Does your firm have dormant accounts for such a long time that your firm does not even know whom you could contact for details? This will help yo uclean up dormant accounts.
Slightly outdated but on 19 December 2018, Securities and Futures Commission in its circular emphsized protection of client assets.
https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=18EC94
There should be policies for maker-checker controls, suspicious address checking and monitoring dormant accounts.
Client Assets and Obligtions
Securities and Futures Ordinance (Cap. 571) (SFO), Schedule 1, Part 1, Interpretation: “client assets” means Client Securities and Collateral or Client Money.
“A licensed person (LC) should ensure that clients assets are promptly and properly accounted for and adequately safeguarded” . [General Principle (GP) 8 and para 11.1 of Code of Conduct for LC]
Client Securities Rules – Summary
“Client Securities” means [S. 3, Client Securities Rules]
– Stock Listed on Recognized Exchange (e.g., HKEX), or
– Collective Investment Scheme (CIS)
which were received in HK in the course of regulated activities (e.g., Type 1)
Upon receipt of securities (or collateral), licensed coroporation(LC) safe-keeps in segregated account (CCASS client account) as soon as practicable [S. 5]
LC may deal with securities, if (amonst others):- [S. 6]
– An oral or written direction (instruction) from client to sell securities,
– Written direction by client to withdraw the security (from CCASS), and
– Standing authority (requires renewal after 12 months if not PI) [S. 4]
Client Money Rules – Summary
This Applies to client money received by LC in Hong Kong [S.3]
(If received outside of Hong Kong, not applicable) q
Upon receipt of client money (including cheque), within 1 business day, LC must
safe keep in a segregated client accounts (at HKMA licensed bank) [S. 4]
LC may pay client money out of segregated accounts, if (amongst others):- [S. 5]
To Client
– In accordance with Client’s Written Direction
– In accordance with Standing Authority (12 months rule, if not PI)
– LC may deduct fees or reimbursement amount [S. 4(3)(a)(i) & 5(1)(d)]
Unless with agreement, interest accrued from client money in savings account will be treated as client money [S. 6]
AML Concerns: Third Party Deposits and Payment [Chapter 11, SFC AML Guideline for LC]
– AML risk increases when customers use third parties to pay or receive investment proceeds
– Third-party deposits and payments should be accepted under exceptional and legitimate circumstances
– Adequate policies and procedures to monitor (e.g., deposits)
– Due Diligence on the source of deposits before settling transactions Delayed Due Diligence will increase difficulty to justify
How to Deal with Delisted Securities
Grounds to Halt or Suspend Trading or Delist Shares (HK stocks)
By HKSE or By Issuer (or by Financial Advisor/ Type 6):
[Mainboard Listing Rule 6.01]
– When HKSE’s listing committee believes that:
(1) Lack of Liquidity in the Market
(2) Issuer does not carry on a business as required (liquidation)
(3) Issuer or the business is no longer suitable for listing
(Instead of delisting) Usually, 18 months suspension by HKSE
=> Issuer is to comply with Remedial Proposal for resumptio
=> If not remedied, Delisted
By Issuer – Voluntary Withdrawal from listing is possible
Two usual types of Delisted Shares
(1)Active Delisted Securities
=> For strategies, some issuer go private (withdrawal) – Although delisted (System may show 0 value), still active!
=> But brokers are not helpful to safe-keep Active Delisted Shares, due to lack of liquidity for trading.
=> Need to seek client instruction [“Dormant Accounts” on SFC Circular Dec 2018]
To seek instruction to surrender (purchase by LC) or withdraw certificates (from CCASS) and send it to clients
Note 1: Odd Lots cannot be withdrawn from CCASS
Note 2: Share Register (TRICOR, etc.) may not provide service to re-register to client’s name
Note 3: Consent Form to Surrender (based on recent case law) Liquidation Delisted Shares (Bankruptcy)
(a) Voluntary Liquidation (Company itself files bankruptcy) – Not many
(b) Compulsory Liquidation = Winding-up (3rd Party sues for non-payment) – Very common during COVID/Recession
Compulsory Liquidation q Many Issuers are Bermuda or Cayman Companies (Variable Interest Entity Structure (VIE) with PRC Op Co)
=> They follow English Common-law (generally, liquidation law is the same)
=> HK Court and HK Companies Registry will recognize bankruptcy judgments rendered in other jurisdictions Effect of Compulsory Liquidation – Becomes Worthless Shares at some point, but when?
=> We should notify clients [“dormant accounts” on SFC Circular (Dec 2018)]
Procedures for Compulsory Liquidation Procedures (HK and Common-law Jurisdiction)
(1) Statutory Demand for unpaid debt amount for HK$10,000 or more by Lender
=> If no payment after 21 days of service of demand, Creditor can file a winding-up petition
(2) Court Hearing to verify Company’s insolvency or inability to repay
=> If verified, court will issue Winding-up order and Provisional Liquidator is appointed
=> At this stage, HKSE usually suspends trading of shares (but Liquidation is not final yet)
(3) Meetings with Creditors to appoint liquidator (accountant / lawyer), and Liquidation Begins
=> At this stage, almost impossible to revive the company – Virtually Value of Shares are Worthles
=> Not worth waiting until (5) below, and we should notify clients [“dormant accounts” on SFC Circular (Dec 2018)]
[Recommended Approach] To Seek instruction to surrender (transfer to LC’s CCASS house account)
Note 1: Odd Lots cannot be withdrawn from CCAS
Note 2: Share Register (TRICOR, etc.) may not provide service to re-register to client’s name
Note 3: Consent Form Template Shown in 2021 Case Re Wing Fat Securities Ltd (Next Page)
(4) Preparation of Final Accounts => Assets are Distributed to Creditors, if any left
(5) De-registration or Strike-off of Company Registration By Companies Registry => Officially Company is Closed
Consent Form to Surrender Abandoned Shares (based on Recent Case Law)
Death of Clients
Joint Account
Legally, joint tenancy with rights of survivorship (e.g., Husband and Wife are called “Joint Tenants”)
Upon death of 1 tenant, estate (asset) will automatically pass to surviving tenant
Upon death certificate being verified, account ownership transfers surviving owner (no probate)
Single Account (Probate)
Must wait until completion of probate which identifies:
– “Heir” means descendants entitled to estates (could be multiple account owners)
– Executor or Administrator of Estate who will handle estates
– In case of Deceased with a Will (testate)
– Generally the will be accepted by court to appoint “Executor” and distribute estates ØAt conclusion of probate, court will issue “Grant of Probate”
– In case of Deceased without a Will (intestate) Ø Court will examine and appoint Administrator to handle estates
At conclusion of probate, court will issue “Letter of Administration”
In case of estate not exceeding HK50,000 Home Affairs Department (no court’s involvement) will handle and issue “Confirmation Notice”
We should wait for “Grant of Probate”, “Letter of Administration” and “Confirmation Notice” to assign ownership of deceased’s client account
(Grant of Probate and Letter of Administration are collectively called “Grant of Representation”)
Ways to close dormant accounts
(1)We may consider changing policy to charge account maintenances fees for dormant accounts every mont
=> Some low value client money account will reach zero eventually => close accounts (Client Money)
(2) If Annual Confirmation to retail clients was returned, we should make steps to close accounts
=> Re-sending confirmation several times, calling or news paper advertisement, etc.
If Delisted Shares or Odd Lot Shares in the Securities Account, we should enclose Consent Form
=> 1 year of client chasing to be considered best effort being made (Case Law)
(3) In case of no updates from client, we apply (Originating Summons) to surrender client assets to High Court
=> Strong Case Law supports that LC is considered a “trustee” of the client trust asset
Even though LC did not sign a trust instrument with Client – Client Agreement is considered a “trust” document
=> S. 56(1), Trust Ordinance (Cap. 29) – if there are no instructions from clients after reasonable endeavor, court may
provide the instruction in the absence of client instructions
=> S. 62, Trust Ordinance allows trustee to surrender the client assets to court. •Client Money can be paid into court (Cheque payable to High Court Registry) •Client Securities in the form of paper certificate form can be surrendered to court (We should try to withdraw first- High Court doesn’t have CCASS Account)
But Odd Lots and Delisted Shares may be surrendered to LC
