GENERAL

Shenzhen-Hong Kong Stock Connect to be Launched Soon

Following the success of Shanghai-Hong Kong Stock Connect launched on 17 November 2014, the China Securities Regulatory Commission (CSRC) and Hong Kong’s Securities and Futures Commission (SFC) jointly announced the establishment of mutual stock market access between Shenzhen and Hong Kong (Shenzhen-Hong Kong Stock Connect).

The principal arrangements for Shenzhen-Hong Kong Stock Connect are made by reference to those under the Shanghai-Hong Kong Stock Connect and by following the existing laws and regulations and operational models governing trading and clearing in each market. Key features of Shenzhen-Hong Kong Stock Connect include:

(a) Eligible shares -

In respect of the Northbound Shenzhen Trading Link (Note 1), eligible shares refer to (i) any constituent stock of the SZSE (Shenzhen Stock Exchange) Small/Mid Cap Innovation Index with a market capitalisation of RMB6 billion or above and (ii) all SZSE-listed shares of companies which have listed A and H shares. At the initial stage, trading in eligible shares that are listed on the ChiNext Board of SZSE under the Northbound Shenzhen Trading Link will be limited to institutional professional investors only.

In respect of the Southbound Hong Kong Trading Link (Note 2), eligible shares refer to (i) any constituent stock of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, (ii) any constituent stock of the Hang Seng Composite SmallCap Index with a market capitalisation of HK$5 billion or above, and (iii) shares of those companies listed on HKSE (Hong Kong Stock Exchange) which have listed A and H shares.

(b) Investment quota -

The daily quota for the Northbound Shenzhen Trading Link and the Southbound Hong Kong Trading Link will be RMB13 billion and RMB10.5 billion respectively, same as the Shanghai-Hong Kong Stock Connect. However, there will be no aggregate quota under the Shenzhen-Hong Kong Stock Connect (which has also been abolished for the Shanghai-Hong Kong Stock Connect).

The Shenzhen-Hong Kong Stock Connect will only be formally launched after completion of the preparation work (including relevant rule amendments, the granting of final regulatory approval, adaptation of market participants’ operational and technical systems, and all necessary arrangements for cross-boundary regulatory and enforcement cooperation being in place). It is currently anticipated that this would take about four months.

To further enrich the variety of traded products available for investment by domestic and overseas investors, the CSRC and the SFC have reached a consensus to include exchange-traded funds as eligible securities under the mutual market access scheme. A launch date (currently planned to be in 2017) will be announced after Shenzhen-Hong Kong Stock Connect has been in operation for a period of time and upon the satisfaction of relevant conditions.

A copy of the joint announcement of CSRC and SFC can be downloaded via the link below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR80

Notes:

  • Referring to investors, through their appointed Hong Kong brokers and a securities trading service company to be established by SZSE, trading eligible shares under Shenzhen-Hong Kong Stock Connect listed on SZSE by routing orders to SZSE.
  • Referring to investors, through their appointed mainland securities firms and a securities trading service company established by SZSE in Hong Kong, trading eligible shares under the Shenzhen-Hong Kong Stock Connect listed on HKSE (Hong Kong Stock Exchange) by routing orders to HKSE.

SFC ENFORCEMENT ACTIONS

SFC Fines Sponsor for Misconduct

The SFC fined Quam Capital Limited (Quam) HK$800,000 for failing to discharge its duties as a sponsor in relation to the listing of Gayety Holdings Limited (Gayety) (now known as Food Idea Holdings Limited) on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited.

Quam was the sole sponsor to the listing application of Gayety. The prospectus inaccurately stated that:

  1. none of the directors of Gayety had any interest in four of the five largest suppliers during the track record period – however, one of those suppliers was owned by two directors of Gayety; and
  2. none of the key suppliers had ceased supply to Gayety and its group companies – in fact, the arrangement with one of these suppliers had discontinued by the end of the track record period.

In preparing the listing application, Gayety had disclosed to Quam the information relating to the ownership of the supplier and the status of the business relationship between Gayety and the supplier. Therefore, the inaccuracy was not the result of any information withheld by Gayety. While there was insufficient evidence to establish that those matters constitute materially false or misleading statements, the SFC nonetheless found that Quam had failed to act with due skill, care and diligence as required of sponsors in Hong Kong in preparing the prospectus of Gayety.

A copy of the Statement of Disciplinary Action can be found via the link below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR75&appendix=0&lang=EN

SFC Reprimands and Fines Securities House over Internal Control Failures

The SFC resolved its concerns with Morgan Stanley Hong Kong Securities Limited (MSHK) over its internal control failures. Under the resolution, the SFC reprimanded and fined MSHK HK$18.5 million for breaches of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).

The internal control failures of MSHK related to the following areas:

  • avoidance of conflicts of interest;
  • comprehensive documentation of its electronic trading system;
  • disclosure of short selling orders;
  • compliance with position limits and reporting of large open positions; and
  • execution of client instructions in connection with futures and stock options contract reporting obligations.

In reaching the resolution, the SFC took into account that MSHK:

  1. co-operated with the SFC in resolving regulatory concerns;
  2. agreed to engage an independent reviewer to conduct a forward-looking review of its internal controls to ensure compliance with the relevant regulatory requirements; and
  3. had no disciplinary record in respect of the present failures.

A copy of the Statement of Disciplinary Action can be downloaded via the link below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR83

SFC Reprimands and Fines Authorised Financial Institution for Overcharging its Clients

The SFC reprimanded and fined BNP Paribas Wealth Management (BNPPWM) HK$4 million for its failure to exercise due skill, care and diligence to ensure that monetary benefits it received from client transactions were fair and reasonable, and in accordance with its representations to the clients, in breach of the Code of Conduct.

The SFC’s investigation found that at the material time, the monetary benefits, including charges, mark-ups and fees, received by BNPPWM from around 2,300 client transactions exceeded the levels it represented in its documentation provided to the clients. The total overcharged amount was around HK$9.5 million. The affected transactions covered different types of investment products, including equities, bonds, structured products, options, swaps and funds.

In determining the sanction, the SFC took into consideration that BNPPWM:

  • agreed to engage an independent reviewer to review and ensure that all overcharged amounts would be returned to the affected clients;
  • repaid all overcharged amounts received from current clients and was in the process of repaying former clients, which no longer retain an account with BNPPWM;
  • self-reported the matter to the SFC and the Hong Kong Monetary Authority;
  • proactively co-operated with the SFC in resolving the concerns; and
  • had an otherwise clean disciplinary record.

A copy of the Statement of Disciplinary Action can be downloaded via the link below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR85&appendix=0

Market Misconduct Tribunal Found No Insider Dealing in Warderly Shares

The Market Misconduct Tribunal (MMT) handed down its decision that Mr Lo Hang Fong, a former Company Secretary of Warderly International Holdings Limited (Warderly), and Mr Luu Hung Viet Derrick, a lender and potential investor of Warderly, have not engaged in insider dealing in the shares of Warderly in 2007.

The SFC commenced the MMT proceedings against Mr Lo and Mr Luu in May 2015. The SFC alleged that Mr Lo and Mr Luu were aware that Warderly was in a perilous financial position with banks withdrawing credit facilities when they sold the company’s shares in 2007 and avoided a total loss of HK$12,564,516. The SFC further alleged that Mr Lo and Mr Luu knew that the financial crisis facing Warderly was material, highly price sensitive and not generally known to the market.

Trading in Warderly was suspended by the SFC on 14 May 2007, and resumed on 16 December 2013 after Warderly underwent a restructuring of its business operations and a change of its management team.

The MMT unanimously found that the evidence did not support the finding that the events relied upon by the SFC had been shown to the requisite standard of proof (on balance of probability) to constitute “relevant information” which would, if generally known to persons accustomed to or likely to deal in the listed securities of Warderly, be likely to materially affect the price of the listed securities. Accordingly, the MMT found that no market misconduct had been identified in the case.

A copy of the MMT’s report can be downloaded via the link below:

http://www.mmt.gov.hk/eng/reports/Warderly.International.Holdings.Limited.pdf

Market Misconduct Tribunal Finds Research Analyst Culpable of Market Misconduct

The MMT found that Mr Andrew Left of Citron Research in the United States disclosed false or misleading information inducing transactions and therefore, engaged in market misconduct in contravention of section 277 of the Securities and Futures Ordinance.

The SFC alleged that, on 21 June 2012, Mr Left published a report on Citron Research’s website stating that Evergrande Real Estate Group Limited (Evergrande) had been culpable of fraudulent accounting and was insolvent. The MMT found that these allegations were false and misleading and likely to alarm ordinary investors. Mr Left was found to have made these allegations recklessly or negligently with no understanding of the Hong Kong accounting standards that applied and without checking them with an accounting expert or seeking comments from Evergrande.

The MMT had yet to hear from both the SFC and Mr Left as to the orders to be imposed on Mr Left on a date to be agreed.

A copy of the MMT’s report can be downloaded via the link below:

http://www.mmt.gov.hk/eng/reports/Evergrande_Report.pdf

SFC Takes Disciplinary Actions Against Five Licensed Persons for Various Misconduct

The SFC has taken disciplinary actions against five licensed persons pursuant to section 194 of the Securities and Futures Ordinance in the following four cases:

(a) In the first case, the SFC prohibited Mr Wong Lap Yin, accredited to Phillip Securities (Hong Kong) Limited and related companies at the time, from re-entering the industry for three years. The SFC found that Mr Wong placed a series of unauthorized bid orders through a client’s account for the shares of China Nonferrous Metals Company Limited (CNFM) to artificially inflate the share price of CNFM, for the purpose of facilitating a cross trade which eliminated the debit cash balance in the account of another client.

(b) In the second case, the SFC suspended Mr Ko Cho Ting, an account executive and a branch manager of Emperor Securities Limited at the time, for two years. The disciplinary action followed an SFC investigation which found that Mr Ko:

  1. placed suspicious bid orders for a client for the shares of Timeless Software Limited (Timeless). From 1 May to 28 June 2012, the client placed a small order for Timeless shares during the last two minutes of the “Continuous Trading Session” on 18 trading days. 17 of these late orders were the last order of the day that set a higher closing price for Timeless shares. Although Mr Ko suspected that the late orders might inflate the closing price of Timeless shares and be considered to be manipulative, Mr Ko neither made proper enquiries nor took steps to escalate the orders to the management of his firm; and
  2. breached his firm’s employee dealing policy by failing to disclose a personal securities trading account and the securities transactions conducted in it.

(c) In the third case, the SFC banned Mr Lam Chun Yin and Mr Yeung Chok Cheong, both former representatives of United Simsen Securities Limited (United Simsen), from re-entering the industry for 36 months and 30 months respectively. In addition, Mr Lam and Mr Yeung were respectively fined HK$111,000 and HK$51,830, which are the profits each of them made from trading in shares of Renhe Commercial Holdings Co., Ltd (Renhe) on 31 December 2013.

At the material time, United Simsen was engaged by Pacific Plywood Holdings Limited (Pacific Plywood) to provide corporate advisory services. Mr Lam and Mr Yeung were responsible for preparing a draft announcement for Pacific Plywood on its acquisition of 80 million Renhe shares on 31 December 2013. In the morning of 31 December 2013, Mr Lam and Mr Yeung purchased a total of 1.2 million and 392,000 Renhe shares respectively before Pacific Plywood placed its order with United Simsen for the acquisitions. Mr Lam and Mr Yeung sold their Renhe shares during and shortly after Pacific Plywood’s acquisition of the Renhe shares.

(d) In the last case, the SFC suspended the licence of Mr Ku Yuen Leung, an account executive of BOCOM International Securities Limited, for a period of 18 months for engaging in manipulative activities. An SFC investigation found that between 5 and 26 November 2010, Mr Ku created a false or misleading appearance in the market by placing large-sized bid orders for the shares of Agricultural Bank of China Limited to drive up the prices of five related call warrants. All the bid orders were cancelled immediately after Mr Ku sold the related warrants at inflated prices for profits. Mr Ku made a gross profit of HK$15,500 from trading the warrants.

Copies of the respective Statements of Disciplinary Action for the above cases can be downloaded via the links below:

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR74&appendix=0&lang=EN

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR76&appendix=0&lang=EN

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR78&appendix=0

http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/openAppendix?refNo=16PR82&appendix=0&lang=EN