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Author: Rory Gallaher
Service Area: Financial Services
Date: April 2013
Country: Hong Kong

 

Financial Services Newsletter
Issue 4 of 2013: April

SUMMARY OF CONTENTS


Internet marketing of private funds in Hong Kong

by Mary Nieto (mary.nieto@deacons.com.hk)

A Hong Kong court has acquitted a company and its director on four counts of issuing advertisements to promote a collective investment scheme, including posting relevant information on its website, without authorisation by the Securities and Futures Commission (SFC) in contravention of section 103 of the Securities and Futures Ordinance (SFO). What does this mean for website marketing of private funds to professional investors in Hong Kong?

Regulatory background

Under the SFO, it is an offence to issue a public advertisement for a fund without the SFC's authorisation. The SFO allows an exemption for funds that are, or are intended to be, disposed of only to professional investors. The term "advertisement" is widely drafted and can include information posted on a website.

The SFC has had success with prosecutions in this area in the past. In 2007, a company and its responsible officer were fined for unauthorised fund advertisements, which included posting information on its website.

For funds authorised for sale to the public in HK, the SFC has issued guidance on advertisements and the use of the internet: see the CIS Internet Guidance Note of April 2003 and the Advertising Guidelines of July 2008.

For private funds however, even though the SFO permits advertising to professional investors, there is no SFC guidance on what is acceptable marketing. Further, the SFC states in its product handbook that it "does not generally consider it appropriate to authorise any advertisement ... in respect of [an] unauthorised product".

The lack of guidance, plus the SFC's previous prosecutions, has lead to a cautious approach from the industry, with website information on unauthorised funds generally restricted from public view by way of password protection.

The recent case

The SFC alleged that the defendants issued an advertisement on their corporate website promoting a collective investment scheme without the authorisation of the SFC. The defendants submitted that they intended to sell interests in the fund only to professional investors and so the advertisements did not require SFC authorisation under the statutory exemption. The SFC argued that the exemption did not permit advertisements that had not been authorised by the SFC to be issued to the public and that in this case there was no evidence that the interests in the fund had only been sold to professional investors. The magistrate accepted the defendants' argument and ruled also that the advertisements did not constitute invitations to the public to invest in the fund. In a press release issued on 21 March 2013, the SFC stated it will consider an appeal.

Is it now permissible for fund managers and promoters to place web-advertisements for unauthorised funds on publicly available websites so long as it is clearly stated that the product is only available to professional investors and so long as only enquiries from professional investors are pursued? Some further guidance from the SFC in the light of this decision on what is acceptable conduct in marketing private funds to institutions and other professional investors would be helpful. An SFC consultation with the industry would be very welcome.


Our article of March 2013 on authorised fund advertisements is available here: Tips for preparing Hong Kong product advertisements

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Protection of client assets
by Sharon Pun (sharon.pun@deacons.com.hk)

In March 2013, Hong Kong's Securities and Futures Commission (SFC) commenced legal proceedings in the High Court against five defendants in relation to allegations of misappropriation of clients' assets by two former staff of a local securities firm. The alleged misappropriation came to light during an on-site inspection by the SFC.

This mirrors a circular issued by the SFC in February 2013 reminding licensed corporations to guard against risk of client asset misappropriation and the importance of (i) putting in place adequate internal controls on administrative and settlement procedures and (ii) having management supervision over the activities of their account executives. The SFC referred to the previous circulars on this topic, dated 16 March 2010, 8 March 2006 and 22 July 2002.

What internal controls should exist?

The recent circular pointed out several control areas that licensed firms should pay special attention to, including the establishment of controls over the generation and dispatch of client statements, "hold mail" arrangements and the use of blank client statements. There should also be controls over telephone systems and the ability of staff to access the firm's computer system.

What should senior management do?

Limited management supervision can lead staff to abuse the management's trust and take opportunities to commit fraud. The circular reminds senior management of the need to exercise adequate supervision over front and back office functions to ensure activities are subject to regular review and implement policies and procedures to prevent and detect potential fraud. There should also be strict segregation of duties between front office, middle office and back office functions.

What should firms do now?

Licensed firms should start reviewing their internal control systems and paying attention to whether senior management have exercised adequate supervision over the activities of their staff. Licensed entities are obliged to report any suspicion of client asset misappropriation to the SFC.


Although not specifically mentioned in the circular, firms should also remind their clients to be vigilant in checking their own accounts. They may wish to remind clients to check monthly statements carefully; follow up promptly if they fail to receive monthly statements; never allow account executives to trade their own transactions on client accounts; and never deposit money directly to an executive's bank account. Finally, clients should be reminded to contact the firm's complaint officer or senior management if they have any complaints or dispute on their accounts.

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Increase in late filing penalties for changes in directors and officers in the Cayman Islands
by Penelope Shen (penelope.shen@deacons.com.hk)

The 2013 Cayman Islands Companies Amendment Law has raised the late filing penalties for companies that fail to notify the Registrar of Companies within 30 days of any resignation/appointment of directors and/or officers. Where filing is received 31 days or later after date of change, a penalty of CI$1,000 (US$1,220) per change will be levied. A daily penalty of CI$100 (US$122) per change will also be levied up to a maximum of five days, or CI$500 (US$610). This means that if the filing is received 36 days or later after date of change, the late fee is CI$1,500 (US$1829) per change in total, including daily penalties. The law further provides that any director or manager who knowingly and willfully authorises or permits such default shall be liable for the same penalties. Previously, there was only a daily penalty of CI$10 (US$12) for every late filing beyond 30 days.

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SFC licensing and compliance hints
by Rebecca Yip (rebecca.yip@deacons.com.hk) and
Lavita Pong (lavita.pong@deacons.com.hk)

Licensing short-cuts for representatives: If someone prefers not to wait eight weeks to get a representative licence, for example because they need to start regulated activities as soon as they join a licensed corporation, they can apply for a provisional licence at the same time, in which case they would usually get SFC approval to commence regulated activity within about a week. The process is simple. You just need to check the right box on the cover page of the SFC Form 3 and pay an additional HK$800 (on top of the normal representative licence application fee).

As the name suggests, the first licence is only "provisional", and should be replaced by a "full/normal" licence after the SFC has finished assessing the main application (which could take another seven weeks). A provisional licence will be revoked if the SFC decides for any reason not to issue a "full/normal" licence to the person.


If the person has not passed HKSI Paper 1 by the time their provisional licence application is filed, they can ask the SFC to impose a licensing condition which allows them six months to pass the exam.

There is no provisional licence arrangement for responsible officer applicants.

Let's talk about CPT: As the first quarter of 2013 is already behind us, it is time to remind all licensed individuals to plan ahead to meet their 2013 CPT requirements in order to avoid a year-end rush. Internal training can be counted for these purposes provided it meets the SFC's requirements which are set out in the Guidelines on Continuous Professional Training.

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SFC routine inspection update
by Nick Chiu (nick.chiu@deacons.com.hk)

Board meetings: The SFC has not provided any general guidance as to the frequency of board meetings or what should be discussed at board level. However we usually suggest licensed corporations hold board meetings at least semi-annually. In terms of what boards should consider, the template for the SFC's recent "Business Activities and Control Practices Survey" is a useful tool. It refers to the following items: Review / approve the business and strategic plan; Monitor and manage key business risks; Supervise the performance of the senior management and responsible officers; Monitor the licensed corporation's financial performance; Monitor the effectiveness of internal control system; Monitor the licensed corporation's compliance status with applicable laws, regulations and policies.

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New Financial Services partner

We are delighted to announce the appointment of senior private equity lawyer Robert Woll as a partner in our Deacons' Financial Services group, strengthening one of our key growth areas. A recognised leader in private equity fund formation and transactions in Asia, Robert will further expand his work with financial institutions, private equity firms and institutional investors in Greater China and across Asia.

Robert joins our Financial Services team of seven partners and 35 other fee earners. Susan Gordon, Head of our Commercial Department said, "We are delighted that Bob has chosen to join the firm. Many of us know and respect Bob and his track record in both Hong Kong and the PRC, and he is a welcome addition to our market leading financial services practice."

Robert is joining from a global law firm, where he was chair of the firm's China corporate practice and co-managing partner of the firm's Beijing office. A graduate of Princeton University and Stanford Law School, Robert was resident in Hong Kong from 1997 to 2007, and has been based in Beijing since 2007. He has received numerous professional honours and achievements, including recognition as a leading practitioner in China private equity by Chambers Asia-Pacific and as a "Leading Lawyer" in investment funds and private equity transactions by The Asia-Pacific Legal 500, Asialaw Leading Lawyers and Who's Who Legal.

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Recent Deacons' publications

April

A Guide to the Personal Data (Privacy) Ordinance

Act now to protect your trademarks against potential infringements in the explosion of new generic domain names

Impact of new electronic trading rules on Hong Kong asset managers

China Legal Update, Issue 3 of 2013: April

March

Legal Considerations when Employing an Employee in Hong Kong

China issued new RQFII rules – benefiting managers licensed in Hong Kong

Financial Services Newsletter, Issue 3 of 2013: March

China Legal Update, Issue 2 of 2013: March

Human Resources and Pensions Newsletter, Issue 2 of 2013: March

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.