Concealment of Error Trade

SFC announced on 23 Sep 2024 that it prohibited Mr Dennis Cheng Chung Sing from re-entering the industry for 6 months because Cheng had acted dishonestly to conceal a trade execution error when he attempted to fix the error.

Between 23 Jul 2018 and 2 Sep 2020, Cheng was a sales trader on Goldman Sachs’ Hong Kong Program Trading Sales Trading Desk (PT Desk). Cheng’s duties included executing client orders.

On 21 Aug 2020, a client placed an order with Goldman Sachs to buy 6,700,000 shares in Company X at volume weighted average price (VWAP), to be executed over 3 days (2,232,000 shares on 24 Aug 2020 and 2,234,000 shares each on 25 and 26 Aug 2020). The client order was routed to the PT Desk for execution.

Cheng picked up the client order for execution on 24 Aug 2020. However, Cheng wrongly inputted 232,000 shares instead of 2,232,000 shares into the system, resulting in an under-execution of 2 million shares.

Cheng was alerted to the error trade by his colleague after market close on the same day. However, Cheng did not immediately report the error trade to Goldman Sachs’ management and compliance department in accordance with Goldman Sachs’ internal policy on error escalation and only reported it 4 days later.

Upon discovery of the error trade, Cheng immediately approached Goldman Sachs’ facilitation desks to arrange a facilitation trade for the shortfall, without obtaining the client’s prior consent.

When booking the two executed trades consisting of: (i) the 232,000 on-exchange executions; and (ii) the facilitation trade to the client’s account on 24 Aug 2020, Cheng did not select the average price for the executed trades in accordance with Goldman Sachs’ booking practice. Instead, Cheng booked the executed trades at the more favourable VWAP which reflected the client’s requested price, and not the average price. As a result of this price error, the client was not disadvantaged by the facilitation trade. However, the price error caused the error trade to be hidden from Goldman Sachs until 28 Aug 2020, when its share trading desk discovered a trading loss from the facilitation trade.

Cheng also made multiple misrepresentations to his colleagues to conceal the error trade including:

• on 24 Aug 2020, Cheng told a colleague on the facilitation desk that he needed to buy the shortfall by client facilitation because of a lack of current liquidity when the real reason was to cover the shortfall which had resulted from the error trade;
• on 24 Aug 2020, immediately before the execution of the facilitation trade, he told another colleague that he had obtained the client’s consent by telephone, notwithstanding he had not done so; and
• on 28 Aug 2020, in response to his supervisor’s query as to why he needed to arrange a client facilitation trade, Cheng told his supervisor that he had spoken to the client after he became aware of the shortfall and the client had asked him to arrange a facilitation trade for the shortfall.

Failures to Monitor Suspicious Trading Activities

SFC announced that it reprimanded and fined China Industrial Securities International Brokerage Limited $3.5 million for internal control failures relating to monitoring of suspicious trading activities and recording of client order instructions. I am more interested in reviewing the following issues described in the SDA.

Failures to ensure all identified unusual transactions were properly examined and the relevant examination findings and outcomes were adequately documented

• Since June 2015, China Industrial has been using a third-party post-trade surveillance system to detect suspicious trading activities.
• China Industrial’s post-trade monitoring policy provided that Compliance Department would circulate daily reports on the alerts generated by the surveillance system to the ROs of the relevant departments that handled client accounts for review on a daily basis. Each department would receive and assess alerts that were relevant to the client accounts they handled and the ROs were required to make specific enquiries with the relevant AEs and/or clients for different types of alerts.
• However, the evidence shows that:
• prior to May 2018, the daily reports were not sent to 2 of the 4 Frontline Departments that handled client accounts;
• between 29 Mar and 7 Sep 2016, there were a total of 1,607 alerts. However, there is no review record for these alerts; and
• during the periods from 1 Aug 2017 to 31 Jul 2019 and from 1 Jun to 31 Oct 2020, there were a total of 18,008 alerts. However, there are review records for only around 5,000 alerts.
• According to China Industrial’s former ROs, the surveillance system generated many false alerts, which they would discuss, review and remark on the list of alerts. Nevertheless, China Industrial failed to properly maintain the ROs’ alert review records and/or to ensure that the ROs adequately record their examination remarks.

Failure to implement effective compliance procedures in relation to the alert reviews

• Compliance Department would select 5 to 8 sample alerts per month for review and the review findings and follow-up actions were recorded in writing.
• However, the monthly check records show Compliance Department focused on examining the actual sample alerts (e.g. comparing the specific trade and client profile covered in each sample alert), and never reviewed the adequacy of the records kept and whether the steps taken by the ROs to examine the unusual transactions flagged by the alerts were compliant with the post-trade monitoring policy.

Many firms may have the misconception that putting in place a surveillance system which generate a lot of daily alerts is adequate. But now the regulatory is getting more concerned about the quality of monitoring. Unless RegTech facilitated by AI has become mature and reliable, human efforts in screening out false alerts and following up true alerts remain critical.

Misleading Share Placement

On 18 May 2023, SFC announced that it reprimanded and fined China On Securities Limited $6 million over its failures as the placing agent in a share placement between 25 Nov and 6 Dec 2019.

Summary of facts in this case:

• On 25 November 2019, China On entered into a share placing agreement with the then majority shareholder (vendor) of Hon Corp (with GEM listing cancelled on 22 Jun 2022), under which it agreed to procure, as the vendor’s agent, not less than 6 placees to subscribe for shares representing up to 45% of Hon Corp’s total issued share capital. The agreed total placing price for the shares would amount to HK$57.24 million (i.e. HK$0.265 per share).
• When completion takes place, (i) China On should pay, or procure the placees to pay, to the Vendor the aggregate placing price; and (ii) the Vendor should allot the shares to the placees. The vendor deposited the shares into its account with China On thereafter.
• In the meantime, China On entered into a subscription agreement with each of the placees on 27 November 2019. Subsequently, on 28 November 2019, without the vendor’s specific authority, China On entered into a bought and sold note relating to the shares on behalf of the vendor with each of the placees, in which the transaction prices were inconsistent with the placing price agreed with the vendor.
• On 6 December 2019, in the absence of the vendor’s consent or any funds deposited by the placees to settle the placing price, China On arranged to transfer the shares from the vendor’s account to the placees’ accounts. Such arrangements were made by China On in the mere hope that the placees would sell the shares on the market and the sale proceeds from such disposal would be sufficient to settle the placing price with the vendor, without even considering that the sale proceeds might fall short of the agreed placing price, not to mention other settlement risks which had not been accepted by the vendor.
• China On’s then responsible officer (RO) handling the placement claimed that he carried out the above arrangement because he had received instructions from two individuals (including a consultant of China On and a person associated with the minority shareholder of China On, both were not licensed representatives or employees of China On), that the vendor had agreed to allot the shares to the placees and receive payment from the placees only after the placees successfully sold the shares on the market. Whilst the RO had no idea how these "associates" communicated with the vendor, he did not seek written or any other direct confirmation from the vendor before effecting the above arrangement.
• Almost all the shares were immediately sold by the placees on the market on 6 December 2019, and the account statements issued by China On show that HK$53 million was credited from the placees’ accounts to the Vendor’s account on the next business day (9 December 2019). This amount fell short of the total agreed placing price for the shares of HK$57.24 million because the RO was under the unverified and unsupported belief that the vendor had agreed with one of the placees for the placing price of HK$4.24 million to be settled “off market” (i.e. not through China On).
• On 9 and 10 December 2019, China On was informed by law enforcement agencies that the placees were suspected to be involved in market manipulation. On 21 January 2020, SFC issued a restriction notice on China On, prohibiting it from disposing of or dealing with any assets in the placees’ accounts up to the total value of HK$170 million. Since the placees did not have any additional funds in their accounts, China On refused to make payment of the agreed price for the shares to the vendor.

Based on the facts summarised above, SFC found that China On was grossly negligent, if not reckless, in its disregard of its fundamental duties to safeguard its client’s assets and ensure that it was acting under its client’s instructions and authorities.

My comments/queries:

• It appears that the share placing arrangement was misleading, given that the actual transaction prices were lower than the agreed placing price.
• Whether or not the placees were really procured by China On is questionable.
• I suppose SFC had investigated the two "associates", the vendor and even Hon Corp; if yes, the investigation results had better been disclosed.
• Who were the "law enforcement agencies" informing China On? Were they including the PRC authorities (e.g. CSRC)?
• If the placees were suspected to be involved in market manipulation, does it mean this share placing was part of it?

Victims of a Stock Manipulation Scheme

SFC banned Peter Law Chi Kin from re-entering the industry for 10 years for taking part in a stock manipulation scheme.

In mid-2016, Wong Kwun Shing, Law’s colleague at Convoy Asset Management Limited (CAML), introduced to Law a scheme operated by certain unknown manipulators to offload the shares of a GEM listed company to retail investors who were willing to hold onto the same for one to three months in return for a cash rebate of 12% to 15% of the transaction value.

Between June and July 2016, Law solicited and arranged for the clients to buy the shares from the manipulators. Law represented that he had met the manipulators to discuss the plan to push up the share price, but in fact he neither knew nor had direct contact with the manipulators. The clients agreed to buy and hold the shares until Law gave them permission to sell.

Wong would agree the date, time, quantity and price of each transaction with the manipulators in advance and inform Law of the same. At the agreed date and time, the manipulators would place an ask order within one to two spreads of the prevailing nominal price. Upon receiving Wong’s confirmation, Law would instruct the client to place a corresponding bid order. After the transaction was completed, Wong would pay the cash rebate collected from the manipulators to Law for onward distribution to the client.

Before the clients were allowed to dispose of the shares, the share price of the company collapsed and they suffered substantial losses.

Law admitted that he received a "referral fee" from Wong / the manipulators for soliciting the clients to participate in the scheme, which was calculated on the basis of the value of the shares the clients purchased. He did not disclose to the clients his financial interest in the transactions.

Law repeatedly gave reckless advice to some of the clients in connection with their investment in the shares, e.g.

• He represented that the scheme was "100% safe" and riskless, or had a guaranteed return of 12%, without explaining that the clients might suffer losses if the share price were to drop.
• He suggested one of the clients sell all her existing holdings and use the proceeds to invest in the company, without analysing and warning her of the concentration risk.
• He suggested two of the clients make use of the overdraft facilities offered by a brokerage firm to acquire a larger quantity of the shares, without explaining to them the risk of "margin call". Instead, he assured one of them that the brokerage firm would not force sell the shares in his account, and advised the other to ignore the brokerage firm's demand for deposit of additional funds. In the end, both their shares were force sold by the brokerage firm when the share price plummeted.
• When the share price started to fall, he dissuaded the clients from offloading their shares and reassured them that they would recoup their losses or even make a profit by holding onto the shares. As a result, the clients missed the opportunities to mitigate their losses.

Though the clients were victims, they had in fact participated in this stock manipulation scheme in return for a remuneration. Would SFC prosecute them?

Summary Review of SFC's Disciplinary Action against Swiss-Asia

On 8 November 2022, SFC fined Swiss-Asia Asset Management (HK) Limited $3 million for internal control failings and regulatory breaches in relation to the monitoring of trading activities in discretionary accounts and record keeping.

In mid-April 2015, a client signed an asset management mandate granting Swiss-Asia full discretionary power to manage the account, subject to certain management restrictions, e.g.

• Swiss-Asia could sell covered call options on existing securities and option strategies which have defined risk.
• It should not include any option strategies that involved uncapped risk or purchase options as a speculative strategy for the portfolio.

In late August 2016, the client complained to Swiss-Asia that its licensed representative conducted option trading in the account which was much riskier than agreed.

From May 2015 to August 2016, the licenced representative placed a total of 869 options trades in the account. Swiss-Asia only submitted to SFC in April 2017 that it had identified 225 of these options trades to be outside the management restrictions.

Swiss-Asia asserted that its responsible officers would randomly select five to seven portfolios on a monthly basis and conduct rough high-level reviews on them, which is considered inadequate by SFC. It did not maintain records of such random sample checks.

As a result of this case, Swiss-Asia has revised its internal control policies and procedures such that post-trade checks would be conducted on all accounts on a weekly basis. Any breaches in investment strategies or exceptions in the investment restrictions would be documented and escalated to executive management.

Swiss-Asia claimed that it operated with the support of the three lines of defence, i.e. (1) management supervision, (2) oversight by the legal and compliance team, and (3) audit by external auditors. SFC questions how legal and compliance as well as external auditors could perform their functions properly and effectively without records of the sample checks. I also question if legal and compliance (rather than risk management) would have the expertise in option strategies to identify breaches of investment mandate.

SFC highlights that the monitoring of trading activities are important for the detection and prevention of potential market misconduct (i.e. not just breaches of investment mandate). If this case involved also market misconduct, the penalty would be much higher.

SFC's Statement of Disciplinary Action is found here.

Proposed Amendments to SFO: Advertisements of Investment Products

In June 2022, SFC published a consultation paper on proposed amendments to the SFO. The proposal contains 2 enforcement-related amendments and the other one relating to the professional investor (PI) exemption (PI amendment) under section 103 of the SFO. I discuss the PI amendment in this article.

The PI amendment is triggered by the Pacific Sun case happened many years ago, summarized as follows:

• SFC announced on 21 Mar 2013 that Pacific Sun Advisors Limited and its director Andrew Mantel were charged for issuing an advertisement on the corporate website promoting "Pacific Sun Greater China Equities Fund" (the Fund) without SFC's authorization. The defendants submitted that they intended to sell the Fund only to PIs and so the advertisements did not require SFC's authorization under the PI exemption. Surprisingly, the Magistrate accepted the defendants' argument and acquitted them.
• SFC announced on 10 Jun 2014 that following its appeal, the Court of First Instance (CFI) issued a ruling in Jan 2014 clarifying that the advertisements in question did not fall within the PI exemption and ordered the case to be returned to the Magistrate for reconsideration. The CFI made it clear that the exemption only applies where the advertisement states on its face that the terms of the offer are limited to PIs. As a result, the defendants were convicted at the Magistrate.
• SFC announced on 20 Mar 2015 that following the defendants' appeal, the Court of Final Appeal (CFA) overturned the ruling of the CFI in that the PI exemption applies even if the intention to sell the Fund only to PIs is not expressed in the advertisement, unless the Fund is subsequently sold to a retail investor. It follows that contravention of section 103 of the SFO can only be established well after the offer to the public has been issued.

SFC has definitely thought the CFA's ruling is not in line with the intention of the PI exemption. SFC expressed on 20 Mar 2015 that it will study the CFA's decision to determine whether there should be any proposal to amend section 103 of the SFO. However, SFC has not taken any action until Jun 2022.

In the consultation paper, SFC proposes an amendment to section 103(3)(k) to restore the PI exemption to the original point in time when the advertising materials are issued. Therefore, following the proposed amendments, unauthorized advertisements of investment products which are intended to be sold only to PIs may only be issued to PIs who have been identified as such in advance by an intermediary through its know-your-client and related procedures, regardless of whether or not such an intention has been stated on the advertisements.

My views:

• The CFA's ruling was weird. Even the CFA made it clear that the burden of establishing the PI exemption applies rests on the defendants, it didn't say expressing the intention to sell the Fund only to PIs was a must.
• SFC's proposed amendments overshoot. It sounds impractical to require an intermediary to identify the PIs (esp. corporate and individual clients) in advance before issuing unauthorized advertisements of investment products.
• My stance is close to the Magistrate's decision in 2014. Section 103 should be amended to require an intermediary to express prominently in the advertisements that the unauthorized product is intended to be sold only to PIs, otherwise the PI exemption won't apply. SFC can subsequently sample check if the intermediary has sold the product to retail investors.

Customer Supplied Systems

On 30 Dec 2021, SFC announced that it reprimanded and fined Grand International Futures Co., Limited (GIFCL) $8,000,000 and suspended the licence of GIFCL's responsible officer, Mr Liang Benyou for 8 months.

Liang has been accredited to GIFCL and approved to act as its responsible officer for RA2 and RA5 since 3 October 2017. Liang has been GIFCL's MIC of the OMO, OCR, Compliance and IT since 1 Sep 2017, and MIC of KBL since 4 Apr 2018. This is probably the first time a MIC of Compliance was sanctioned by SFC, though obviously Liang was not a full-time compliance professional.

Summary of Facts

• SFC received a complaint against various LCs, including GIFCL, for allowing clients to place orders to their broker supplied systems (BSS) through a software called Xinguanjia (XGJ). XGJ was developed and/or provided by Hengxin Software Limited.
• The complainant alleged that XGJ permitted the LCs' clients to create sub-accounts under their accounts maintained with the LCs, and the clients had solicited investors in Mainland China to trade through the sub-accounts via XGJ without having to open separate securities accounts with the LCs in Hong Kong.
• Between Oct 2017 and Oct 2018 (Relevant Period), GIFCL has permitted 103 clients to use their designated customer supplied systems ("CSSs", including XGJ) for placing orders. From Dec 2017 to Oct 2018, the number of futures contracts transacted by GIFCL clients through orders placed via CSSs accounted for 93.92% to 99.25% of its monthly trading volume.

Failure to perform adequate due diligence on the CSSs and assess and manage the associated ML/TF and other risks

• Before allowing its clients to connect their CSSs to its BSS, GIFCL would require its clients to: (a) complete an application form and risk disclosure statement; and (b) apply for authorisation from its BSS Supplier. But GIFCL did not perform any due diligence or testing on the CSSs used by its clients.
• While GIFCL claimed that it relied on the BSS Supplier to conduct due diligence on the CSSs, the BSS Supplier stated that GIFCL had never instructed it to, and it did not, conduct any due diligence or test on the CSSs to examine their design and functions.
• In the absence of proper control over the use of CSSs by its clients, GIFCL has exposed itself to the risks of improper conduct such as unlicensed activities, money laundering, nominee account arrangement and unauthorized access to client accounts.

Failure to conduct proper enquiries on client deposits which were incommensurate with the clients' financial profiles

• SFC's review of the fund movements in sample client accounts showed that the amounts of deposits made into the accounts of four clients (Four Clients) were incommensurate with their financial profiles declared in their account opening documents, which were unusual and/or suspicious (Anomalies).
• GIFCL claimed that it was aware of the Anomalies during the Relevant Period. As part of its monthly monitoring measure, it had contacted the top clients (including the Four Clients) via WeChat to understand the client situation (Monthly Monitoring).
• However, the Monthly Monitoring was inadequate:
• GIFCL did not document the policies and procedures governing the Monthly Monitoring.
• The scope of the Monthly Monitoring was limited to top 10 clients with the highest number of transactions and top 10 clients with the highest amount of deposits.
• GIFCL has not maintained any record of the Monthly Monitoring, including its enquiries allegedly made with the Four Clients and their responses to the enquiries.

Failure to maintain effective ongoing monitoring system to detect and assess suspicious trading patterns in client accounts

• SFC’s review of the transactions in sample client accounts showed that there were 100,989 self-matched trades (i.e. the client’s order matched with his/her own order in the opposite direction) (Matched Trades) in nine client accounts during the Relevant Period. But GIFCL was not aware of the Matched Trades at the material time.
• During the Relevant Period, GIFCL relied on its dealing department to monitor client trading activities. However, it did not provide its staff with any guidelines or procedures for such monitoring.

As a result, SFC remarked that LCs should assess the risks of any new products and services (especially those that may lead to misuse of technological developments or facilitate anonymity in ML/TF schemes) before they are introduced and ensure appropriate additional measures and controls are implemented to mitigate and manage the associated ML/TF risks. Approving the use of CSSs by clients is indeed a new challenge to LCs.

In addition, as SFC said, the LCs' clients had solicited investors in Mainland China to trade through the sub-accounts via XGJ without having to open separate securities accounts with the LCs in Hong Kong. This may even facilitate the breach PRC's regulations which restrict cross-border online brokers.

Provision of False Client Documents and Information

On 30 Aug 2021, SFC announced that it suspended Mr Cheung Man Chit, a former licensed representative of Emperor Securities Limited and Emperor Futures Limited (collectively, Emperor), for two years. The facts are summarized below.

Submission of false client documents and information to Emperor

• Cheung received two sets of client agreements from Client L and H in around Aug 2013 for the opening of Client L's accounts at Emperor, but submitted to Emperor the one received from H. Further, he falsely certified and claimed to have witnessed Client L's signing of the submitted client agreement.
• In around Jan 2014, Cheung received three payment forms authorising fund transfer from Client L to H, one from Client L and two from H. He submitted to Emperor the two payment forms received from H and not signed by Client L, one of which resulted in the $300,000 Transfer which Client L alleged was not authorised by her.
• He handled and submitted to Emperor six other account documents of Client L which were not signed by her between Nov 2013 and Jun 2014.
• Cheung provided his own addresses, and an email address he created, to state as the residential addresses and email address of another client (Client Y) in her client agreement and a change of particulars form which he submitted to Emperor.

Transfer of funds for clients

• Between Jun 2014 and Jan 2017, the accounts of Client Y and another client (Client C) at Emperor recorded transfers totalling around $3.2 million to/from Cheung's bank account or the bank account of a company solely owned by him (Company U) on 15 occasions. Ten of the 15 transfers were made pursuant to third party deposit/payment request forms (Third Party Forms) of the clients signed by Cheung as the handling account executive.
• Cheung admitted that he helped the clients transfer money to/from the Mainland using his and Company U's bank accounts, and claimed that he did not receive any benefit for transferring money for the clients. He accepted that the money transferred from the Emperor accounts of the clients had been mingled with the money in his and Company U's bank accounts.
• To secure Emperor's approval of the third party fund transfer requests of the clients and get around the need to provide supporting documents required under the firms' then policy, he falsely stated in the clients' Third Party Forms that they were directors of Company U, he and Client C were business partners, and the reason for payment was capital recovery by Company U.

Using a client's password to place trade orders in her online trading account

• Client C opened an option account at Emperor in May 2014. Based on the records of internet service providers, 84 orders were placed in her option account via internet from IP addresses subscribed by Cheung or situated at the offices of Emperor and his new employers between Jun 2014 and Aug 2017.
• Cheung stated that he placed orders for Client C via internet as a friend and did not receive any personal benefit from her. Client C only paid commission to Emperor for the trades.

Failure to inform SFC and Emperor of directorship / proprietorship

• Cheung has been the sole proprietor of Company U and the director of another company since their incorporation in around 2010 and January 2018.
• He did not report to SFC his directorship and proprietorship of the two companies in his licence application and throughout the period when he was licensed with SFC.
• Cheung did not notify Emperor of his proprietorship of Company U during his accreditation with the firms pursuant to their internal policy.

My comments on this case:

• In terms of variety, severity and duration of Cheung's misconducts, licence suspension of two years seems too lenient.
• Emperor's account opening, trading and settlement procedures had been abused by Cheung. The relevant internal controls and monitoring should be strengthened.

Various Regulatory Breaches of UBS

A large-cap investment bank is supposed to have a more robust compliance mechanism than mid-cap/small-cap ones, but it is not immune from regulatory breaches.

On 3 Aug 2021, SFC announced it reprimanded and fined UBS AG and UBS Securities Asia Limited (UBSSAL) (collectively, UBS) $9.8 million and $1.75 million respectively over various regulatory breaches.

Disclosure of financial interests in research reports

• Between May 2004 and May 2018, UBS failed to make proper disclosure of its financial interests in some Hong Kong listed issuers covered in its research reports in breach of para. 16.5(a) of the Code of Conduct.
• The failure was caused by (i) multiple data feed logic errors in relation to a legacy data source used by UBS for tracking its shareholding positions; and (ii) UBS’s lack of proper systems and controls to test the accuracy of, and detect the logic errors in, the data feeds.
• Based on UBS's review, the failure affected 80 (6.43%) research reports issued by UBSSAL and 125 (14.59%) research reports issued by UBS AG during sample periods between Sep 2017 and May 2018.

Compliance with the Client Securities Rules ("CSR") and Contract Notes Rules ("CNR")

• Between Nov 2012 and Feb 2019, UBS AG failed to diligently supervise its client advisors and implement sufficient controls to ensure that only professional investor ("PI") clients were subscribed to the securities pooled lending ("SPL") service. As a result, 2,263 non-PI clients were subscribed to the SPL service, out of which 91 clients entered into 913 SPL transactions with UBS AG.
• As UBS AG had wrongly assumed that these clients were PIs, it failed to obtain valid standing authorities from and issue contract notes to them in respect of the SPL transactions, in breach of sections 4 and 7 of the CSR and section 5 of the CNR.

Compliance with the telephone recording requirement

• Between Aug 2017 and Jun 2019, UBS AG had failed to record client order instructions received through the telephone in breach of paragraph 3.9 of the Code of Conduct:
• Between Aug 2017 and Dec 2017, the order instructions placed through 8 overflow lines for 2,006 transactions executed for 364 clients were not recorded. This was caused by an omission in the voice recording setting during the migration of UBS AG’s telephone system to a new system. Due to the wrong assumption held by the project team responsible for the migration that overflow lines of UBS AG’s wealth management department would be automatically recorded after migrating to the new telephone system, it failed to enable the recording function of such phone lines during and after the migration.
• Between Nov 2018 and Jan 2019, the order instructions placed. through a telephone line for 20 transactions executed for 5 clients were not recorded. This was caused by an omission to re-activate the voice recording function when the telephone line was transferred from a former client adviser to a newly joined client adviser.
• Between 13 and 17 Jun 2019, the order instructions placed through 26 telephone lines for 96 transactions executed for 51 clients were not recorded. This was caused by human error in the course of transitioning UBS AG's telephony system from Skype for Business soft phones to Cisco desk phone which led to a break in the voice recording system.

Assessment of clients' derivatives knowledge

• Prior to 2018, UBS AG required its staff to obtain trading evidence (such as bank statements) from clients who declared that they had conducted five or more derivative trades in the past 3 years. UBS AG discontinued this practice in 2018 due to its misinterpretation of another FAQ issued by SFC.
• As a result, between 2 Jan 2018 and 17 Jun 2020, UBS AG failed to follow applicable regulatory guidelines relating to the assessment of clients' derivative knowledge by failing to obtain trading evidence from 858 clients who declared that they had conducted 5 or more derivative trades in the past 3 years, in breach of paragraph 5.1A of the Code of Conduct. Out of these 858 clients, 380 of them have subsequently traded derivative products with UBS AG.

Disclosure of product risk

• UBS AG had failed to disclose to its clients the "stop loss event" feature of a structured note issued by an issuer (Notes) before trade execution. The failure affected 15 client accounts involving the sale of 12 Notes between Oct 2017 and Feb 2020 for a total notional amount of about US$12 million.
• UBS AG's disclosure failure was caused by an omission of the stop loss event feature in the additional product sheet prepared by UBS AG's Structured Product Sales Team in Singapore (SP Team). The SP Team member who prepared the additional product sheet was not aware of the stop loss event feature. When another SP Team member reviewed the draft additional product sheet, he noted that the stop loss event feature was not included but he did not raise any issues as he considered the stop loss event feature to be insignificant as compared to the issuer default risk. UBS AG discovered the failure when handling a client complaint in Apr 2020.

Other investment banks may take this comprehensive case as a good reference when reviewing their own internal controls.

Operation of House and Client Bank Accounts

On 28 Jun 2021, SFC issued a circular about operation of bank accounts.  This 7-page circular is quite clumsy and repetitive.  Its essentials can be summarized as follows:

• Authorised signers for effecting payments out of a LC's client bank accounts should only be RO, MIC or his / her delegate.
• Authorised signers for effecting payments out of a LC's house bank accounts should be:
• RO, MIC or his delegate; or
• Any other person, provided that such person can only effect payments jointly with RO, MIC or his delegate.

The "delegate" should be accountable to the RO or MIC, e.g. staff of the LC, staff of the LC's group companies, or a payment processing agent.

SFC issued this circular because it has noted cases of LC's unsatisfactory practices.  For example, a LC's house or client bank accounts were operated solely by a shareholder, a director or a nominee of a shareholder or director, and these were not RO, MIC or their delegates.  The authorised signers were not subject to appropriate oversight in relation to the operation of the LC's bank accounts and were not accountable to any RO or MIC.

SFC requires LC to critically review their existing policies and procedures to ensure full compliance with this circular.  To account for the time of making necessary changes, SFC leniently allows LC to implement the expected standards by 3 Jan 2022.  I wish no LC collapse during the transitional period due to lax operational controls over bank accounts.

Suspected Ramp and Dump Scams

This year SFC has put substantial efforts to combat ramp and dump scams involving market manipulation of Hong Kong listed shares.  Today it issued a circular to remind intermediaries of their existing obligations under para. 12.5(f) of the Code of Conduct to report suspected market misconduct suspected of their clients to SFC timely manner.

Most importantly, this circular provides a non-exhaustive illustrative list of red flags may indicate a potential ramp and dump scam:

• Clients whose transaction amounts are generally incommensurate with their reported profiles. For example, a client, who is unemployed with no significant previous trading experience and has limited reported assets, conducts a large volume of trading in a stock in a short period of time;
• Clients who regularly acquire shares through bought and sold notes or on a free-of-payment basis or who receive large third-party deposits in their accounts;
• Clients who bought shares on a delayed settlement basis, following which the share price rose substantially during the delayed settlement period, and then gave instructions before the payment date to sell these shares;
• Clients who bought shares in a particular stock towards the end of the trading day in a way that had the effect of substantially raising the closing price on a number of days, particularly when the company is a thinly-traded, small-cap stock with a highly concentrated shareholding and it has experienced a sustained price increase which cannot be explained by any corporate or sector-specific news;
• Clients who sold a large volume of shares in a particular company shortly before a collapse of the share price which cannot be explained by any corporate or sector specific news.  It would be particularly suspicious if clients seek to receive the funds immediately following the selling instruction and before the completion of the normal T+2 settlement period;
• A group of clients, some of whom are identified from the trading behavior set out above, traded in the same stock in the same direction, at more or less the same price or at the same time, and exhibit any of the following characteristics:
• they have authorised the same third party to operate their accounts;
• they have effected fund transfers amongst themselves;
• they opened accounts on or around the same day, were served by the same account executive or referred to the intermediary by the same person at account opening; or
• they share the same personal particulars such as telephone numbers or email addresses.

In my compliance practice, I had witnessed most of the above red flags and taken necessary actions against those suspicious clients.  This circular is in fact a summary of good industry practices.

Incorrect Client Statements

On 24 Jun 2021, SFC announced that it reprimanded Deutsche Securities Asia Limited (DSAL) and fined it $2.45 million for issuing incorrect statements to its prime brokerage (PB) clients and delaying reporting its failures to SFC.

Since 2006, DSAL has booked information regarding corporate actions (CA) (including issuance of bonus shares) by listed companies which its PB clients hold shares in to its front office system (FO System).  The FO System would transfer these CA details to another system responsible for the generation of periodic statements issued to the PB clients (Statements).

However, due to a design defect in the FO System, it did not distinguish between ex-entitlement dates (Ex-Dates) and settlement dates (Pay Dates) of bonus share events.  The FO System only extracted the Ex-Dates when transferring the relevant data to the other system for generation of the Statements.

As a result, where there was an interval between the Ex-Dates and the Pay Dates, the transaction records and shareholding positions displayed in the Statements showed the bonus shares as settled and tradable as of the ExDates, when in fact these shares had not become unconditional for long sale until the Pay Dates (Error).  Disposing of such bonus shares during the interval without borrowing the requisite shares could constitute naked short selling.

One of DSAL’s PB clients (Client) appeared to have relied on the Statements containing the Error (Impacted Statements) and oversold bonus shares issued by three Hong Kong-listed companies in Jul 2018, between the respective Ex-Dates and Pay Dates of the relevant bonus issuances.

DSAL had likely issued Impacted Statements to some of its PB clients since the FO System was implemented in 2006, until the Error was remedied in Nov 2018:

• 34 PB clients received Impacted Statements from DSAL between Jan and Oct 2018;
• 75 PB clients likely received Impacted Statements between 2011 and 2017; and
• DSAL was unable to identify the number of PB clients who may have received Impacted Statements before 2011 since the data is no longer available.

Although DSAL first discovered in Jul 2018 that Impacted Statements had been issued to the Client and became aware in the following month that the Error was attributable to a design defect in the FO System, it delayed reporting its failures to SFC for over 6 months until Feb 2019 when it completed its internal investigation.

In this case, only one client was misled to conduct naked short selling.  Does DSAL deserve such a high penalty (though you may say $2.45 million is not much for it)?  But SFC might have considered the facts that:

• The system design defect had not been discovered over a long period (10+ years).
• DSAL failed to immediately report such material non-compliance to SFC (it should not wait until the completion of internal investigation).

New CPT Regime 2022

On 18 Jun 2021, SFC issued the Consultation Conclusions on Proposed Enhancements to the Competency Framework for Intermediaries and Individual Practitioners.  The revised Competence Guidelines, CPT Guidelines and Fit and Proper Guidelines will become effective on 1 Jan 2022.

As a compliance trainer, I am more keen on discussing the revised CPT requirements first.

Specifying 10 CPT hours per calendar year as the minimum requirement for LR, with two additional hours on regulatory compliance for RO

• This is a fundamental change of the CPT regime.  In the past, if you're licensed for multiple RA competence groups, your CPT obligation may amount to 15 or even 20 hours.  But of course, many SFC licensees have been smart enough to take CPT on topics relevant to different RA competence groups (for multiple counting).  So I think most of them have taken only 5 CPT hours every year.

• While RA competence group basis is no longer used, SFC straightly increases the minimum CPT requirement (per individual basis) to 10 hours (for LR) or 12 hours (for RO) per year.  This change would probably affect a lot of licensees as most of them should have "enjoyed" 5 hours over the past years.  But when comparing with the CPD regime of other regulated industries (e.g. insurance, lawyers, etc.), 10 or 12 hours is actually not excessive.
• Requiring RO to take 2 extra hours on regulatory compliance is also fair.  There are too many RO who are ignorant of regulatory requirements and over-relying on compliance officers to handle regulatory compliance.  SFC has also clarified that "regulatory compliance" is only a subset of "compliance".  When fulfilling this 2-hour requirement, RO should choose topics about SFC's rules and regulations.  Topics about compliance with internal company policies are not eligible (unless those policies are primarily originated from SFC's regulations).

Requiring each individual practitioner to attend at least five CPT hours on topics directly relevant to the RAs in which he or she engages

• In other words, a LR can feel free to attend 5 hours on topics which are relevant to CPT but not necessarily relevant to his licensed RA.  This seems to be SFC's response to a long-term problem encountered by licensees: too difficult to identify adequate trainings relevant to their licensed RA.
• SFC emphasizes that such CPT hours should be allocated to cover an individual's practice areas in proportion to the time and effort that he spends in each area.  The allocation is not an easy matter to administer.  For example, a LR is licensed for both RA1 and RA2, assuming he allocates 60% of his time to RA1 and 40% to RA2.  It follows that out of the 5 CPT hours on "directly relevant to RA" topics, 3 hours should cover RA1 and 2 hours should cover RA2.  The problem is...WHO (the LR himself, his supervisor, HR...?) is responsible for formally defining the LR's allocation of time and effort among different RA?  Even SFC has admitted that it doesn't intend to require any precise calculation of the time and effort an individual spends during the year on different RA.  My practical suggestion is...trying to identify CPT on topics covering as many RA as possible.

Requiring each individual practitioner to complete no less than two CPT hours on topics relating to ethics or compliance per calendar year

• This is reasonable.  Spending 20% of the 10 CPT hours on ethics or compliance topics (even they are not directly relevant to RA one is licensed for) is good for fostering compliance culture.

Requiring each individual practitioner who first joins the industry in Hong Kong to complete two CPT hours on ethics within 12 months

• From 2022 onwards, first time SFC licensee must take 2 CPT hours on ethics for "brainwashing" purpose.  In subsequent years he will be required to take 2 CPT hours on either ethics or compliance (see above).  That means, SFC considers that ethics precedes compliance.
• However, ethics training is not widely available in the market due to lack of commercial value.  Thus SFC suggests organizing in-house trainings or using the free training service offered by ICAC's Community Relations Department.

Other issues

• SFC has clarified in the revised CPT Guidelines that CPT in both face-to-face and virtual formats are acceptable.  In fact, due to the pandemic, many CPT courses are now delivered via online platform.  But I still think webinar is not eligible for CPT purpose because usually the host is unable to provide the attendance record.
• The revised CPT Guidelines has also widened the scope of relevant CPT topics to include: market developments, Fintech, ESG, cybersecurity and IT (which is actually replacing "computer knowledge").  These topics are suitable for fulfilling the "non-core" CPT hours (i.e. not directly relevant to RA one is licensed for).

Ad time: I am going to launch the SFC Compliance Series 2021 by collaborating with KORNERSTONE.  In these new CPT sessions, I would share my practical experience in handling the following compliance topics:

• Module 1 – Licensing Issues, Complaint Handling and Dealing with SFC
• Module 2 – AML and Combating Financial Crimes and Frauds

SFC's Lip Service

Recently Financial Times reported that SFC "has privately advised financial institutions they can implement US sanctions without automatically violating a tough national security law (NSL) imposed on the city by Beijing".  Financial institutions include banks and institutional investors.

But where is HKMA?  Has HKMA also privately advise banks under its supervision as such?  Interestingly, HKMA's standpoint on US sanctions is subtly different from SFC's.

Can financial institutions rely on SFC's lip service?  If financial institutions implement US sanctions and then their employees are charged with breach of NSL, could they tell the court that they were misled by the securities regulator?  The answer is obvious.

The latest challenge is that 4 more China-Hong Kong officials have been added to OFAC's SDN list.  Let's see if those financial institutions bravely implement the new round of US sanctions.

Expired Standing Authority

As required by the Client Securities Rules ("CSR") under the SFO, a broker firm is only allowed to repledge its clients' securities collateral to banks if it has obtained their valid standing authority (but exemption is applicable to professional investors).  The CSR also requires annual renewal of the standing authority, where the broker firm must send a renewal notice to clients 14 days prior to the expiry date.  Negative consent is allowed (i.e. if a client doesn't object, the standing authority is automatically renewed for another 12 months).

Yesterday SFC reprimanded China Everbright Securities (HK) Limited ("CESHK") and fined it $2.5 million for pledging its clients’ securities with banks for financial accommodation without valid authorization.

Between 1 April 2018 and 19 August 2018, CESHK relied on expired standing authority given by around 6,841 clients to pledge their securities as collateral in obtaining credit line from three banks in Hong Kong.  The standing authority in question had expired on 31 March 2018.

Details of the incident leading to the breach:

• Starting from late 2017, China Everbright Securities International Group (of which CESHK is a member) and Everbright Sun Hung Kai Group (EBSHK Group) were going through an amalgamation.
• In late February 2018, the Compliance Department of the EBSHK Group (EBSHK Compliance) was instructed to take over CESHK’s compliance function.
• At CESHK, the standing authority renewal exercise was handled by its compliance team in or around March every year.  At EBSHK, the same process was handled by its operations team in or around August every year.
• It was not highlighted to EBSHK Compliance that the standing authority of CESHK’s clients should be handled by the compliance team.
• In mid-August 2018, when EBSHK Group began the process of renewing the standing authority of its clients, it discovered that CESHK had not delivered standing authority renewal notices to its clients at least 14 days before 31 March 2018 in respect of standing authority that had expired on 31 March 2018 pursuant to section 4(3) of the CSR.
• On 20 August 2018, CESHK made a self-report to SFC regarding its failure to renew its clients’ standing authority which expired on 31 March 2018.

It appears that this incident was caused by internal miscommunication, i.e. CESHK wrongly believed that the standing authority renewal exercise would be handled by EBSHK Compliance.  But in my opinion, it is not appropriate for the compliance team to take over such operational duties.  I reproduce below the following paragraph from SFC's Internal Control Guidelines:

Management ensures that, where practicable, policy formulation, supervisory and other internal review or advisory functions, including where applicable compliance and internal audit, are effectively segregated from line operational duties. Such segregation serves to ensure the effectiveness of supervisory and other internal controls established by Management.

Basic Mistake, Silly Belief

Yesterday SFC publicly reprimanded The Bank of East Asia, Limited (BEA) and fined it HK$4.2 million due to BEA’s failure to segregate its client securities from proprietary securities into separate accounts maintained at two external custodians as required by the Client Securities Rules ("CSR").

Section 5(1) of the CSR requires an intermediary (or its associated entity) to ensure client securities it receives are deposited in safe custody in a segregated account which is designated as a trust account or client account established or maintained in Hong Kong with an authorized financial institution, an approved custodian or other intermediaries licensed for dealing in securities, asap.

Between Nov 2015 and Jan 2016, HKMA conducted an on-site examination on BEA and expressed concerns regarding BEA’s non-compliance with the CSR.  In Dec 2016, following further enquiries from the HKMA, BEA made a report to SFC and HKMA regarding its failure to deposit client securities in a designated segregated account in accordance with the CSR.

SFC conducted an investigation and found that BEA failed to segregate its client securities and proprietary securities in accounts maintained at two external custodians, CCASS and Sumitomo Mitsui Banking Corporation ("SMBC"), from Apr 2003 to Dec 2016.

According to BEA, its failure to segregate client securities and proprietary securities was caused by its belief that the identification and segregation of client securities and proprietary securities in its internal electronic accounting records was sufficient to comply with section 5(1) of the CSR.

BEA had made a basic mistake, which was caused by a silly belief.  Who in BEA made the non-segregation decision?  Did they consult their lawyers or compliance team in advance?  Why such problem had not been detected by BEA's auditors (internal and external) over 13 years?

Listed Brokerage Houses Halted to Disclose Operating Data

Disclosure-based approach is a key regulatory philosophy.  Listed companies are usually required by regulatory authorities to publicly and regularly disclose their financial and operating information to enhance market transparency.

However, this week I read a shocking news from the PRC media  第一财经, where the key points are reproduced below:

• 券商8月单月经营数据目前尚未发布。按照惯例，证券公司在每月10号前会披露上一个月的经营数据简报。但目前已进入9月中旬，全部上市券商的8月月报却都迟迟未至。
• 记者以投资者身份电话询问了部分上市券商，有中小型券商投资者关系部人士表示，于上周接到相关通知要求暂不披露8月经营数据。
• 上市券商按月公布经营数据的规定于2010年出台，当年7月，上市券商首次公布月度经营数据。
• 据证监会官网，证监会2010年6月发布了《关于修改〈关于加强上市证券公司监管的规定〉的决定》，其中规定，上市证券公司在向监管部门报送综合监管报表的同时，应当以临时公告的形式在交易所网站公开披露公司月度经营情况主要财务信息，包括当期营业收入、当期净利润、期末净资产等数据，以及公司认为应当披露的其他财务信息。

We may have a reasonable belief that last week PRC listed brokerage houses were requested by CSRC to halt the monthly disclosure of their operating data.  But why did CSRC make such seemingly "anti-regulatory" request?  Would the disclosure create a chaotic market?

I wish such black-box operation won't be adopted by regulatory bodies in Hong Kong.

Retail Investor Convicted of False Trading

Last week Hong Kong Police arrested 15 people on suspicion of conspiracy to defraud and money laundering by manipulating shares of Next Digital (282.hk), inducing a lot of criticisms. 

This week SFC demonstrated how it professionally sanctioned a retail investor who manipulated the market.

Yesterday SFC announced that the Eastern Magistrates’ Court has convicted Mr Ke Wen Hua of false trading in the shares of Carry Wealth (643.hk) following a prosecution by SFC.

Let's have a look at SFC's investigation findings:

• Ke began accumulating Carry Wealth shares in May 2011 and acquired most of his holdings in Carry Wealth shares at a price between $0.48 and $1.30 until Sep 2011.
• On 4 Sep 2012, Ke conducted trading in Carry Wealth shares through 6 securities accounts under his control.  In doing so, the share price of Carry Wealth was pushed to reach as high as $0.6 which was 50% higher than the preceding day’s closing price of $0.4.  On the same day, Ke’s trading generated a trading volume of 58.6 million Carry Wealth shares, approximately 3,000 times the average daily trading volume of Carry Wealth shares during the previous 10 trading days.
• Consequently, Ke was able to dispose of Carry Wealth shares at artificially inflated prices through his false trading and reduce the total of his trading losses by approximately $887,220.

Ke's trading had created extreme results (soaring price and turnover), otherwise SFC's prosecution would be an uphill battle.  He pleaded guilty to the offence and was fined only $30,000 (and also ordered to pay SFC’s investigation cost), not very punitive.  More importantly, Ke's market misconduct happened 8 years ago but SFC commenced criminal proceedings against him in July 2020.  This case seems like a delayed justice.

SFC Bypassed by Hong Kong Police

Yesterday Hong Kong Police ("HKP") arrested 15 people on suspicion of conspiracy to defraud and money laundering by manipulating shares of Next Digital (282.hk).  There have been lots of online discussions with some misconceptions.

Some laymen criticized HKP for accusing stock market speculators or prohibiting "buy low sell high" (profit making).  Stock market speculation is of course not illegal, but manipulation is another matter.  Stock market manipulation refers to fraudulent activities aiming at distorting the actual demand and supply  in order to create a false or misleading appearance of the price or turnover of a stock.  It is indeed a financial crime specified under the Securities and Futures Ordinance ("SFO").

If a securities firm has identified such fraudulent activities from its clients, it is obliged to report them to Securities and Futures Commission ("SFC").  A suspicious transaction report ("STR") would also be filed to Joint Financial Intelligence Unit ("JFIU") under HKP's Narcotics Division because the use of proceeds from a financial crime has the implication of money laundering.  Usually HKPF would not take any action until SFC has concluded that a serious offence was committed.

Whether or not the share trading constitutes market manipulation should be the professional judgement exercised by SFC at the outset.  Typically SFC spends a long period of time on the investigation process by collecting tons of records from securities firms and questioning the suspects.  According to SFO's relevant provisions, SFC is able to mandate any person to answer questions (but their answers may not be admitted as evidences in criminal proceedings to avoid self-incrimination).

SFC can refer a potential market manipulation case to Department of Justice ("DoJ") to assess whether the case should be criminally prosecuted and, if so, whether the case should be prosecuted on indictment by the DoJ in the higher courts or summarily by SFC in the Magistrates’ Courts.  SFC seldom requests HKP to make an arrest unless the suspect has a high chance to flee.

Unfortunately, it appears that in Next Digital's case SFC has been bypassed by HKP.  The public is hardly convinced that HKP is more professional than SFC to conduct an investigation into a market manipulation case, not to mention it hastily completed the process within one month.  Moreover, HKP bypassed SFC only for Next Digital's case but not for numerous other suspected cases, why?

If Hong Kong still has separation of powers (already denied by the HKSAR Government), SFC should challenge HKP's reckless action.   But now SFC has chosen to keep silent.

Latest update:

Today's evening SFC eventually made a statement on HKPF's action.  Apart from those wishy-washy words (implying HKP is not professional), SFC left only such remark: As investigations are continuing, the SFC is not in a position to comment any further.

I am afraid Hong Kong would soon be transformed from an IFC into a NFC.into a NFC.

Licensing of Family Offices

Over the past 2 decades, family offices have become more influential in the wealth management industry. Ultra HNWIs are no longer satisfied with the services of traditional private banks. They need an in-house professional team.

But shall family offices in Hong Kong, which make investment decisions on behalf of one or more families, be licensed by SFC?

On 7 January 2020, SFC issued a circular on the licensing obligations of family offices. It provides general guidance for family offices intending to carry out asset management or other services in Hong Kong. On 8 September 2020, SFC published a FAQ to provide additional guidance on the implications of the licensing regime to single family offices and multi-family offices. I reproduce the questions (Q) and answers (A) and give my comments (C) below:

Q1:
Is there a definition for “family” or “family office” under the licensing regime?
A2:
No, the Ordinance does not define “family” or “family office”. It is noteworthy that the licensing regime does not hinge on whether an entity is called a family office or whether its clients are families. A family office operator will have more flexibility to determine its legal form and operational structure with respect to its services to be provided.
C1:
A family office ("FO") is most likely deemed as an asset management firm because it usually conducts discretionary trading for the client (family). Thus licensing for RA9 is required. But if the client occasionally places dealing orders to the FO, then licensing for RA1 or RA2 may also be required.

Q2:
What constitutes a single family office for the purposes of the Circular?
A2:
It typically refers to an arrangement (often structured through a corporate vehicle owned or controlled by the family) under which the assets, investments and long-term interests of members of a single family are managed. The SFC has not sought to define what relationships of blood or of law would constitute family membership because the licensing obligations under the Ordinance do not hinge on whether the clients of a family office are family members or not.
C2:
SFC reiterated that members of a single family don't need to be strict "family members". In the Circular, SFC stated that "the family office will not need a licence because it will not be providing asset management services to a third party". I wonder if such licensing exemption could be abused, e.g. a so-called FO attempts to group a number of actually unrelated clients into a "single family".

Q3:
Is a single family office required to be licensed under the Ordinance?
A3:
The issue of whether a single family office is required to be licensed under the Ordinance is determined by reference to three key factors, all of which must be present in order to give rise to a licensing obligation: firstly, the services provided by the family office constitute one or more regulated activity as defined under the Ordinance; secondly, the family office is carrying on a business in the provision of such services; and thirdly, the business is carried on in Hong Kong.
In determining whether certain asset management activities amount to a regulated activity, the definition of Type 9 regulated activity contains an intra-group carve-out for a single family office where it provides such services solely to its related entities, which are defined as its wholly owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly owned subsidiaries.
What amounts to “carrying on a business in Hong Kong” is not defined in the Ordinance and will need to be determined by reference to the facts of each case, including whether the person is performing an occupation or a duty which requires attention; the activity involves continuity; the activity is capable of making profit; and the activity was carried out for the purpose of making profit. A genuine single family office arrangement, established to serve the investment needs of members of a single family, which is not being run as a business (i.e. not receiving any income, other than reimbursement of operating expenses from the family) or have the pursuit of profit as its business objective, should not in the ordinary course be considered as carrying on a business from a licensing perspective. It is also not the SFC’s intent to extend its regulatory oversight to this type of single family office setup.
C3:
A single FO is typically low key, not being run like a business. I think not many single FOs would be licensed by SFC in foreseeable future.

Q4:
If two or more single family offices co-operate together for the purposes of sharing a common administrative infrastructure in order to reduce operating overheads, would such arrangements trigger a licensing obligation?
A4:
The discussion in the response to Q3 above on the types of factors required to be present in order to give rise to a licensing obligation under the Ordinance would apply equally in these circumstances.
The sharing of office premises and administrative infrastructure by two or more family offices would not of itself automatically trigger a licensing obligation for such single family offices. However, where two or more single family offices make arrangements for the sharing of human resources involved in investment related matters, research or the investment process, this may be regarded as a multi-family office structure (see also the response to Q5 below) and, where the provision of services is carried on as a business, increases the likelihood of a licensing obligation arising.
C4:
If the different single FOs share not only administrative team but also investment team and they are required to be licensed, there is a potential conflict of interest problem - a licensed person (investment staff) is generally disallowed by SFC to carry out a regulated activity for 2 or more licensed corporations if they are not within the same group.

Q5:
What constitutes a multi-family office for the purposes of the Circular and is a multi-family office required to be licensed?
A5:
As mentioned in the Circular, “a multi-family office by definition serves more than one high net worth family” and such arrangements are likely to be evident.
Multi-family offices are typically established and run as commercial ventures. The issue of whether a multi-family office is required to be licensed under the Ordinance will be primarily determined by the three key factors set out in the response to Q3.
C5:
I envisage multi-FOs are more likely to be licensed by SFC. When the number of family clients increases, a multi-FO is akin to a private bank.