The Securities and Futures Commission (SFC) has banned Mr Kong Kar Bong, a former account executive of Sanfull Securities Limited (Sanfull), from re-entering the industry for 10 years from 11 December 2018 to 10 December 2028 (Note 1).

The SFC found that in June 2012, Kong received two cheques from a friend for opening a securities account and a futures account at Sanfull.  While the securities account of Kong’s friend was opened, the futures account was never opened.  Instead, Kong deposited the cheque of $500,000 that his friend had issued for the futures account into his own securities account at Sanfull.

In September 2012, upon his friend’s repeated inquiries about the status of the futures account, Kong misrepresented to his friend that the futures account existed and the $500,000 sum was in the futures account by emailing a forged statement to his friend showing a balance of $500,000 in an account under his friend’s name.

Kong’s friend only became aware that his futures account did not exist when he requested Sanfull to close the account in 2014.

The SFC considers that Kong’s conduct was deliberate and dishonest and called into question his character, reliability, and fitness and properness to be a regulated person.

In deciding the sanction, the SFC took into account all relevant circumstances, including Kong’s otherwise clean disciplinary record.

Note:

1. Kong was licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities) regulated activity and was accredited to Sanfull between 21 May 2012 and 21 September 2013. Kong is currently not licensed by the SFC.

SFC reprimands and fines SFM HK Management Limited $1.5 million over naked short selling

The Securities and Futures Commission (SFC) has reprimanded and fined SFM HK Management Limited (SFM) $1.5 million for failures relating to the short selling of Great Wall Motor Company Limited (Great Wall) shares in 2015 on behalf of a fund it managed (Note 1).

On 28 August 2015, Great Wall announced its proposed bonus issue of shares, which was equivalent to 200 per cent of its existing issued shares and was subject to the fulfilment of certain conditions.  The settlement date of the bonus shares was expected to be on 13 October 2015.

The SFC investigation found that:

• On 30 September 2015, the fund’s custodian notified SFM’s trade support department of SFM’s entitlement to 1,616,000 bonus shares as a result of the fund’s pre-existing holding of 808,000 Great Wall shares.
• SFM’s trade support team booked the 1,616,000 bonus shares into SFM’s trading system on 30 September 2015 without segregating them into a restricted account as required by SFM’s internal policy.  Consequently, the system indicated that a total of 2,424,000 shares of Great Wall were available for trading when in fact only 808,000 shares were available for trading at that point in time.
• Based on the erroneous information shown in the system, one of the fund’s portfolio managers placed an order to sell 2,424,000 shares of Great Wall on 2 October 2015, causing the fund to become short by 1,616,000 shares in Great Wall (Notes 2 & 3).

The SFC considers that SFM not only failed to act with due skill, care and diligence in dealing in the bonus shares, but also failed to diligently supervise its staff members and implement adequate and effective systems and controls to ensure compliance with the short selling requirements.

In deciding the sanctions against SFM, the SFC took into account all the circumstances including that:

• there is no evidence to suggest that SFM had acted in bad faith in short selling the bonus shares;
• this incident is the second occurrence of a similar kind over a period of five years;
• SFM has taken remedial measures to strengthen its internal controls and systems; and
• SFM has an otherwise clean disciplinary record.

Notes:

1. SFM is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 9 (asset management) regulated activities.
2. Section 170(1) of the SFO prohibits “naked” or “uncovered” short selling.  It is a criminal offence for a person to sell securities at or through a recognized stock market unless at the time of the sale, he has a presently exercisable and unconditional right to vest the securities in the purchaser of them, or believes and has reasonable grounds to believe that he has such a right.
3. Prior to the settlement date, Great Wall did not make any public announcement regarding the fulfillment of the conditions.  The public did not have reasonable grounds to believe that they had presently exercisable and unconditional rights to vest the bonus share in the purchaser of them before the settlement date.

SFC issues quarterly report

During the quarter, the SFC released consultation conclusions on proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs, which came into effect on 13 July. It also launched consultations on proposed guidelines for securities margin financing activities to enhance brokers’ risk management and on proposals to amend the Guideline on Anti-Money Laundering and Counter-Terrorist Financing to align with the latest international standards.

In a July circular, the SFC provided guidance for using electronic signatures to onboard individual clients online. It also issued a circular in August to caution that anyone involved in providing securities margin financing in the guise of investments may be liable to prosecution.

The open-ended fund companies regime which introduces a new corporate fund structure in addition to the current unit trust form took effect in July, and the investor identification regime for northbound trading under Mainland-Hong Kong Stock Connect was introduced in September.

The SFC published a strategic framework in September which set out its agenda to contribute to Hong Kong’s green finance development as well as to connect green finance flows between the Mainland and the rest of the world.

In enforcement, five licensed corporations and five representatives were disciplined during the quarter, resulting in total fines of $40.4 million.

Key figures from the report include the following:

• The number of licensees and registrants reached 46,063, up 5% year-on-year, and the number of licensed corporations increased 9% to 2,844. Both were record highs.
• A total of 81 on-site inspections of licensed corporations were conducted to review their compliance with regulatory requirements.
• The SFC reviewed 118 new listing applications, up 7% from the previous quarter.

The report is available on the SFC website.

The Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) recently hosted a joint enforcement training in Shenzhen on digital forensics (Note 1).