Deacons
  November 30, 2004 - Hong Kong

Hong Kong: Enforcement Action by the SFC

Disclosure of Interests Recently, the SFC has successfully prosecuted a number of breaches of the duty to disclose securities interests, among which the most widely reported in the news was that of the prosecution of Mr. William Mong Man-wai. Mr. Mong was charged with failure to declare his interest in nearly 3 million shares of Bank of East Asia in contravention of section 28(1)(b) of the Securities (Disclosure of Interests) Ordinance. Mr. Mong claimed in defence that he had failed to disclose his interest when he was appointed a non-executive director of Bank of East Asia in 1995 because he had simply forgotten that he had signed a cheque for HK$40 million to buy the shares at issue. Mr. Mong was found guilty and was fined HK$2,500 and ordered to pay HK$13,578 costs. Investors should note that for events/transactions taking place after 1 April 2003, the Securities and Futures Ordinance (SFO) applies in lieu of the Securities (Disclosure of Interests) Ordinance. Under the SFO, the disclosure threshold for notifiable securities interests has accordingly been reduced from 10% to 5% and the reporting period from five to three business days. Investors should be reminded that apart from acquisition of shares, any reduction or disposal of share interests is also considered as discloseable under the SFO. A director of another listed company was successfully prosecuted recently for his failure to disclose within three business days his disposal of shares in June 2003 which caused him to cease to have a notifiable interest in the company. Investors should therefore make sure that they notify both the Hong Kong Stock Exchange and the listed company within three business days if their shareholding fluctuates above or below the 5% threshold. The duty to disclose also arises when there is a whole figure change in the percentage level of their shareholdings above the 5% threshold. Regular checking of the level of their shareholdings against the nominal value of the issued share capital of the stocks they own is necessary to ensure compliance. For more information on the complicated requirements for disclosure of interests and short positions in the securities of Hong Kong listed companies under the SFO, you may wish to refer to “Disclosure of Interests in Securities of Hong Kong Listed Companies” (2004), a recent publication on the subject by William Mackesy, an experienced practitioner in this area of law. The book can be ordered by email at [email protected]. Cold Calling The SFC recently prosecuted four licensed representatives for making unsolicited calls inducing others to enter into agreements for opening accounts and trading in future contracts on various foreign currencies and commodities. In one of the cases, the corporation employing the licensed representative was also reprimanded by the SFC for internal control failures. It is a criminal offence to make an unsolicited call either to induce or attempt to induce someone to enter into agreement to invest in securities, futures or leveraged foreign exchange contracts, or an agreement to provide securities margin financing. The prohibition of cold calling is designed to protect the public from unwanted and undesirable approaches and sales tactics of market intermediaries and their staff, which may cause harassed investors to make ill-informed and hasty investment decisions. Unsolicited calls made to existing clients, a solicitor or certified public accountant acting in his/her professional capacity, or a licensed person, registered institution, money lender or professional investor, are excluded from the prohibition of cold calling. A call is unsolicited if it is not made at the express invitation of the person called. Therefore the fact that a person has provided a market intermediary or its staff with his or her contact information does not readily represent an invitation to call that person out of the blue to solicit business. It is not uncommon for market intermediaries to invite people to seminars and to ask attendees to complete a questionnaire which provides their contact details. According to the SFC, providing contact information in such a way does not constitute an express invitation for cold calling. Intermediaries should therefore be wary of how they use the contact information obtained under such circumstances to solicit business. Intermediaries should also make sure that internal control measures are in place so that staff members are reminded that cold calling is illegal. An internal policy or compliance manual prohibiting the making of unsolicited calls or requiring compliance with the applicable law and regulations by itself is generally not sufficient. There must be close supervision of staff members’ marketing and promotional efforts to ensure compliance. As can be seen from the recent prosecutions, any intermediary that permits its staff to engage in such activities is also running the risk of facilitating a breach of the law and may be prosecuted. Apart from criminal liability, the agreement entered into consequent of the unsolicited call may also be subject to challenge. Where a person enters into an agreement as a result of an unsolicited call, the person on whom the unsolicited call was made may, subject to the rights of a subsequent purchaser in good faith for value, rescind the agreement, by giving notice in writing to that effect to the other party to the agreement, within 28 days after the day the agreement was entered into.


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