SFC Publishes Consultation Conclusions on Client Agreement Requirements

The Securities and Futures Commission (SFC) has published the “Consultation Conclusions on the Client Agreement Requirements” under which licensed intermediaries are required to incorporate a new clause in all client agreements which imposes a contractual obligation to ensure the suitability of investment recommendations and solicitations.  The new clause reads as follows:

“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives.  No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.”

A note is added to the above clause to explain the meaning of “financial product”  - any securities, futures contracts or leveraged foreign exchange contracts as defined under the Securities and Futures Ordinance (SFO).  Regarding “leveraged foreign exchange contracts”, it is only applicable to those traded by persons licensed for Type 3 (leveraged foreign exchange trading) regulated activity. 

There is an 18-month transitional period (expiring on 9 June 2017) for intermediaries to revise their client agreements, though the SFC expects all intermediaries to commence reviewing and revising client agreements immediately and to complete the exercise well before the end of the transitional period.

A copy of the Consultation Conclusions can be downloaded via the link below:

Consultation Conclusions

Listing Rules–Related Developments

Stock Exchange Publishes New Guidance Letter

The Stock Exchange of Hong Kong Limited (Stock Exchange) has published a new Guidance Letter (GL83-15) on trading halts.  It provides guidance on good practices about trading halts pending disclosures of material information by listed issuers including, amongst others:

• measures to avoid and minimize trading halt;
  • preservation of confidentiality of inside information concerning an incomplete proposal or business negotiation;
  • prompt response to the Stock Exchange’s enquiries on unusual share price/volume movements; and
• handling of specific market speculations and negative publicity.

Separately, the Stock Exchange has also updated the following:

1. GL79-14 – This letter provides guidance on documentary requirements and administrative matters for collective investment scheme applications.  It has been updated to reflect the recent revamped fund authorisation process by the SFC.
2. LD75-4 – This Listing Decision states that a proposed distribution of a subsidiary’s shares in specie by its listed parent would not constitute a transaction for the listed parent within the meaning of Chapter 14 or 14A of the Listing Rules.  This Listing Decision has now been updated to address the Stock Exchange’s concern that such type of distribution is tantamount to delisting of the assets to be distributed and shareholders should be afforded the same level of protection available for a withdrawal of listing.  Accordingly, the Stock Exchange now requires that where a disposal of assets by an issuer amounts to a very substantial disposal under the Listing Rules (based on the percentage ratio calculations), the proposed distribution would also be subject to the Listing Rule requirements applicable to a withdrawal of listing, that is:

•  
  • the issuer should obtain prior approval of the distribution by independent shareholders in a general meeting.  The approval should be given by at least 75% of shareholders voting either in person or by proxy at the meeting, and not more than 10% of the shareholders may vote against the resolution; and
  • the issuer’s shareholders (other than the directors (excluding independent non-executive directors), chief executive and controlling shareholders) should be offered a reasonable cash alternative or other reasonable alternative for the distributed assets.

Copies of the new and revised Guidance Letters and Listing Decision can be downloaded via the links below:

GL83-15

GL79-14

LD75-4

SFC Enforcement Actions

Licensed Corporations Reprimanded and Fined HK$30 Million for Regulatory Breaches

The SFC has reprimanded J.P. Morgan Broking (Hong Kong) Limited (JPMBHK), J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) and J.P. Morgan Securities (Far East) Limited (collectively “JP Morgan”), and fined them HK$15 million, HK$12 million and HK$3 million respectively for various regulatory breaches and/or internal control failings.

An SFC investigation revealed that JP Morgan had failed to implement adequate systems and controls in its institutional equities business in Hong Kong during the relevant period to ensure compliance with the rules and regulations applicable to the following areas:

1. short selling activities – As a result of incorrectly aggregating the inventory positions controlled by a principal trading desk across two offshore affiliates, JPMBHK and JPMSAP wrongly conducted over 41,000 uncovered short sale trades as long sale trades.  Further, JP Morgan did not have adequate systems and controls in place to ensure that appropriate documentary assurance were in place when short selling orders were placed;
2. client facilitation and principal trading business – JP Morgan did not have adequate systems and controls in place to prevent a client facilitation trade being executed without the client’s consent, to prevent facilitation and principal traders from being able to view certain client order flow information beyond their defined access rights, and to guard against potential misuse or abuse of client agency order flow information by the facilitation traders; and
3. operation of dark liquidity pool trading services – As a result of human and systems errors, there was incorrect mixing of agency orders with principal orders in JP Morgan’s crossing engine.

A copy of the Statement of Disciplinary Action can be downloaded via the link below:

Statement of Disciplinary Action

Court Dismisses Appeal by a Substantial Shareholder against Convictions for Failing to Make Disclosure of Interests

The Court of First Instance (Court) has dismissed an appeal by Mr Lam Fai Man, a substantial shareholder of Victory Group Limited (Victory), against his convictions for failing to disclose to Victory changes in his interests in the shares of Victory under Part XV of the SFO (though he did disclose to the Stock Exchange in time).

Mr Lam was previously convicted and fined HK$12,000 by the magistrate court.  The Court dismissed Mr Lam’s argument that the trial magistrate erred in law in finding that he, who had delegated his duty of disclosure to his account executive at a securities house, had failed to establish a defence of reasonable excuse for his failure to make disclosures to Victory.

The Court held that the legal obligation was on Mr Lam to ensure that his duty of disclosure and notification was properly performed; even if he had delegated the task, he would bear the ultimate responsibility and liability for any failure to perform the duty.

A copy of the judgment of the Court can be downloaded via the link below:

Court Judgment