HKMA Exam on Relevant Individuals

I understand last year HKMA had conducted thematic exam on selected banks which are active in SFC regulated activities and have employed a large number of relevant individuals (ReIs). Recently HKMA has published a report of deficiencies identified, some of which are remarkable:

• Policies and procedures do not describe the division of duties among different units involved in the fit & proper assessment of proposed ReIs. (Comment: Some banks have involved both Compliance and HR in the assessment process, but the ultimate responsible unit is never made clear.)
• There is incomplete coverage of background checks of proposed ReIs (e.g. on transferees from group entity), no documentary evidence to support the performance of background checks and follow up actions on adverse results. (Comment: The bank staff performing the background checks should be adequately trained.)
• The documentation for competence assessment is insufficient in such areas as eligibility for grandfathering and 6-month grace period arrangement. (Comment: Many bank staff are quite confused with grandfathering if they don't know the history of this system. They don't understand the importance of post-registration monitoring during the 6-month grace period.)
• Some banks have erroneously included the attendance in meetings or irrelevant training courses as CPT hours. (Comment: Some banks' Training Departments have a misconception that all kinds of group activities, including team building, are eligible as CPT.)
• The job duties of some ReIs (e.g. mortgage business) are not relevant to any regulated activity. (Comment: Some bank staff often think once a day they may be transferred to a unit engaging in regulated activity. So they take advantage of grandfathering a few years ago to "park" their registrations first.)
• There are difficulties in obtaining timely and satisfactory employment reference and confirmation on grandfathering and registration details from other banks (as previous employers). (Comment: HKMA is not user-friendly enough to provide the previous registration records of ReIs to the banks.)

While large banks have already put in place adequate policies and procedures for ReIs assessment and registration, many small-to-medium sized have not yet met the standards.

Continuing Education Fraud

CPT is a nightmare to many licensed persons in HK. I am often told that some supervisors would ask their subordinates to attend CPT courses (especially in-house ones) on their behalf. What would happen if such "fraud" was uncovered?

FINRA recently fined and suspended 16 current and former registered representatives of State Farm VP Management Corp. for misconduct involving FINRA's Continuing Education requirements for registered representatives. State Farm is engaged in the business of selling mutual funds and variable products.

Nine of the sanctioned representatives were supervisors who directed or allowed subordinates to take State Farm's "Firm Element" proficiency test for them. One was a supervisor who directed a subordinate to take the test for other registered representatives. Six of the sanctioned representatives completed the Firm Element test for their superiors. State Farm reported the misconduct to FINRA after uncovering test-taking irregularities in one of its regions and conducting a preliminary investigation. State Farm then expanded its internal investigation nationwide and provided FINRA with its findings.

Since 1995, FINRA has administered a two-part mandatory Continuing Education Program which consist of a Regulatory Element and a Firm Element. The Regulatory Element requires all registered persons to take computer-based training, devoted to industry rules and regulations, on the second anniversary of their initial securities registration and every three years thereafter. The Firm Element requires firms to administer appropriate training to their registered persons who have direct contact with customers, and to the registered persons' immediate supervisors, on an ongoing basis. The training must cover topics specifically related to their business, such as new products, sales practices, risk disclosure, and new regulatory requirements and concerns.

The 2005 Firm Element designed by State Farm was an internal, computer-based system. Covered representatives were required to complete a two-hour training session and then pass a proficiency test with a minimum score of 80%. In order to access the Firm Element training session and proficiency test, the participant was required to sign on to the system using a user ID and password. The subordinate representatives who took the test for their superiors signed on as the superiors for whom they were taking the test, using the superiors' user IDs and passwords.

I am just curious if once a day a licensed person in HK would be sanctioned by SFC for "cheating" CPT hours!

Breach of Takeovers Code for Late Announcement

Last week SFC's Takeovers Executive issued a public notice criticising the failure of Bonus Raider Investments Ltd to make a timely announcement in connection with the acquisition of shares in iMerchants Ltd (8009), which constitutes a breach of Takeovers Code.

The story as follows:

• Bonus Raider is a wholly-owned subsidiary of China Water Industry Group Ltd (1129).
• On 12 Dec 2007, China Water, Bonus Raider and iMerchants jointly announced the possible unconditional mandatory cash offers by Bonus Raider for iMerchants' shares.
• The possible offers related to an agreement under which Bonus Raider had conditionally (subject to approval of China Water's shareholders in a general meeting) agreed to aquire 67.32% (i.e. exceeding the 30% trigger point) in iMerchants from its then controlling shareholder.
• On 12 Feb 2008, China Water announced that its shareholders had approved the acquisition in iMerchants but did not mention the date of completion of the acquisition agreement.
• On 21 Feb 2008, Bonus Raider and iMerchants despatched a composite offer document setting out the terms of the unconditional mandatory general cash offers and indicating that the acquisition agreement had already been completed on 14 Feb 2008.

Under Rule 3.6 of Takeovers Code, Bonus Raider was required to announce the completion of the acquisition agreement on 14 Feb 2008 but it failed to do so. This was a funny mistake. According to Bonus Raider, the breach was due to the fact that the parties had focused their efforts on completing the acquistion agreement and preparing the composite offer document, thus omitting the announcement.

SFC's concern was that during the period from 14 Feb 2008 to 21 Feb 2008 the stock market had not been informed of the acquisition. However, I don't think whether the market had been totally unaware of the matter if Bonus Raider announced the approval of China Water's shareholders to acquire iMerchants' shares. This incident appeared to be a technical breach and thus a public criticism was appropriate.

First Criminal Case of Insider Dealing in HK

Though insider dealing has been made a criminal offence under S.291 of SFO since 2003, in the past years those cases were handled in a civil way via the IDT. However, the first criminal prosecution has recently happened in HK.

SFC has commenced criminal proceedings against five defendants alleging they have committed insider dealing offences, namely, Mr Ma Hon Yeung, Ms Lo Yuk Wah Ivy, Mr Ma Hon Kit Sammy, Ms Tso Kin Wah Cordelia and Mr Ma Chun Ho Ronald. They appeared at the Eastern Magistracy today on a total of 12 charges. The case was adjourned until 17 Mar 2008 to enable an application to be made by the Department of Justice to transfer the case to the District Court. This case will then be the first indictable prosecution for an offence under the SFO. The maximum penalty for insider dealing of 10 years jail and a fine of $10 million can only be imposed upon conviction by indictment.

The charges concern alleged trading in the shares of Egana Jewellery & Pearls Ltd ("Egana") prior to an announcement made to the market on 11 Jul 2006 about a proposal to privatise the company. Egana was the jewellery division of EganaGoldpfeil (Holdings) Ltd ("EganaGoldpfeil") with its business principally in luxury and fashion branded jewellery.

Between 1 Jun and 6 Jul 2006, trading in Egana's shares ranged between $1.35 and $1.61 with average daily turnover of 636,630. Trading in the shares of Egana and EganaGoldpfeil were suspended on 7 Jul 2006 pending an announcement. On 11 Jul 2006, Egana and EganaGoldpfeil made a joint announcement about a proposed privatisation of Egana. The proposal offered shareholders a choice of receiving $1.80 per share or 1 share of EganaGoldpfeil for every 1.5 Egana shares or a combination of both. Following the announcement on 11 Jul 2006 the share price closed at $1.84 with substantially increased turnover of 25 million shares. The privatisation proposal was approved by shareholders and by the Court and became effective on 23 Oct 2006. Egana was delisted on the following day.

Ma Hon Yeung ("Ma") joined BNP Paribas Peregrine Capital Ltd ("BNP") as a VP on 1 Jun 2006. BNP was involved in advising Egana on the deal. SFC alleges that:

• Knowing about the proposed privatisation before it was announced, Ma had counselled or procured Ivy and Sammy to trade in Egana shares.
• Ivy, Sammy, Ronald and Cordelia traded in Egana shares having information through Ma's connection to Egana about the proposed privatisation.

The offences are alleged to have occurred between 1 Jun 2006 and 6 Jul 2006 (being the day before the announcement of the proposed privatisation).

Let's see if this case could become a landmark case of sanctioning insider dealing in HK.