFC had commenced proceedings in the Market Misconduct Tribunal (MMT) against chairman of Dickson Concepts (International) Limited (“Dickson Concepts”), Mr Dickson Poon, and Equity Advantage Limited (“Equity”) for alleged insider dealing in the shares of Dickson Concepts on 15 October. The SFC also alleges that Dickson Poon and his son, Pearson Poon, caused a seven-week delay in disclosing inside information about Paypal’s acquisition of Honey Science Corporation, which significantly benefited the Company.
On 20 November 2019, Paypal Holdings, Inc. (“Paypal”) announced on its website that it had agreed to acquire Honey Science Corporation (“Honey”) for approximately US$4 billion (proposed acquisition). At the material time, Dickson Concepts held 24,834,600 shares of Honey, yet the holdings were only recorded as “Unlisted equity securities” under “Other Financial Assets” without any reference to Honey.
On 9 January 2020, Dickson Concepts issued an announcement disclosing to the public, among other things, that Paypal and Honey had completed the proposed acquisition on 3 January 2020, thus resulting in a gain of approximately HK$928,744,921 over Dickson Concepts’ net book value, triggering the stock price of Dickson Concepts an increase of 33.3%!
Findings of SFC revealed that:
(1) Dickson Poon was in possession of the inside information about the proposed acquisition, and purchased a total of 2,756,500 shares of Dickson Concepts via the securities account of Equity between 28 November and 19 December 2019 before public disclosure.
(2) Dickson Concepts failed to disclose inside information about the proposed acquisition as soon as reasonably practicable, Dickson Poon and Pearson Poon caused Dickson Concepts’ breach of the disclosure of insider information requirements.
(3) Dickson Poon and Pearson Poon, who were members of senior management of Dickson Concepts, became aware of the inside information about the proposed acquisition; and failed to take steps to cause the Board of Dickson Concepts to disclose the inside information to the public as soon as reasonably practicable and Dickson Concepts only issued the announcement seven weeks later on 9 January 2020.
SIGNIFICANCE:
It is an illustrative exemplification of insider information where the individual possessing the information can take advantage of it for making lucrative remuneration.
The SFC alleges that Dickson Poon and Pearson Poon, senior management of the Company, became aware of the inside information on 21 November 2019 but failed to ensure timely disclosure. The announcement was issued seven weeks later on 9 January 2020. And the SFC’s proceedings highlight the importance of timely and accurate disclosure to maintain market integrity.
Dickson Poon has denied the allegation.
10. SFC disqualifies former CFO of Fujian Nuoqi
The SFC has obtained a disqualification order against Mr. Au Yeung Ho Yin, the former CFO and executive director of Fujian Nuoqi Co., Ltd. (Stock Code: 1353) (“Nuoqi”), for failing to discharge his duties. Au Yeung is disqualified from holding directorial or managerial positions in any Hong Kong corporation for three years.
Au Yeung admitted failing to oversee accounting functions and ensure proper governance. The SFC's investigation revealed that around RMB225 million was withdrawn from the Company’s bank accounts without proper approval.
Justice Peter Ng of the Court of First Instance stated that Au Yeung breached his duties as CFO by failing to investigate unauthorized transfers totalling RMB225 million and not alerting fellow directors. He also falsely claimed in Nuoqi's 2013 annual report that unused IPO proceeds were deposited in Hong Kong banks, while RMB160 million was actually transferred to a Mainland bank and used outside the specified scope in the listing prospectus.
SIGNIFICANCE:
Mr. Christopher Wilson, the SFC’s Executive Director of Enforcement, emphasized that investors rely heavily on chief financial officers of listed companies to safeguard business assets through their oversight of financial functions and reporting. This case clearly shows CFOs have a duty to investigate suspicious transactions and promptly report them to the board. CFOs must ensure all financial report disclosures are accurate and complete, as investors depend on these reports to evaluate the financial health of listed companies.
11. SFC suspends former employee of Julius Baer for several regulatory breaches
On 18 October 2024, the SFC announced the suspension of Mr. Singh Amit Kishan, a former employee of Bank Julius Baer & Co. Ltd. (“Julius Baer”), for seven months due to regulatory breaches.
Key Findings:
Singh falsely claimed he had a face-to-face meeting with a client as part of the required account opening procedure.
Singh advised a client to make 14 transactions that appeared unsolicited, breaching company policies.
Eleven transactions involved products not permitted for solicitation, while the others lacked pre-trade approval.
SIGNIFICANCE:
As a result, Singh circumvented the Company’s procedures on account opening, know-your-client (“KYC”), and product suitability, preventing proper compliance monitoring.
In deciding the sanction, the SFC considered the lack of evidence suggesting the client information was materially deficient and Singh’s otherwise clean disciplinary record.
12. First jail sentence for Unlicensed Activity with compensation order
On 30 Oct 2024, the Eastern Magistrates’ Court has sentenced Ms. LAI Ka Yi (“LAI”) to two weeks’ imprisonment and ordered her to pay $98,000 as a compensation to a victim of her unlicensed activity after she was convicted of holding herself out as carrying on a business in dealing in securities without a licence from the SFF. It is also the first time the Court imposed an immediate imprisonment for an unlicensed activity offence under section 114 of the SFO (Restriction on carrying on business in regulated activities).
Between April and 10 May 2018, Lai who was then a university student, held herself out to the victim, who she knew personally, as carrying on a business in dealing in securities. Lai enticed the victim to transfer to her bank account funds for her to invest in securities on the victim’s behalf. In the end, the victim was unable to withdraw the investment from Lai except receiving from her $2,000 in purported earnings.
SIGNIFICANCE:
The SFC urges the public to verify the licensing status of firms and individuals on its Public Register of Licensed Persons and Registered Institutions. According to public information, LAI was licensed and accredited to Convoy Asset Management Limited to carry on Type 1 (dealing in securities) regulated activity from 30 December 2015 to 11 January 2016, for thirteen days only. And the incidence happened between April and 10 May 2018, a relatively short episode which was two years after expiry of her previous SFC license, while the only victim was a friend of LAI personally.
This marks the first time an immediate jail sentence and compensation order have been imposed for such an offence under section 114 of the Cap. 571 Securities and Futures Ordinance (“SFO”).
For more details, please click on the title of the topic above.
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