The Securities and Futures Commission (SFC) commenced legal proceedings under section 213 of the Securities and Futures Ordinance against Tiger Asia, a New York hedge fund, and 3 of its officers. The allegations are that the Tiger Asia parties contravened the prohibition on insider dealing in section 291(5) of the Ordinance, in relation to 3 transactions in shares of Bank of China Limited and China Construction Bank Corporation Limited conducted in 2008 and 2009. Tiger Asia had no physical presence in Hong Kong.
Tiger applied to the Court to strike out the SFC's proceedings on the ground that the Court has no jurisdiction to decide the question whether Tiger Asia contravened section 291(5).
It may be recalled that the Ordinance creates a dual civil and criminal regime to deal with misconduct in the financial markets (including insider dealing). If following investigations, the SFC concludes that there is a potential case of market misconduct, it may, with the consent of the Secretary for Justice, bring civil proceedings before the Market Misconduct Tribunal or refer the matter to the Secretary for Justice for criminal prosecution on indictment. The SFC can itself prosecute less serious offences summarily. These procedures, criminal and civil, are mutually exclusive.
The Market Misconduct Tribunal's functions include determining whether market misconduct has taken place and the identity of any person who has engaged in it. A person identified as having engaged in market misconduct may be subjected to various civil penalties, such as disqualification from being a director of a listed company, disqualification from dealing in securities for up to 5 years, payment to the Government of the profit gained or loss avoided by the market misconduct, payment of the costs of the investigation and a recommendation that he or she be disciplined by the appropriate professional body.
On conviction on indictment, the offender may be sentenced to imprisonment for up to 10 years or a fine of up to $10 million.
Tiger Asia argued that section 213 does not provide a third route by which the SFC can seek a determination of market conduct before the Court.
The Hong Kong Court of Final Appeal has on 30 April 2013 ruled that the ' third route' is open to the SFC.
Section 213, among other things, covers contravention of any provision of the Securities and Futures Ordinance, and is not limited to contravention of the market misconduct provisions. The section provides remedies for the benefit of parties involved in the impugned transactions. The Court has power to order that particular transactions be unwound, to declare contracts to be void or voidable, and to require any person to pay damages.
The Court of Appeal has said that in cases involving a large number of small investors, it may be eminently reasonable for the SFC to sue under section 213 for the investors' benefit. The availability of this new route of remedy may have huge significance in any future large scale financial mishap. It can become the vehicle for the regulator's “class action” suit in Hong Kong.
Anti-money laundering and counter-financing of terrorism
Mr. Norman T.L. Chan, Chief Executive of the Hong Kong Monetary Authority (HKMA), in a high-level seminar on Anti-Money Laundering on 12 April 2013, warned of dire consequences for failure to comply with anti-money laundering and counter-terrorist financing requirements, both for the bank concerned and for Hong Kong as a whole. The HKMA is expecting banks' senior management to take clear responsibility for managing money laundering risks, and will look for evidence of active engagement by top Management. Top Management includes the Board of Directors in locally incorporated banks and the regional/global compliance office in foreign bank branches. The question is: is the tone from the top clear in the bank?
Top Management must ensure that AML issues are dealt with on a proactive basis, and that sufficient resources are allocated to AML work. Banks must understand and carry out their detection and reporting obligations. To this end, they will need to have adequate monitoring systems, taking into account their business activities and size, and investigate unusual transactions in a systematic way.
The HKMA emphasise that they will be ready to take tougher actions.
The HKMA expect that the issues covered in the high-level seminar to be discussed by the Board in locally incorporated banks and in foreign bank branches' regional/global compliance meeting, with a view to identifying concrete actions to be taken to set an appropriate tone on the bank's risk culture.
Sale of investment-linked assurance scheme (ILAS) products
The HKMA's circular dated 22 April 2013 introduced enhanced regulatory measures applicable to the sale of ILAS products by authorized institutions (AIs). AIs are required to:
in each case in the customer's preferred language (Chinese or English). These are to be implemented by no later than end June 2013.
AIs should ensure that their sales staff:
A copy of the IFS-AD and the remuneration disclosure statement both signed by the customer should be provided to the customer at the point of sale.
AIs should not proceed with an ILAS application if any of the required confirmations in the IFS has not been properly signed by the customer, or if the customer does not sign to confirm that he/she has read and understood the remuneration disclosure statement.
AIs that distribute ILAS products for their group insurance company should determine the remuneration they receive from their group insurance company on an arm's length and commercially justifiable basis. There should be no arrangement which may prejudice the disclosure requirements, directly or indirectly, such as transfer pricing that has the effect of concealing or distorting the remuneration receivable.
The HKMA has continued to find instances of inadequacies in AI's policies and procedures, such as failing to provide adequate guidance to staff for the purpose of customer's affordability assessment, faulty methodology in assessing customer's asset concentration risk, inadequate product due diligence, and failing to properly assess the customer's needs/objectives.
In a circular dated 3 May 2013, the SFC introduces a revised KFS Template for ILAS products (including, among other things, a new total fees and charges disclosure, and a new disclosure about insurance intermediaries' remuneration), and requires issuers of existing ILAS Schemes which will continue to be marketed to the public in Hong Kong after 30 September 2013 to revise the KFS of such ILAS Schemes to comply with the enhanced disclosure requirements no later than 30 September 2013. These revisions do not require the SFC's prior approval. The revised offering documents must, however, be filed with the SFC within one week from the date of issuance (7.3 of the ILAS Code). Any ILAS Scheme that does not comply with the enhanced disclosure requirements after 30 September 2013 cannot continue to be marketed to the public in Hong Kong.
Weapons of mass destruction (WMD)
The HKMA has reminded AIs that the provision of any services to customers, where activities or transactions are suspected to be related to WMD proliferation, is an offence under section 4 of the Weapons of Mass Destruction (Control of Provisions of Services) Ordinance (WMD(CPS)O). Section 25A of the Organised and Serious Crimes Ordinance also applies to knowledge or suspicion that any property represents any proceeds of an offence under section 4 of WMD(CPS)O. in such a case, a report is also required to be made to the HKMA. (Circular dated 5 April 2013)
Mystery Shopping Programme (MSP)
The HKMA will institute a MSP in respect of the sale practices of AIs with respect to investment and insurance products. (Circular dated 4 March 2013)