ComplianceOne Newsletter - October 2023
The topics discussed in this monthly newsletter are as follows:
1. China banned new offshore brokerage accounts to prevent “bypassing” of forex controls
2. SFC/HKMA joint circular on intermediaries’ virtual asset-related activities
4. SFC consulted on market sounding guidelines
6. SFC banned Ivan Chan Chuk Cheung for seven years for IPO sponsor failures
MARKET NEWS
1. China banned new offshore brokerage accounts to prevent 'bypassing' of forex controls
According to Reuters news on 12 October 2023, China had for the first time issued a notice prohibiting domestic brokerages and their overseas units from taking on new mainland clients for offshore trading; whereas new investments by existing mainland clients are also subject to strict monitoring to prevent investors from bypassing China’s foreign exchange controls.
The China Securities Regulatory Commission (CSRC) had made it explicit earlier in September that brokers should cease providing securities trading from offshore accounts such as from Hong Kong to new mainland investors, and activities now considered as illegal include cross-border securities brokerage services, securities lending, fund sales or investment consultancy.
The story can be traced back to last December when the CSRC put a ban on the offshore investments through two main online brokers, Futu Holdings Ltd and UP Fintech Holdings Ltd where it was stated that such activities were in breach of the securities laws in China.
Despite of the recent tightening measures, institutional investors from mainland China are still able to gain access to the HK stock markets through the Stock Connect, though on a quota-restriction basis.
SIGNIFICANCE:
The notice and subsequent actions are conceived by many market participants as symbols of restricting capital outflows from mainland, particular amid the weakening of RMB in the foreign exchange market over the past months.
This impact from the regulatory regime can be far-reaching and suppressing, especially for brokerage firms with strong mainland backgrounds of which larger portion of offshore retail business was originated from.
2. SFC/HKMA Joint circular on intermediaries’ virtual asset-related activities
On 20 October 2023, the SFC and the HKMA published a “Joint Circular on intermediaries’ virtual asset-related activities” amid the buoyant interests and enquiries from intermediaries about the distribution of virtual assets-related (VA-related) products, advisory and dealing services as well as asset management services in virtual assets industry.
The SFC and the HKMA have been reviewing their existing policies for intermediaries contemplating to engage in virtual assets-related industry in the light of the ever-changing and fast-growing VA activities.
This Joint Circular incorporated FOUR main categories of VA-related activities with relevant Appendices, providing guidance and “terms & conditions” in details for intermediaries engaging the following categories:
A. Distribution of VA-related products
B. Provision of virtual asset dealing services (VA dealing services)
C. Provision of asset management services in respect of virtual assets
D. Provision of virtual asset advisory services
SIGNIFICANCE:
Intermediaries with intention to engage in VA-related business or dealing services are strongly recommended to take notes of the relevant Appendices which serve as regulatory guidelines to ensure intermediaries themselves of being in compliance while conducting their VA-related activities or VA brokerage services.
Please be reminded the prevailing Joint Circular supersedes the previous versions, and intermediaries have the obligations to keep abreast of the changing VA regulatory regime in collaboration with the ongoing concerted efforts of the law-enforcing counterparts like the SFC and the HKMA in order to develop and consolidate a sound regulatory landscape.
On 24 October 2023, this circular was published in the light of the recent observations of licensed corporations’ practice in offering and promoting SFC-authorised funds. It was noticed that intermediaries have been offering additional returns or other incentives that may divert the client’s focus from properly considering the risks and features of the underlying funds. In some observed cases, “guaranteed returns” and “lock-up period” are the common features.
Guaranteed returns
The “guaranteed returns” typically comprise: (i) the actual return of the relevant fund(s) invested by the investor (i.e., fund return); and (ii) a top-up return to make up the difference between the fund return and the guaranteed rate of return offered by the distributor.
Moreover, the guaranteed returns offered by some distributors may be considered as a “gift” which may contravene paragraph 3.11 of the Code of Conduct that “distributors should not offer any gifts (other than a discount of fees or charges) in promoting a specific investment product or a particular type of investment product to a client", lest investors may be distracted from the unique features and risks of such particular fund per se.
Lock-up period and dealing frequency
When distributing SFC-authorised funds, some distributors imposed a lock-up period on their clients’ investments or lowered the funds’ dealing frequency. It is reminded that distributors should act fairly and in the best interests of their clients in providing services in accordance with General Principle 1 (Honesty and fairness) of the Code of Conduct that clients should not be restricted to redeem his investment in a fund which interferes with his timely investment decisions.
SIGNIFICANCE:
SFC-authorised funds without guaranteed features are required to highlight in their offering documents that they do not have these features and that investors may not get back the principal of their investment. For this reason, any guaranteed returns provided by distributors may create a misleading impression to the investors that these returns are provided by the underlying funds which is not a factual presentation indeed!
As for the lock-up period, the SFC has made its expectation expressly that distributors should use their best endeavours to adhere to a fund’s dealing frequency as stipulated in the offering documents despite the need to achieve any administrative efficiency in setting any cut-off times.
4. SFC consulted on market sounding guidelines
On 11 October 2023, the SFC launched a consultation on proposed guidelines for market soundings which highlighted the general principle of honesty, fairness and best interests to the clients while conducting the regulated activities.
Under the proposals, intermediaries would have to implement robust governance and effective policies and internal control procedures to prevent the misuse and leakage of non-public information they are entrusted with. As Ms Julia Leung, the SFC’s Chief Executive Officer, has said: “both sell-side brokers and buy-side participants have obligations to uphold market integrity by keeping in strict confidence non-public information entrusted to them and not abusing that information.”
SIGNIFICANCE:
This consultation follows a thematic review of market soundings the SFC commenced in early 2022. In developing the proposed guidelines, the SFC took into consideration local and overseas market practices and regulatory requirements, related cases as well as information gathered and feedback from intermediaries in the thematic review.
On 31 October 2023, the SFC announced that it would support and sponsor the development of a code of conduct for voluntary adoption by environmental, social and governance (ESG) ratings and data products providers providing products and services in Hong Kong. The Voluntary Code of Conduct (VCoC) will be developed via an industry-led working group, namely the Hong Kong ESG Ratings and Data Products Providers VCoC Working Group (VCWG). And The SFC also welcomed the International Capital Market Association (ICMA) to act as the Secretariat of the VCWG.
The proposed VCoC would align with international best practices as recommended by the International Organization of Securities Commissions (IOSCO) and relevant expectations introduced in other major jurisdictions, with the SFC, HKMA and the Insurance Authority (IA) as observers to the VCWG.
As Ms Julia Leung, the SFC’s Chief Executive Officer, has said: “the Voluntary Code of Conduct will help strengthen the transparency, quality and reliability of ESG information used by licensed corporations in their investment decisions; this is an important initiative to mitigate the risk of greenwashing in investment products.”
The initiative is the culmination of the SFC’s fact-finding exercise and industry outreach conducted since mid-2022, the key observations from the exercise and proposed way forward for these providers were summarised in a report published by the SFC that date.
ENFORCEMENT NEWS
6. SFC banned Ivan Chan Chuk Cheung for seven years for IPO sponsor failures
An announcement made on 11 October 2023, the SFC had prohibited Mr Ivan Chan Chuk Cheung (Chan), a former responsible officer (RO) of Changjiang Corporate Finance (HK) Limited (CJCF), from re-entering the industry for seven years from 10 October 2023 to 9 October 2030 for failing to discharge his supervisory duties as a sponsor principal in charge of five listing applications
The disciplinary action followed the earlier sanctions against CJCF for serious and extensive failures in discharging its duties as the sponsor in six listing applications, five out of which were attributable to neglect on the part of Chan.
SIGNIFICANCE:
Given a ban of such long duration of seven years, Chan had failed in his role as the sponsor principal to:
(i) exercise due skill, care and diligence in handling the Five Listing Applications;
(ii) diligently supervise the transaction teams in carrying out the sponsor work; and
(iii) ensure the maintenance of appropriate standards of conduct by CJCF.
On 19 October 2023, the SFC, the Independent Commission Against Corruption (ICAC), and the Accounting and Financial Reporting Council (AFRC) have conducted the first tripartite operation involving two Hong Kong-listed companies on suspicion that they falsified corporate transactions totalling HK$193 million.
In the joint operation, three persons, including an executive director of a listed company, were arrested by the ICAC for suspected offences of agent using documents with intent to deceive his principal under the Prevention of Bribery Ordinance.
The investigation revealed that the management of the two companies listed on the SEHK had allegedly conspired with members of the syndicate to falsify corporate transactions, resulting in overstatements of HK$83.9 million in their revenue and misstatement of assets in the sum of HK$109.2 million. Such overstatements and misstatement of assets might lead to disclosure of false or misleading information in the interim results and/or annual reports of the two listed companies.
The SFC’s Executive Director of Enforcement, Mr Christopher Wilson, said: “Directors of listed companies are entrusted to govern truthful and accurate financial disclosures which serve as the bedrock of our capital markets. The tripartite operation, and the first with the AFRC, underscores our shared commitment to holding accountable those who abuse that trust and defraud investors.” Meanwhile, Deputy Commissioner and Head of Operations of the ICAC, Mr Ricky Yau Shu-chun, and Ms Janey Lai, Acting Chief Executive Officer of the AFRC, separately expressed their appreciation of the tripartite operation in upholding the integrity of the financial market in Hong Kong.
For more details, please click on the title of the topic above.
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