Bright Smart Fined for Advertisement with False/Misleading Information

On 29 July 2014 SFC announced that it fined Bright Smart Securities International (H.K.) Limited ("BSSI") $700,000 for allowing an advertisement which contains false/misleading information to be published.

The advertisement, published in four newspapers and on BSSI's website (www.bsgroup.com.hk) from 27 August to 14 September 2013, gave the false impression that the gold bullion business of Bright Smart Securities and Commodities Group Ltd ("BS Group", listed on SEHK) is regulated and that Bright Smart Global Bullion Limited ("BS Bullion") is regulated by SFC. In fact, gold bullion business is not a regulated activity under SFO, and BS Bullion is not licensed by SFC.

The advertisement's wording:

"坊間金業冇皇管, 上市耀才有監管 !

(耀才金業為上市大行耀才證券全資附屬, 受證監監管)" 

Translation: 

"The gold bullion business in the market is not regulated, but the listed company, BS Group, is regulated!

(BS Bullion is a wholly owned subsidiary of a large listed company BS Group, [and is] regulated by SFC)"

I would say this "misleading" advertisement is a borderline case. First, BS Group, though not a licensed corporation, is regulated by SEHK and SFC as a listed company. Second, the bracketed sentence may be arguably interpreted as saying that BS Group (instead of BS Bullion) is regulated by SFC! But of course, such ambiguous wording could make the public to perceive that BS Bullion is regulated by SFC, thus deserving a disciplinary action.

Interestingly, immediately after SFC's announcement of this sanction, BSSI published a newspaper advertisement (which "thank" SFC for the reminder) as "crisis management":

Actually this is not first time BSSI was penalized by SFC for providing false/misleading information to the public:

• In 2004, SFC reprimanded and fined BSSI for publishing 13 statements in two newspapers, which stated incorrectly that clients of BSSI could make direct payment to CCASS for settlement.
• In 2005, SFC reprimanded and fined BSSI for posting misleading contents in a newsletter on BSSI’s website in June 2004, which stated that one of the duties of BSSI’s customer services officers was to provide investment analysis. It held the customer services officers out as performing Type 4 regulated activity when three of them were unlicensed.

I just wonder if BSSI has the internal procedure of asking its compliance officers to vet their newsletters/advertisements.

Enhanced Competency Framework for Private Wealth Management Practitioners

HKMA recently announced the launch of an Enhanced Competency Framework (ECF) for private wealth management (PWM) practitioners in Hong Kong.

HKMA said it has led a Task Force, comprising representatives from the newly established Private Wealth Management Association (PWMA), Hong Kong Institute of Bankers (HKIB), Hong Kong Securities and Investment Institute (HKSI), and Treasury Markets Association (TMA), in developing the ECF.  Industry consultation on the ECF was completed in 2013, with general support from the industry.

The ECF is a non-statutory framework that sets out an enhanced level of core competence and on-going professional development of PWM practitioners who undertake customer-facing roles.  New entrants and relevant industry practitioners may meet the ECF benchmark by self-study and / or taking accredited training programmes, and passing examinations.  The training programmes and examinations will consist of two modules: Module 1 on technical, industry and product knowledge, and Module 2 on ethics and compliance.  Providers of the initial programmes and examinations will be HKSI for Module 1 and HKIB for Module 2.  The PWMA will be responsible for certifying qualified practitioners as Certified Private Wealth Professional (CPWP).

Following the financial tsunami, the professionalism of PWM practitioners has been severely criticized.  I had read the ECF consultation paper and found the contents of the CPWP programmes quite comprehensive and advanced.  The ECF is expected to serve as a benchmark of competency for private bankers, but how about PWM practitioners not working in the banking sector?  I don't see SFC has formally given any acknowledgement or blessing on the ECF, seemingly it is a single-handed project of HKMA, though HKMA's circular about the ECF was copied to SFC.

My questions:

• Can PWM practitioners licensed by SFC also complete the CPWP programmes and obtain SFC's recognition?
• Can other PWM related professional qualifications, like CFA, CWM, etc., get any exemption from the CPWP programmes?

Without covering all PWM practitioners (from banks and non-banks) in Hong Kong, I am afraid the ECF is only "a small circle game".

Ernst & Young's Dilemma

SFC announced that on 20 June 2014 Ernst & Young (EY) filed a Notice of Appeal in respect of the court order to produce documents held by its Mainland affiliate, EY Hua Ming (EYHM), having produced a disc of documents it held in Hong Kong.

EY's Notice of Appeal relates to documents held by EYHM, EY's agent in carrying out specific audit activities as part of EY's engagement as reporting accountant and auditor of Standard Water Limited.

The disc of documents produced to SFC were found by EY on various hard drives in its Hong Kong office on the eve of the trial in this case, in March 2013, when production of the documents were refused by EY on the basis that the hard drives belonged to EYHM.

EY had argued during the trial that it was prevented from producing audit working papers held by EYHM because of restrictions under PRC law. SFC argued and the court accepted that PRC law does not prohibit the production of these documents and there is no blanket prohibition against their production under PRC law.

SFC also argued that EY had not done anything to follow the process under PRC law for obtaining clearance of these documents. EY has informed the SFC that it has provided these documents to China Securities Regulatory Commission (CSRC) as part of this process.

My comments/queries:

1. Why didn't EY seek the clearance from CSRC earlier when dealing with SFC (given that the communication between CSRC and SFC is so fantastic)?
2. While those PRC authority figures can see no difference between "without legal basis" and "illegal", is "PRC law does not prohibit" really a protection for EY?

Suspicious Placees

As announced on 21 May 2014, SFC reprimanded ICBC International Capital Limited and ICBC International Securities Limited (collectively ICBCI) and fined them $12.5 million respectively in relation to their role in the IPO of Powerlong Real Estate Holdings Limited  in 2009.

SFC's investigation into the practice and procedure adopted by ICBCI found that it had:

• failed to conduct customer due diligence and perform ongoing scrutiny of accounts of certain placees referred by Powerlong (Placees) to ensure that the transactions being conducted were consistent with its knowledge of the Placees, taking into account their source of funds;
• turned a blind eye to the lack of independence of Placees for the subscription of Powerlong’s shares allotted through its listing (the Offer Shares) on SEHK;
• facilitated the listing of Powerlong by ensuring that margin financing would be extended to the Placees despite its suspicion of their non-independence; and
• failed to use reasonable efforts to ensure that submissions to SEHK were true, accurate and not misleading.

The Placees were referred by Powerlong to ICBCI Capital, which in turn referred them to its affiliate ICBCI Securities to open accounts for the subscription of the Offer Shares. ICBCI Securities accepted the subscriptions of the Placees without conducting know-your-client due diligence as required under the Code of Conduct to either ascertain their financial situation or confirm their independence from Powerlong.

The Offer Shares were subsequently re-priced due to insufficient demand. Upon the request of Powerlong, ICBCI Capital informed ICBCI Securities that extensive margin financing would have to be extended to particular Placees so that subscriptions under their accounts could be increased to prevent the listing from falling through.

Thereafter, subscriptions of these Placees suddenly increased by as much as tenfold. ICBCI Securities failed to perform ongoing scrutiny to ensure that the Placees' subscriptions were consistent with its knowledge of their financial situation.

In light of the unusual and substantial increase in subscription sizes of these Placees, a certain staff member of ICBCI Capital voiced out his suspicion that the orders of these Placees belonged to Powerlong. However, no inquiry was made by ICBCI Capital to ascertain whether this was the case or the relationship between the Placees and Powerlong. Although the subscriptions of some of these Placees far exceeded their declared net worth, ICBCI Capital nevertheless allocated the Offer Shares to them. As a result, massive debit balances were triggered after the Offer Shares were booked into their accounts. Margin financing of as much as 50%, which was not generally granted in international primary placings, was then extended by ICBCI Securities to certain Placees.

When some Placees raised questions regarding third-party settlement of their subscriptions, instead of questioning the reasons behind them, personnel of ICBCI Securities advised them to settle their allotment by various methods which ensured that the identity of the third-party depositors could not be traced.

ICBCI Securities filed the Marketing Statement (known as Form D) and a letter vouching placee independence with SEHK even though it had not received all independence confirmations from the Placees at the time of making the filing with SEHK in Oct 2009. ICBCI Capital filed a Sponsor’s Declaration (known as Form E) to SEHK without making any reasonable enquiries that the number of Offer Shares in public hands would satisfy the minimum percentage prescribed by Rule 8.08 of the Listing Rules.

This is a landmark case which comprehensively highlights the major misconducts in the placing process.

Importance of IP Address

During an investigation into market misconduct, SFC often demands the clients' IP addresses from securities firms for the purpose of ascertaining who are actually placing the orders.

As announced by SFC on 13 Feb 2014, the Eastern Magistrates' Court convicted Mr Ng Kai Chak on two charges of misleading SFC during an SFC investigation. Ng pleaded guilty and was fined a total of $16,000. The court also ordered him to pay SFC’s investigation costs.

During an SFC investigation into market manipulation in the shares of Sino-Tech International Holdings Limited, Ng twice misled SFC investigators about who controlled his securities account by claiming that he had personally placed the relevant buy and sell orders for the Sino-Tech shares in his account.

However, the SFC investigation revealed that Ng could not have operated the account because the orders were placed through the IP address assigned to the workplace of Mr Wong Chun. Ng allowed Wong to access and use his online securities trading account and it was Wong who placed the relevant orders.

As a result, SFC is separately prosecuting Wong for market manipulation. The case is set for a pre-trial review on 20 Feb 2014.

Self-Matching Transactions

As announced on 9 Jan 2014, SFC resolved its compliance concerns with Cheong Lee Securities Limited. Under the resolution, SFC reprimands and fines Cheong Lee $2 million for internal control failures relating to self-matching transactions in breach of SFC’s Code of Conduct.

SFC's investigation into Cheong Lee’s client securities trading activities revealed that Cheong Lee allowed its clients to adopt a master account and sub-accounts structure. During the period from Dec 2008 to Nov 2011, more than 1,500 transactions were identified to be traded between the sub-accounts operated by different traders for the same master account.

Cheong Lee failed to put in place effective internal control procedures to detect and prevent self-matching transactions between the sub-accounts which SFC considers not to be in the best interest of market integrity.

Use of master account and sub-accounts structure is not uncommon, but securities firms should put in place the proper surveillance system to detect self-matching transactions (equivalent to wash trades).