ComplianceOne Newsletter – September 2024
The topics discussed in this monthly newsletter are as follows:
Statistics showed Hong Kong’s securities industry extends earnings growth into first half of 2024
SFC reprimands and fines Profitech Securities Limited $3.99 million for several regulatory breaches
MARKET NEWS
1. Statistics showed Hong Kong’s securities industry extends earnings growth into first half of 2024
On 25 September 2024, the SFC issued the financial review of the securities industry illustrating that Hong Kong’ s securities industry posted further growth in total net profits for the six months ended 30 June 2024 amidst higher average daily market turnover and increases in the number of active cash and margin clients.
A snapshot of the key takeaways:
During the first half of 2024, the total net profits of all securities dealers and securities margin financiers rose 50% to HKD19 billion, or up 29% from a year ago;
The total income for the first six months in 2024 ended flat, as higher net commission income, underwriting fees and trading profits were offset by the lower income from asset management and corporate finance advisory!
Reduction in non-interest overheads was the main drivers of the increase in profits;
Dealing activities in virtual assets generated a total revenue of HKD77 million for the first year;
Transactions of non-exchange traded investment products also reached a record high of HKD1,238 billion.
SIGNIFICANCE:
The promising performance of the industry is attributed to the enhanced breadth and depth of the products and services offered over the time; as well as the improved business environment that active cash and margin clients reaching an all-time high of around 4.87 million, demonstrating the securities industry remain robust and resilient.
The principal of “survival of the fittest” always prevail, those participants remaining in the market should be the ones which can adapt to weather the tough times in past few years.
2. SFC announces arrangements to facilitate distribution of research reports of eligible ETFs under Stock Connect
On 9 September 2024, the SFC issued a circular to set out the conditions that allow intermediaries to distribute research reports of eligible Mainland exchange-traded funds (ETFs) under Stock Connect in Hong Kong.
Ever since its inclusion of ETFs under the Stock Connect (ETF Connect) in July 2022, the scheme was highly welcomed by investors in both markets. In view of the recent expansion and increasing diversity of eligible securities, China Securities Regulatory Commission (CSRC) has clarified that the existing relevant requirements for Mainland securities companies to forward research reports of eligible Hong Kong stocks under Stock Connect on the Mainland can apply to research reports of eligible Hong Kong ETFs under Stock Connect.
Such reciprocity in access to information helps enhance Mainland and Hong Kong investors’ understanding of the products in each other’s market, as well as facilitate trading and liquidity in both markets. It should be noted that the SFC would not consider these research reports as advertisement or invitation as prohibited by section 103(1) of the SFO, subject to the following conditions:
Distribution Party: The reports are distributed by an intermediary licensed in Type 4 regulated activities; or in Type 1 regulated activities in an incidental manner.
Preparation: The intermediary preparing the reports should be responsible for it, and be compliant with the applicable requirements in the Code of Conduct; and to ensure that the information is factual, fair and neutral.
Disclosure: The reports should contain prominent and adequate disclosures of conflicts of interest and warning statements with respect to any relation or interests between the intermediary and the subject ETFs in the reports.
SIGNIFICANCE:
As Ms Christina Choi, the SFC’ s Executive Director of Investment Products, had said, “the latest arrangement will facilitate the circulation of product information with a clear, compliant and professional method.”
3. SFC issues new guides for visiting and returning professionals to highlight pragmatic licensing options
On 2 September 2024, the SFC published two new quick reference guides to assist visiting and returning professionals in understanding the SFC's pragmatic licensing regime, complementing the five popular quick reference guides published in 2023.
Let us take a snapshot of the arrangements for “returning professional” which is a more common phenomenon nowadays in Hong Kong.
Theme:
The new guideline in licensing regime provides flexibility for former practitioners intending to return to the industry in Hong Kong after an interval of less than eight years to perform regulated activities (RAs) with alternative means to satisfy the competence requirements.
Time Intervals of returning:
A prerequisite here is that the RA the returning professional is planning to carry on should be with the same examination requirements (namely, the same LRP) and in the same role (namely, the same RIQ) as previously licensed, then if:
within three years: enjoy full exemption from all examinations (under both the RIQ and LRP requirements);
within three years to eight years: enjoy conditional exemptions from both RIQ and LRP requirements by only completing additional CPT hours before re-applying for a license (if subject to same RIQ and LRP requirements).
Remarks:
LRP: Local Regulatory Framework Paper
RIQ: Recognised Industry Qualifications
SIGNIFICANCE:
With illustrative case studies, the two new guides offer useful information about licensing options and processes as well as various conditions for examination exemptions, in order to facilitate a smooth and compliant transition to the Hong Kong financial markets for these professionals.
The more flexibility is provided in the second case where the years of absence from being licensed is above the three years threshold to within eight years. According to the quick reference guide leaflet, in order to be eligible for conditional exemptions, the applicant has to complete five CPT hours per RA applied, and per year of absence, with at least 50% of the CPT hours are in local regulatory knowledge. Suffice it to say that if the applicant has been licensed four years ago for an RA, it is required to complete 20 CPT hours (10 hours in regulatory knowledge) instead of having to re-take the LRP again.
ENFORCEMENT NEWS
4. LET and Summit Ascent were required to repurchase shares to protect independent minority shareholders
On 27 September 2024, it was announced that the SFC had commenced legal proceedings under the section 214 of the SFO in the Court of First Instance to seek a share repurchase order to protect the interests of independent minority shareholders (the “Minority”) of LET Group Holdings Limited (LET) and Summit Ascent Holdings Limited (Summit) as a result of alleged misconduct of Mr Lo Kai Bong (LO), chairman, executive director and controlling shareholder of both companies.
As the alleged misconduct of LO had resulted in suspension of trading of the shares of LET and Summit and it was not certain when the shares could be resumed for trading. In order to protect the Minority, LO, LET and Summit were required by the Court to repurchase the shares from the Minority at a price and in a manner determined by the Court.
The SFC investigation further revealed that LO deliberately disregarded the Listing Rules and the Code on Takeover and Merger in disposing of the assets of LET and Summit in Russia in 2024 despite of disapproval by other directors of LET and Summit in a non-compliant manner. Though the disposal was later terminated, the SFC alleged that LO had failed to apply due care and diligence in performing his duties in both companies.
5. SFC reprimands and fines Profitech Securities Limited $3.99 million for several regulatory breaches
On 30 September 2024, the SFC reprimanded and fined Profitech Securities Limited (Profitech) HKD3.99 million for failures to comply with the Securities and Futures (Financial Resources) Rules (FRR) and other regulatory requirements.
Key findings in the SFC investigation were that Profitech:
(i) failed to maintain its required liquid capital of HKD3 million in compliance with the FRR between February and June 2021 and since July 2022;
(ii) improperly repledged client securities collateral to its execution broker for 17 months for financial accommodation without a valid client standing authority;
(iii) failed to ensure that the aggregate market value of its repledged securities collateral should not exceed the repledging limit;
(iv) recklessly provided financial accommodation to two new clients for HKD15.6 million without reasonable credit controls and risk management measures;
(v) failed to notify SFC of a change in its holding company’s shareholding structure within seven business days.
The above-mentioned failures of Profitech constituted breaches of the SFO, the Securities and Futures (Licensing and Registration) (Information) Rules, the Securities and Futures (Client Securities) Rules and the Code of Conduct.
SIGNIFICANCE:
Observation of the findings directly revealed how insufficient the internal controls measures Profitech was managed as a licensed corporation; as SFC had pointed out in considering its disciplinary sanction note including Profitech’s repeated and prolonged failures to maintain the required liquid capital, the gravity of the improper repledge of client securities and failure to rectify the irregularities despite repeated reminders from SFC, it all rendered the SFC to its suggestion for Profitech to engage an independent reviewer to review its relevant internal controls!
6. SFC bans former Goldman Sachs employee for six months for misusing facilitation trade and misrepresentation
On 23 September 2024, it was announced that the SFC banned Mr Dennis Cheng Chung Sing (Cheng), a former trader of Goldman Sachs (Asia) L.L.C. and Goldman Sachs (Asia) Securities Ltd (collectively, Goldman Sachs), from re-entering the industry for six months from 20 September 2024 to 19 March 2025
The investigation found that on 24 August 2020, Cheng erroneously placed a client order for buying 2,232,000 shares of company X to 232,000 shares into the system, resulting in an under-execution of two million shares. Cheung reported the case to Goldman Sach’s management only four day later, and he dishonestly conceal the trade execution error by the following means:
(i) arranging a facilitation trade to buy the under-executed two million shares to fill the client order;
(ii) misrepresenting to his colleagues that he had consent from client for the trade facilitation;
(iii) booking the lower price for the original trade instead of the higher price for the trade facilitation.
As a result, the SFC considered Cheng’ s conduct was in breach of the Code of Conduct and he was not fit and proper to be a licensed person.
SIGNIFICANCE:
Errors in trade executions are not uncommon in daily dealing activities. Licensed corporations should have internal control measure in place to govern any remedial procedures to be taken in a timely manner, including immediate reporting to senior management, notification to client with their consent for any compensating arrangements, as well as any subsequent reconciliations of the post error trade arrangements. Licensed corporations have to review their internal controls and procedures, and assess if they can be implemented as efficiently as designed for any specific purpose.
For more details, please click on the title of the topic above.
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