Hong Kong SFC Fines KTF Capital $50,000 for Failure to Report Insufficient Capital Requirement of $360,000, $2.5 Million Deficit from Failure to Anticipate Adverse Proprietary Shares Trading
4th August 2022 | Hong Kong
The Hong Kong Securities & Futures Commission (SFC) has fined KTF Capital Management $50,000 (HKD 400,000) for failure to report insufficient capital requirement of $360,000 (HKD 2.8 million) to HK SFC, resulting in $2.5 million deficit (HKD 20 million) in liquid capital from failure to anticipate adverse implications from its proprietary shares trading. HK SFC: “The SFC originally proposed to fine KTFCM HKD 800,000. Having considered KTFCM’s financial position, the SFC decided to reduce the fine to HKD 400,000.” KTF Capital Management is formerly known as Forchn International Asset Management and Rega Technologies. The fine is for KTF Capital Management (KTFCM) failure to comply with the Securities and Futures (Financial Resources) Rules (FRR). KTFCM is licensed under the Securities and Futures Ordinance to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. (See below for summary of facts, SFC official statement)
“ Hong Kong SFC Fines KTF Capital $50,000 for Failure to Report Insufficient Capital Requirement of $360,000, $2.5 Million Deficit from Failure to Anticipate Adverse Proprietary Shares Trading “
HK SFC Summary of Facts of KTF Capital Mgmt
Summary of Facts: On 13 December 2018, KTFCM subscribed, on a proprietary trading basis, for the shares of Fosun Tourism Group (stock code: 1992) (Shares) upon its initial public offering on the Main Board of The Stock Exchange of Hong Kong Limited. KTFCM’s subscription, which was financed by a loan (Loan), gave rise to a liquid capital deficit.
After the subscription was completed, KTFCM entered into an assignment agreement (Agreement) in relation to the Shares and the Loan and backdated its execution date in an attempt to retrospectively prevent the liquid capital deficit from arising.
Failure to maintain its required liquid capital
- Rule 4 of the FRR provides that a licensed corporation shall at all times maintain financial resources in the amount required of it under Part 3 of the FRR.
- Rule 6(1) of the FRR provides that a licensed corporation shall maintain at all times liquid capital which is not less than its required liquid capital (i.e. approximately HK$2.8 million in the case of KTFCM during the Relevant Period).
- Rule 27(1)(a) of the FRR (Proprietary positions of licensed corporations) provides that In the present instance, the haircut percentage applicable to the Shares when calculating KTFCM’s liquid assets was 30%, in accordance with item(1)(c) of Table 1 in Schedule 2 to the FRR.
- Rule 44(1)(a) and (g) of the FRR (Concentrated proprietary positions) provides that a licensed corporation must include in its liquid assets listed shares that it beneficially owns at market value, less the haircut amounts in relation to the securities concerned where a licensed corporation holds for its own account listed shares and the net market value of any such securities which are of the same description equals 25% or more of its required liquid capital, it must include in its ranking liabilities, where the net market value is 51% or more of its required liquid capital, 10% of such net market value. In the present instance, the net market value of the Shares held by KTFCM for its own account was around HK$50.4 million during the Relevant Period, which was more than HK$700,000 (i.e. 25% of its required liquid capital) and HK$1.43 million (i.e. 51% of its required liquid capital). Therefore, KTFCM was required to include in its ranking liabilities HK$5.04 million (i.e. 10% of net market value of the Shares).
- KTFCM did not anticipate these adverse FRR implications arising from its proprietary trading of the Shares due to an oversight. The SFC’s re-computation of KTFCM’s liquid capital position, after taking into account that the Agreement was in fact backdated (see paragraphs 14 and 15 below), shows that KTFCM breached rules 4 and 6(1) of the FRR for failing to maintain its required level of liquid capital from 13 to 18 December 2018. The deficit in FIAM’s liquid capital was close to HK$20 million.
- In view of the matters set out in paragraphs 5 to 9 above, the SFC finds that KTFCM has failed to comply with GP 2 (Diligence) of the Code of Conduct which requires it to act with due skill, care and diligence in the best interests of its clients and the integrity of the market.
Failure to comply with notification requirements and making misrepresentation to the SFC
- Rule 55(1)(a) of the FRR provides that a licensed corporation shall notify the SFC in writing as soon as reasonably practicable and in any event within one business day after it becomes aware that its liquid capital falls below 120% of its required liquid capital.
- Section 146(1) of the SFO provides that if a licensed corporation becomes aware of its inability to maintain financial resources in accordance with the specified amount requirements that apply to it, it shall as soon as reasonably practicable notify the SFC by notice in writing of that fact.
- The SFC’s investigation shows that KTFCM’s liquid capital fell below 120% of its required liquid capital (i.e. HK$3.36 million) and the required level of approximately HK$2.8 million during the Relevant Period (see paragraph 9 above). By 17 December 2018, KTFCM became aware of these facts, which triggered the notification obligations under rule 55(1)(a) of the FRR and section 146(1) of the SFO.
- On around 19 December 2018, KTFCM entered into the Agreement pursuant to which it assigned the Shares and the Loan to a third party. There is no evidence that such an agreement had been reached before or at the time of KTFCM’s subscription of the Shares. Nevertheless, in order to prevent a liquid capital deficit from arising, KTFCM backdated the execution date of the Agreement to 12 December 2018 in an attempt to have the Shares and Loan derecognised from its balance sheet on the same day when KTFCM subscribed for the Shares.
- Despite KTFCM’s awareness of its liquid capital deficit since 17 December 2018, the SFC was not notified of the deficit until 26 April 2019 by KTFCM’s auditors, after they identified the deficit during audit fieldwork of KTFCM’s accounts for the year ended 31 December 2018. When the SFC enquired about its liquid capital calculations in May 2019, KTFCM misrepresented that it maintained sufficient liquid capital during the Relevant Period. KTFCM subsequently clarified that the Agreement was in fact backdated and failed to provide a credible explanation to justify the backdating of the Agreement.
- In view of the matters set out in paragraphs 11 to 15 above, the SFC concludes that KTFCM has breached rule 55(1)(a) of the FRR and section 146(1) of the SFO.
- In view of the matters set out in paragraphs 3 to 15 above, KTFCM’s failure to comply with the relevant FRR requirements means that it has also failed to comply with GP 7 (Compliance) and paragraph 12.1 of the Code of Conduct which require KTFCM to comply with all regulatory requirements applicable to the conduct of its business activities.
Official Statement
The Securities and Futures Commission (SFC) has reprimanded and fined KTF Capital Management Limited (KTFCM) (formerly known as Forchn International Asset Management Co. Limited and Rega Technologies Limited) $400,000 for failures to comply with the Securities and Futures (Financial Resources) Rules (FRR) (Notes 1 and 2).
The SFC found that KTFCM failed to maintain its required liquid capital of approximately $2.8 million between 13 and 18 December 2018 and notify the SFC when it became aware of its inability to comply with the financial resources requirements. It transpired that the almost $20 million deficit in KTFCM’s liquid capital was the result of an oversight in that it failed to anticipate its proprietary trading in shares would trigger adverse implications to its liquid capital calculation under the FRR (Notes 3 and 4).
The SFC is of the view that KTFCM’s conduct was in breach of the Code of Conduct (See below).
In deciding the sanction, the SFC took into account all relevant circumstances, including:
- The FRR regime represents significant statutory safeguards for the interests of the investors in the KTFCM’s liquid capital deficit was significant in light of its operations but lasted for only a short period of time;
- KTFCM misrepresented to the SFC that it maintained sufficient liquid capital during the relevant period by backdating a relevant agreement;
- KTFCM’s cooperation with the SFC in resolving the disciplinary proceedings;
- KTFCM’s financial situation; and
- KTFCM’s otherwise clean disciplinary record.
Pursuant to rule 27(1)(a) of the FRR (Proprietary positions of licensed corporations), a licensed corporation must include in its liquid assets listed shares that it beneficially owns at market value, less the haircut amounts in relation to the securities concerned.
Pursuant to rule 44(1)(a) and (g) of the FRR (Concentrated proprietary positions), where a licensed corporation holds for its own account listed shares and the net market value of any such securities which are of the same description equals 25% or more of its required liquid capital, it must include in its ranking liabilities, where the net market value is 51% or more of its required liquid capital, 10% of such net market value.
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