The Securities and Futures Commission (SFC) has reprimanded and fined Mr Chang Chyi, an employee of Core Pacific – Yamaichi International (HK) Limited (Core Pacific), $50,000 for breach of the SFC’s Code of Conduct (Notes 1 & 2).
The SFC’s investigation into suspected uncovered short selling of the shares of China Agri-Products Exchange Limited (China Agri-Products) found that Chang had incorrectly represented to a customer that shares allocated by China Agri-Products through a rights issue could be sold before 4:00pm on 21 March 2014 without violating the short selling restriction under section 170 of the Securities and Futures Ordinance, when in fact, that was not the case (Notes 3 & 4).
Relying on Chang’s misrepresentation, the customer placed an order to sell 320,000 rights shares and bonus shares on 21 March 2014 before 4:00pm, which were subject to conditions until 4:00pm that day and could not be sold at that time.
The SFC considers it is important that all licensed representatives understand the short selling restriction because short selling may carry serious consequences for the uncovered short seller.
Chang did not have an adequate understanding of the short selling restriction and had failed to take reasonable steps to verify the date on which the relevant rights issue would become unconditional.
In deciding the sanction, the SFC considers that Chang’s misconduct had subjected the customer to legal and regulatory risks and fell short of the standard expected of a licensed representative under the Code of Conduct (Notes 5, 6 & 7).
End
Notes:
- Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).
- Chang is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) and Type 2 (dealing in futures contracts) regulated activities. He is accredited to Core Pacific – Yamaichi International (HK) Limited for Type 1 regulated activity and Core Pacific – Yamaichi Futures (HK) Limited for Type 2 regulated activity.
- Section 170(1) of the SFO provides that a person shall not sell securities at or through a recognised stock market unless at the time he sells the securities, he or his principal has, or believes and has reasonable grounds to believe that he or his principal has, a presently exercisable and unconditional right to vest the securities in the purchaser of them. Illegal short selling is a criminal offence which carries a maximum penalty of $100,000 fine and two years’ imprisonment upon conviction.
- Paragraph 7 of the Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements (published in 2003) sets out, amongst other things, an agent’s responsibility under section 170 of the SFO. Where a person is acting as an agent for a seller, ie the agent receives a sell order from his principal for execution or for passing onwards for execution, the agent should know or believe and have reasonable grounds to believe that his principal has a presently exercisable and unconditional right to vest the securities in the purchaser of them. An agent seller should either know that the principal has the securities or if not, he should seek a confirmation from the principal as to whether the principal owns the securities that are being sold. Where the principal confirms that he owns the securities, the agent will have complied with his obligations under section 170 of the SFO.
- General Principle 2 of the Code of Conduct provides that a licensed person should act with due skill, care and diligence in conducting business activities.
- Paragraph 2.1 of the Code of Conduct provides that where a licensed or registered person advises or acts on behalf of a client, it should ensure that any representations made and information provided to the client are accurate and not misleading.
- Paragraph 3.4 of the Code of Conduct further provides that when providing advice to a client a licensed person should act diligently and carefully in providing the advice and ensure that its advice and recommendations are based on thorough analysis and take into account available alternatives.
A copy of the Statement of Disciplinary Action is available on the SFC website
