The Hong Kong Securities and Futures Commission (SFC) has commenced proceedings in the Court of First Instance of the High Court seeking orders restraining certain unlicensed persons from dealing in 'grey market' securities, and seeking a declaration that such dealings are a regulated activity under the Securities and Futures Ordinance.
The SFC’s action concerns the activities of two unlicensed individuals, Chow Ngai Keung Alex and Siu Sum Fung Christopher and an unlicensed company, Mega Dragon Group Limited, which has been deregistered.
The SFC alleged that they had been involved in a scheme offering H shares of Bank of China Limited (BoC) since March, 2006 up to June 1st, 2006, when BoC H shares were listed on the Stock Exchange of Hong Kong.
This kind of alleged trading of securities prior to the time when they are traded publicly on a stock exchange is known as grey market trading.
The SFC contends that any person carrying offering shares in a grey market must be licensed by the SFC, and must comply with the obligations of a licensee under the Securitied and Futures Ordinance (SFO), and under the Code of Conduct for Persons Licensed by or Registered with the SFC.
As Mega Dragon has been deregistered, it is not a party to the proceedings, according to the SFC.
The listing of BoC on the Stock Exchange of Hong Kong was one of the biggest IPOs in the world and was heavily over-subscribed.
The regulatory issues surrounding grey markets were raised recently by a Court of Appeal case, Woo Hing Keung Lawrence v CEF Brokerage Limited, in a judgment published on March 19th, 2008. This decision did not deal with the issue of unlicensed persons engaging in grey market activity, however.
The obligations of a licensee under the Code of Conduct include obligations of honesty, fairness, diligence, a requirement to know a client’s financial needs, to avoid conflicts of interest and to act in the best interests of the client and the integrity of the market. The SFC is able to take disciplinary action against licensees who breach the Code of Conduct.
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