ComplianceOne Newsletter – Dec 2024
The topics discussed in this monthly newsletter are as follows:
1. The SFC grants 4 more VTAP licenses under swift licensing process
2. HKEX Data Marketplace is launched
3. Mainland-Hong Kong Mutual Recognition of Funds enhancements to take effect on 1 January 2025
5. The SFC launched “Don’t be Sucker” campaign to raise anti-scam awareness
6. A joint investigation by SFC and ICAC on suspected misconduct in public office
7. Fund manager Ng Ka Shun banned for life by SFC and fined $1.7 million for window-dressing FRR
8. SFC reprimands and fines Ever-Long Securities Company Limited $3 million for sponsor failures
Market News
1. SFC grants 4 more VTAP licenses under swift licensing process
On 18 December 2024, the SFC granted licenses to four virtual asset trading platforms (“VATPs”) under the swift licensing process for handling deemed-to-be-licensed VATP applicants (“deemed applicants”).
In First-Phase, the SFC will engage proactively with senior management and ultimate controllers of the deemed applicants (or the VATPs) through onsite inspections, and provide feedback with the VATP to reach a rectification plan. The SFC will grant a conditional license that requires the VATP to complete penetration test and vulnerability assessment with satisfactory results. The VATP can then operate on a restricted scope of business as a licensing condition; and the VATP can proceed to engage a suitable External Assessor (“EA”) to perform the Second-Phase Assessment through a Tripartite Agreement with the SFC and the EA.
The revamped Second-Phase will focus on VATP’s policies, procedures, system and controls (“P&P”) if these are suitably designed and implemented. The VATP is required to assess and revise its P&P in response to the findings & exceptions identified by the EA and the SFC with remediation measures. Upon completion of the Second-Phase Assessment, the licensing condition(s) that restricts the scope of business of the VATP will eventually be uplifted.
SIGNIFICANCE:
A clear roadmap has been posted in another Circular as Appendix to provide a comprehensive guidance to the VATPs who are interested to acquire a VATP license, and helps alleviate the burden from the previous onerous procedures.
2. HKEX Data Marketplace is launched
On 18 December 2024, the HKEX announced the launch of the HKEX Data Marketplace (the “Platform”), a web-based platform that offers data users a more intuitive experience in accessing HKEX’s historical and reference data. The new Platform allows modern interface with multiple data delivery channels, including cloud transfer, to obtain data directly from the HKEX and offers investors with optimal user experience and convenience.
In its initial stage, the Platform will provide shareholding data from the Central Clearing and Settlement System (“CCASS”) for commercial use, as well as historical full book data from HKEX’s securities and derivatives markets, and securities market daily non-trading reference data.
The HKEX will progressively add more data product offerings and functionality to the Platform, including tools to customise data, and additional options for data delivery, supporting the evolving needs of global investors. More details are available in the HKEX website.
SIGNIFICANCE:
Given the vogue of global investors for richer and more insightful market data to complement their investment strategies, the HKEX is pioneering itself to seize the opportunities as commented by Bonnie Y Chan, the HKEX CEO, that “We are therefore delighted to be launching the HKEX Data Marketplace, providing clients with value-added services from our universe of comprehensive proprietary market data, further enhancing the vibrancy and attractiveness of Hong Kong’s financial markets. Data and analytics will complement our core business and present new and exciting opportunities for us as an adjacency.” Opportunities are for those who are well prepared.
3. Mainland-Hong Kong Mutual Recognition of Funds enhancements to take effect on 1 January 2025
On 20 December 2024, the SFC made a publication of the revised Provisions on the Administration of Recognised Hong Kong Funds (香港互認基⾦管理規定) by the China Securities Regulatory Commission (“CSRC”) and also the revised operating guidelines jointly by the People’ s Bank of China and the State Administration of Foreign Exchange (國家外匯管理局), for the purpose of implementing the enhancements to the Mutual Recognition of Funds (“MRF”) scheme.
Key takeaways of the enhancement:
(i) The MRF is one of the five measures on the capital market cooperation announced by the CSRC on 19 April 2024;
(ii) Relaxation of the sales limit on the value of units of a recognised fund sold to investors from 50% to 80% of the fund’s total assets;
(iii) Relaxation of overseas delegation restriction which provides more opportunities for international asset managers to offer more offshore solutions and products to investors in Mainland with their expertise and knowledge.
SIGNIFICANCE:
The straight impact of the relaxation of the sales limit is an anticipated increase in maximum potential sales value on the Mainland by three times. Ms Julia Leung, CEO of the SFC, has said, “We also feel confident that these enhancements will significantly increase the diversity as well as the scale of products under the MRF, thus injecting fresh momentum into the scheme.” The MRF enhancements becomes effective from 1 January 2025.
4. SFC Quarterly Report states greater connectivity is driving Hong Kong’s capital markets a further step forward
On 12 December 2024, the SFC publicly a Quarterly Report showing that Hong Kong’ s capital markets have continued to reap benefits since the third quarter from the success of Connect schemes with the Mainland and breakthroughs in Middle East market connectivity.
Highlights in the quarterly report are:
(a) Hong Kong’ s ETF market continued to grow, with the market capitalisation of ETFs up 34% year-on-year (YoY).
(b) The numbers of both corporate and individual licence applications received by the SFC increased in the quarter, up 56% and 23% YoY, respectively.
(c) The SFC is reviewing 15 licence applications from virtual asset (“VA”) trading platforms (11 deemed to be licensed), and is on track to license a few deemed operators this year under a swift licensing process (Remark: Our comment on the licensing process is also covered in this Newsletter).
(d) A number of leading Mainland enterprises went public through IPOs in Hong Kong after the Mainland announced support measures in April last year.
(e) The Court of First Instance handed down the heaviest jail sentence on market manipulation cases (i.e. the enforcement news on 22 July 2024) since the Securities and Futures Ordinance took effect.
SIGNIFICANCE:
As Ms Julia Leung, CEO of the SFC, said, “Our ETF market has achieved new milestones this year with continued robust growth in eligible ETFs under the Connect scheme and with new connectivity to the Middle East. Going forward, with broadening mutual market access with the Mainland, the SFC will strive to elevate Hong Kong to a global hub for multi-asset investing and offshore renminbi fixed-income business.”
5. The SFC launched “Don’t be Sucker” campaign to raise anti-scam awareness
On 13 December 2024, launched a new anti-scam campaign titled “Don’t be Sucker” to raise public awareness of the common tactics used in fraudulent schemes, as part of its ongoing efforts to caution investors against investment scams especially in the digital realm.
The main character in this campaign promulgated by the SFC is named Shui Yu (⽔⿂) which symbolises an impulsive, simple-minded and gullible personality, an easy target of the investment scams. The focus is on three common scam scenarios, namely online romance scams, impersonation, and deceptive tips from financial influencers.
As Ms Julia Leung, CEO of the SFC, said, “Like enforcement, education is another essential prong of our efforts to maintain financial market integrity and protect investors against fraudsters.” To achieve this aim, the SFC adopts more innovative approach on Shui Yu to attract audience among investors of all age groups, especially the young generation, delivering to them the message to “stay cool-headed towards too-good-to-be-true investment offers” coming upon them.
Complimented with this was a series of catchy reap song and music video, and YouTube channels which reinforce the SFC’s fraudulence prevention message to and to cultivate the audience with a mindset of alertness. To go further, the SFC also set up booths themed “Rescuing Shui Yu” providing fund and educational games for all age groups at large.
SIGNIFICANCE:
Preventive education is always more preferred to learning a lesson by paying a heavy cost with regret. The crux is not to be greedy, and be alert to any temptations in the camouflage like "it is now or never!"
Enforcement News
6. A joint investigation by SFC and ICAC on suspected misconduct in public office
The SFC confirmed that a former staff member is one of the three individuals in a case of suspected misconduct in public office brought by the ICAC as a result of a joint investigation which remains ongoing. The other two defendants are a senior government counsel of the Department of Justice and a registered nurse of the Hospital Authority.
The joint investigation was triggered by an internal probe of the SFC followed by its suspicion of obtaining and misusing of confidential information came to its attention. It was found in the SFC’s investigation that the former staff had acted on his own with other two individuals mentioned above, and the Commission is looking into potential violations under the Securities and Futures Ordinance.
SIGNIFICANCE:
The SFC upholds the highest standard of integrity and takes any misconduct seriously. It had conducted a thorough review of its internal policies regarding the handling of confidential information and conflict of interest. Further, the employment of the former staff had been terminated, and the matter was under investigation by the ICAC.
7. Fund manager Ng Ka Shun banned for life by SFC and fined $1.7 million for window-dressing FRR
On 23 December 2024, it was announced that SFC had banned Mr Ng Ka Shun (“NG”), responsible officer (RO) of Agg. Asset Management Limited (“Agg”), for life and fined him $1.7 million for window-dressing Agg’ s financial resources and mismanaging two funds.
Key findings of the case are as follows:
(1) Window-dressing the financial resources
NG misled the SFC into believing that Agg had satisfied the financial requirements for a licence by window-dressing the firm’ s liquid capital as of 31 March 2017. NG continued to conceal the fact of Agg’s inability to maintain sufficient liquid capital of HKD3 million after obtaining the license for a period of 34 months from May 2017 to February 2020 by providing misleading information in the financial returns submitted to the SFC.
(2) Deficiencies and substandard conduct in fund management
The SFC also found that Agg mismanaged two funds in its capacity as investment manager which seriously jeopardised the interests of the funds’ investors. The issues identified are:
a) Conflicts of interest and risk management
Agg invested all of its assets in debentures issued by companies controlled by Ng, resulting in Ng granting loans to himself with investors’ subscription;
b) Investment within mandate, safety of fund assets and valuation
Agg failed to properly safeguard the fund’ s assets by allowing Ng to withdraw part of the investors’ subscriptions from the fund ultimately for his own benefits;
Agg further failed to ensure that the fund’ s investments were in line with its stated investment objective and its assets were valued properly.
SIGNIFICANCE:
This lifelong ban imposed by the SFC indicated the severity of the breach which not only jeopardised the integrity of the market, but induced investors with substantial loss which transcended the bottom-line of the regulatory body; a deterrent message must be manifested to the wrong-doers that they have to pay for their misfeasance.
8. SFC reprimands and fines Ever-Long Securities Company Limited $3 million for sponsor failures
On 27 December 2024, the SFC reprimanded and fined Ever-Long Securities Company Limited (“Ever-Long”) $3 million for failing to discharge its duties as the sole sponsor in the application of Coastal Corporation Limited (“Coastal”) in 2016 to list on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Limited (“SEHK”).
At the material times, Coastal and its subsidiaries (“Coastal Group”) were providers of vessel chartering services based in Singapore.
The important incidence was the change of business model. In January 2014, Coastal’s subsidiary underwent a change of business model from leasing vessels to one of Coastal’s connected persons (Connected Person A) to leasing them to the top customer, an independent third party. Under this business arrangement, the top customer was able to utilise the vessels to provide bunkering services to its customers, which included another connected person of Coastal (Connected Person B).
This leasing arrangement accounted for over 50% of Coastal Group’s revenue for each of the financial years ended 30 June 2015, 2016 and 2017, which fell within the track record periods of Coastal’s listing applications.
Findings in the investigation showed Ever-Long was charged with:
(1) Failure to perform proper due diligence on rationale for and legality of leasing arrangement which might involve a license requirement in Singapore.
(2) Failure to perform proper due diligence on operations of leasing arrangement and Coastal’s business: the descriptions of the operation model of the leasing arrangement in the Application Proof and relevant agreements were at odds with evidence available to Ever-Long.
(3) Failure to perform proper due diligence on deemed connected transactions
Though under the Application Proof, the Coastal’s directors considered it prudent to deem the transactions between Coastal’s subsidiary and the top customer as connected transactions under the GEM Listing Rules; Ever-Long failed to conduct reasonable due diligence to ascertain and ensure the basis and accuracy of such disclosure.
(4) Failure to disclose a known material issue to SEHK and ensure completeness of information in Application Proof
Despite Ever-Long’s knowledge of the top customer’s lack of licence and the materiality of the same to Coastal’s suitability for listing, Ever-Long did not disclose this in the Application Proof and its submission to SEHK.
SIGNIFICANCE:
The SFC is of the view that Ever-Long’s conduct failed to fulfil the standards expected of it as a sponsor and breached the requirements of the Code of Conduct.
9. Alpha Advice is on suspicious list of the SFC for its deceptive unauthorised advertisements on Facebook
On 19 December 2024, the SFC warned the public of Facebook advertisements paid by Alpha Advice in relation to a suspicious investment product “Litigation Asset-Backed Notes” or “90-Day Notes”
The advertisements appeared to be targeting Hong Kong investors, and contain references to the common features of debentures which are not authorised by the SFC. In the view of the SFC, these advertisements may constitute “prospectuses” under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”) without the SFC’ s authorisation for registration, and have already been posted on the Suspicious Investment Products Alert List on 19 December 2024.
SIGNIFICANCE:
The SFC urges the public not to invest in any securities (including debentures) without a document authorised by the SFC for registration and/or issue, where appropriate. The public should also be vigilant and sceptical about “too-good-to-be-true” investment opportunities when making investment decisions.
For more details, please click on the title of the topic above.
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The Newsletter is for general information purpose only and is not intended to constitute legal or other professional advice.
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