Victims from Taiwan

Don't presume victims of Lehman Brothers related products sold in Hong Kong were limited to local residents. Some of them may be overseas investors.

As announced on 4 Dec 2012, SFC reprimanded President Securities (Hong Kong) Limited and fined it $2 million for failing to act in the best interests of its clients when accepting subscriptions for a number of Lehman Brothers related structured products by 21 Taiwanese clients in 2008.

SFC's investigation found that the selling process of the products gave rise to a number of regulatory concerns:

• The Taiwanese clients were referred to President Securities by its parent company in Taiwan, President Securities Corporation (PSC). They opened accounts with President Securities before they purchased the products, but the account opening process was handled by PSC.
• President Securities staff signed as witnesses on the Taiwanese clients’ account opening documents when, in fact, they had never met the clients.
• No one from President Securities contacted the Taiwanese clients to verify their identities, explain the account opening documents to them, establish their financial situation, investment experience, and investment objectives, and make risk disclosure to them.
• President Securities did not sufficiently ensure that the Taiwanese clients understood the products and accepted the risks associated with them before accepting their subscriptions for the products. It relied on standard risk disclaimers signed by the Taiwanese clients even though no explanation of the disclaimers had been given to the clients.
• A number of the products prescribed minimum subscription requirements to restrict the categories of investors eligible to invest in them. Since some of the Taiwanese clients' subscriptions amounts did not meet the minimum subscription requirements, President Securities pooled their orders together so as to meet the minimum subscription requirements. However, President Securities did not inform such clients that their orders would be pooled together.

It appears that President Securities was only a booking center for the product distribution, while all the (lousy) jobs were done by its parent company.

Product Due Diligence Totally Outsourced

As announced on 16 Aug 2012, SFC reprimanded and fined RBC Investment Management (Asia) Limited (RBC) HK$4 million in relation to its provision of investment advice to clients on a number of non-SFC authorized funds between Nov 2006 and Jul 2008. RBC also agreed to make repurchase offers to eligible customers and compensation to eligible former customers in a resolution made under S.201 of the SFO.

SFC's investigation found that:

• RBC did not provide adequate guidance to its staff on conducting due diligence on funds before making investment recommendations or solicitations to clients.
• RBC relied on its Singapore office to conduct due diligence on investment products but it saw no record of any due diligence conducted by its Singapore office, and therefore was not aware of the scope and the extent of any due diligence carried out by its Singapore office.
• RBC did not provide adequate practical guidance to relationship managers (RMs) in providing investment advice or recommendations. RBC also did not have any measure for the overall risk of investment products it sold.
• RBC's RMs did not record or document any product suitability assessment they had undertaken to demonstrate that RBC was reasonably satisfied that the investment products recommended by the RMs were suitable for their clients.
• RBC relied only on e-mails, meeting call reports, file notes and telephone recordings as records of investment advice and recommendation. However, such records are incomplete and do not provide a substantiated account of the advice and/or recommendation given and the underlying rationale.

While a licensed firm may outsource the product due diligence work to an external specialist, it can't turn a blind eye to the whole process.

More User-Friendly Law

Today SCMP reports that the Department of Justice (DoJ) is now planning to make Hong Kong legislation more accessible to the public by adopting a simpler and gender-sensitive writing style. Such initiative will be applied to all legislation starting from this year.

Eamonn Moran, a law draftsman of DoJ, cited Australia and New Zealand as examples of countries that effectively used plain language in legislation to make laws more accessible to the public.  Then people don't need to be a legal professional in order to understand what the law is saying.

Under the new style, "he" will no longer be used to denote "she", and we will see "police officer" instead of "policeman" or "lay person" instead of "layman".  My puzzle is whether in future legislation we must use "she/he" (lady first).

The word "shall" will be replaced by "must" to impose an obligation.  No kidding, in the past I really heard a guy arguing that "shall" is only a future tense expression!

In addition, law drafters will limit unbroken text to about 50 words.  Interestingly, SCMP's article mentions one sub-clause under Section 187 of the Securities and Futures Ordinance  (SFO), which uses 179 words to explain the use of incriminating evidence in proceedings.  Let me end this blog post by reproducing this sub-clause below:

QUOTE

(2) Notwithstanding any other provisions of this Ordinance, where-
(a) an authorized person within the meaning of section 179 requires a person to provide or make an explanation or statement under that section; or
(b) an investigator requires a person to give an explanation or further particulars or to give an answer to any question under section 183,
and the explanation or statement, the explanation or further particulars, or the answer (as the case may be) might tend to incriminate the person and the person so claims before providing or making the explanation or statement, giving the explanation or further particulars, or giving the answer (as the case may be), then the requirement as well as the explanation or statement, the explanation or further particulars, or the question and answer (as the case may be) shall not be admissible in evidence against the person in criminal proceedings in a court of law other than those in which the person is charged with an offence under section 179(13), (14) or (15) or 184, or under section 219(2)(a), 253(2)(a) or 254(6)(a) or (b), or under Part V of the Crimes Ordinance (Cap 200), or for perjury, in respect of the explanation or statement, the explanation or further particulars, or the answer (as the case may be).

UNQUOTE

Grey Market Misconduct

As announced on 13 Feb 2012, SFC revoked the licence of Mr Paco Ng Kar Lun, and prohibited Ng and Mr Adrian Fong Wai Lap from re-entering the industry for 10 and 3 years respectively.

These decisions follow an SFC investigation into transactions conducted by Ng and Fong in relation to allegations they were involved in trading overpriced shares of Metallurgical Corporation of China Limited in the grey market prior to its listing on SEHK on 24 Sep 2009.

Although the scheme ultimately fell through, SFC said the conduct of Ng and Fong was inconsistent with the standards of integrity and honesty expected of licensees under the Code of Conduct.

ICAC has charged both Ng and Fong jointly for conspiracy to defraud.

SFC disclosed too little information about this case. How did trading overpriced shares in the grey market harm other investors? Were Ng's and Fong's trading misbehaviors so severe to deserve their respective heavy penalties?