Checking of SFC licence records

When we check whether a firm or an individual is licensed by SFC, of course we visit SFC's public register. But today I accidentally find another website, which extracts data from SFC's public register but may be useful to a certain extent.

This homepage of SFC Licence Guru lists out licensed corporations with RO/rep most recently licensed. When inputting an individual's name into the search box, you can find out his licence history (no matter his licence is active or inactive) and the link to the official SFC record is also provided. However, you can't get any result by inputing a company name into the search box, which is a limitation.

Of course, David Webb's website can also provide similar licence checking function, where the data are more comprehensive.

Licensing Matters under COVID-19 Pandemic

On 31 Mar 2020, SFC issued the FAQs for "Licensing related matters in light of the COVID-19 pandemic". I would like to make comments on certain messages given by SFC to intermediaries.

All licensed individuals who are originally required, by way of licensing conditions or otherwise, to pass post-licensing regulatory examinations within a prescribed timeframe which falls due on or before 30 Sep 2020, will be allowed an extended period of 3 calendar months after the original due date to meet the requirement.

Comment: This is necessary as HKSI has suspended the regulatory exams (up to 11 Apr 2020, but may be extended due to the potential change of government policy). If the pandemic is not yet put under control, SFC would probably further extend the grace period.

SFC allows all licensed individuals who are unable to fulfil the annual CPT hours by 31 Dec 2020 to carry forward any unfulfilled CPT hours for the calendar year of 2020 to 2021.

Comment: Different from taking exams, fulfilling CPT hours at home (i.e. taking online courses) is perfectly acceptable under SFC's CPT Guidelines, given that it requires the submission of course assignment (e.g. quiz) upon completion.

An LC is required to notify SFC of significant changes in its business plan covering internal controls, organisational structure, contingency plans and related matters, including but not limited to:

• Confirmation of staff infection which may have an impact on the LC’s operations 

• Closing of office premises as a result of staff infection or government lockdown, including overseas office premises, if the closure has implications for the LC’s operations or the carrying on of its regulated activities (e.g. temporary closing of overseas office premises which handles back and middle office functions)

• Changes to its organisational resources (e.g. split team arrangements, staff relocation to overseas offices) 

• The triggering of the LC’s business continuity plan

Comment: It is desirable for SFC to design a questionnaire to facilitate LCs in making such kind of reporting.

While an LC has arranged for its staff to work from home or from its overseas offices which are not premises approved under s130 of the SFO, it should ensure that the staff will be able to remotely access the LC’s trading or other systems, and that the activities conducted by the staff will be captured in the records and documents generated by these systems. If certain records and documents need to be kept in unapproved premises on a temporary basis, the LC should send them back to the approved premises of the LC as soon as practicable.

Comment: During the current extraordinary circumstances, indeed SFC should adopt a lenient approach towards an LC's technical breach of operational rules.

If an LC or AE anticipates delays in preparing its audited accounts or other documents, it may apply for an extension of the submission period asap. SFC will consider these applications pragmatically.

Comment: This year LCs and AEs are required to submit the new version of Business and Risk Management Questionnaire (BRMQ), which is much more lengthy than the old one. Request for delayed submission of BRMQ may be necessary.

Nothing is certain but death and regulations.

Over-charging of Commission in Bond Transactions

As announced on 19 Mar 2020, SFC banned Ms Chan Tan Lo, a former relationship manager of BOCI Securities Limited (BOCIS), for 14 months.

Chan executed nine bond transactions for two clients in Mar 2016, she failed to disclose and/or provided them with inaccurate information about the final execution prices and/or the actual commission rates she charged them. She also overcharged them in these transactions.

Further details are disclosed in the SDA:

• During the regular sample checking of the telephone recordings of the trades executed by its RMs, BOCIS found that in 9 bond transactions Chan executed for the clients from 1 Mar 2016 to 23 Mar 2016, Chan charged them higher commission rates than had been previously agreed with them.
• According to the clients, they agreed with Chan that BOCIS could charge them a commission of 0.2% of the execution price in bond transactions executed on their behalf. The clients were not willing to pay any commission rate higher than 0.2% as had been agreed with BOCIS.
• Audio-recordings of the telephone conversations between Chan and the clients' representative show that during the price quotation stage:

• Chan quoted the best available prices to the clients' representative for the 9 bond transactions.

• Chan either expressly told the clients' representative that there would be a mark-up of 0.2%, or did not correct the clients' representative when he expressed his understanding that there would be a mark-up of 0.2%, or indicate to him that the mark-up might change.

• When the 9 bond transactions were executed at a better price, Chan unilaterally increased the mark-up without informing the clients' representative of the increase and seeking his consent to charge a higher mark-up for the transaction. Chan failed to disclose, and/or provided inaccurate, information to the clients about the actual execution prices and the actual commission rates charged by her, and overcharged the clients commission by 0.2% to 0.8% in the 9 bond transactions.

This is no doubt cheating. This case was revealed by sample checking of telephone recordings. For a better control, the trading system should record the agreed commission rate for the clients and automatically ban any over-charing of commission.

2020-21 Budget - Financial Services

The following points about financial services in the 2020-21 Budget Speech announced on 26 Feb 2019 are relating to the securities industry:

• In order to strengthen the competitiveness of Hong Kong as an ETF listing platform, the Government proposes to waive the stamp duty on stock transfers paid by ETF market makers in the course of creating and redeeming ETF units listed in Hong Kong.
• To attract more private equity funds to Hong Kong, the Government has been making full efforts to introduce new fund structures, including the preparation of new legislation on the establishment of a limited partnership regime that meets the operational needs of funds, so as to encourage the setting up of private equity funds in Hong Kong. The Government also plans to provide tax concession for carried interest issued by private equity funds operating in Hong Kong subject to the fulfilment of certain conditions.
• The Government will further enhance Hong Kong's AML/CTF regime having regard to the recommendations of FATF's evaluation report, and consider incorporating virtual asset service providers and dealers in precious metals, stones and jewellery into the AML/CTF regulatory framework.

Compliance professionals should pay more attention to the last point - further enhancement of the AML/CTF regime.

Challenge to SFC's Investigative Powers Failed

No doubt the SFO has given SFC very strong investigative powers. From time to time market players have attempted to challenge such powers, but this is an uphill battle.

SFC announced on 18 Feb 2020 that the Court of First Instance has dismissed judicial review applications against SFC in connection with a search operation it conducted for ongoing investigations into suspected breaches of the SFO.

The judicial review applications were brought separately and concurrently by Mr Cyril Cheung Ka Ho, Mr To Hang Ming, Mr To Lung Sang, Mr Jacky To Man Choy and Mr Wan Wai Lun. They sought to challenge search warrants issued by two Magistrates in July 2018 on the basis that they were unlawful or invalid for want of specificity.

They also alleged that seizures of the digital devices pursuant to the search warrants, SFC's continued retention of the devices and notices issued by SFC under the SFO for the production of emails or passwords for the devices or email accounts were unlawful, and interfered with their right to privacy under the Basic Law and the Hong Kong Bill of Rights.

The Hon Mr Justice Anderson Chow rejected their applications and held in his judgment that:

• the search warrants plainly authorised digital devices to be seized by SFC. The words "document" or "record" in the SFO should not be narrowly construed, having regard to the manner in which information and data are nowadays being created, transmitted and stored in digital devices;
• the right to privacy is not absolute. The seizures and retention of the digital devices were rationally connected to a legitimate aim. They were no more than reasonably necessary in the circumstances of the cases and they did not result in an unacceptably harsh burden on the five applicants on the facts of the present cases; and
• SFC is empowered, under the SFO, to require the applicants to provide means of access to email accounts and digital devices which contain, or are likely to contain, information relevant to its investigations even though the email accounts and digital devices would likely also contain other personal or private materials which are not relevant to SFC's investigations.

Let's see if those JR applicants would appeal.

Illegal Cross-Border Business Activities

In Jan 2014, SFC issued the circular "Regulatory Compliance regarding Cross-border Business Activities", which warned that before conducting any cross-border business activities, a licensed corporation should make proper enquiry as to how the law of the other jurisdiction applies to the particular activity. Activities which are likely to be regulated under the laws or regulations of other jurisdictions may include:

• solicitation of opening of client accounts
• signing of account agreements or mandates
• marketing or selling of investment products
• entering into transactions of investment products
• giving investment advice

Para 12.1 of the Code of Conduct provides that a licensed person should comply with, and implement and maintain measures appropriate to ensuring compliance with the law and relevant regulatory requirements (including those requirements in other jurisdictions).

As announced in 14 Feb 2020, SFC reprimanded and fined Capital Global Management Limited (CGML) $1.5 million for its failures to ensure compliance with applicable laws and regulations in distributing investment funds and offering investment advice in Taiwan, and to adequately supervise the business activities of its representatives to ensure such compliance.

In August 2015, the Prosecution Office of the Taipei District Court fined the former owners of CGML for distribution of offshore investment funds and offer of investment advice in Taiwan from 2005 to 2014 without obtaining prior approval, in contravention of Taiwan’s Securities Investment Trust and Consulting Act.

Article 16 of the Act provides that "No person may, itself or as an agent, engage within the Republic of China in the public offer, sale, or investment consultancy of offshore funds without first obtaining approval from the Competent Authority or effective registration upon filing with the Competent Authority." The Competent Authority is the Financial Supervisory Commission R.O.C. (Taiwan).

SFC found that CGML's licensed representatives operated and performed sales functions and distributed investment products to clients in Taiwan between July 2014 and April 2015.

I don't understand why a LC would have the fantasy that its SFC licence is an "international driving permit" to let it conduct cross-border business in other jurisdictions. A compliance professional should always question why an overseas-based employee needs a SFC licence, unless she/he wants to be an itinerant professional or temporary licensed representative. 

Suspicious Transactions Arising from Placing

SFC reprimanded and fined BMI Securities Limited (BMISL) $3.7 million for failures in complying with AML/CFT regulatory requirements. It also suspended Ms Maggie Tang Wing Chi, BMISL’s RO, for five and a half months.    

In 2016, a number of BMISL’s clients subscribed for the placing shares of 2 Hong Kong-listed companies and subsequently transferred most or all of these shares to third parties using bought and sold notes in a series of off-exchange transactions.

The off-exchange transactions, whose consideration ranged from $4.4 million to $855.9 million apiece, displayed various suspicious features including:

• the subscription amount for the placing shares was incommensurate with the clients’ financial profile; and
• the clients did not conduct any other transactions in their BMISL accounts apart from acquiring and disposing of the placing shares.

SFC reported those suspicious activities to JFIU.

SFC alleged, during the period from 1 May 2016 to 30 Nov 2017, BMISL failed to:

• implement adequate internal controls to mitigate the ML/TF risk associated with suspicious transactions conducted through bought and sold notes;
• identify, and conduct proper enquiries and sufficient scrutiny on, suspicious transactions and consider reporting them to JFIU;
• perform appropriate CDD and keep customer information up-to-date and relevant; and
• put in place adequate and effective procedures for the identification of PEP and the screening of terrorist and sanction designations.

The SDA revealed 3 cases indicating BMISL's failure to identify and conduct proper enquiries and scrutiny on suspicious transactions. Those red flags were in fact too obvious to be ignored. BMISL as the placing agent should not turn a blind eye to the subsequent off-exchange transfers of those placed shares.

With reference to this case, compliance professionals should include those red flags highlighted by SFC in their AML monitoring program.