The Securities and Futures Commission (SFC) has reprimanded and fined Promising Securities Company Limited (Promising) $3.5 million for breach of the Code of Conduct and the Management, Supervision and Internal Controls Guidelines (Notes 1 to 3).
The SFC’s disciplinary action arose from a self-report by Promising in 2014 that a settlement staff had misappropriated client assets following an enquiry by a client that 1,600 HSBC shares had gone missing from her trading account.
The SFC’s investigation found that Promising:
- employed and allowed the settlement staff, who was unlicensed, to perform regulated functions for its business in regulated activities, such as introducing clients to open trading accounts and handled and took orders from clients (Note 4); and
- failed to implement adequate internal control procedures that ensure effective segregation of its operational functions, and allowed the same individual to perform both sales and settlement functions, which gave the settlement staff the opportunity to misappropriate around $8 million worth of client assets affecting 24 client accounts over a four-year period, which went undetected by Promising until the client enquired about her missing shares (Notes 5 & 6).
In determining the sanction, the SFC took into account all the circumstances, including:
- Promising has taken steps to return the misappropriated assets to all of the affected account holders;
- Promising agreed to engage an independent reviewer to conduct a review of its internal controls to ensure client assets are adequately protected against internal misconduct;
- Promising self-reported to the SFC about the misappropriation;
- Promising cooperated with the SFC in resolving the SFC's concerns;
- Promising has an otherwise clean disciplinary record with the SFC; and
- The SFC wishes to send a clear message to the market that investor protection is one of the SFC’s regulatory objectives and the SFC will not hesitate to take necessary actions against those who fail to put in place appropriate internal controls to protect the firms and their clients.
- Promising is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities) regulated activities.
- Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).
- The Management, Supervision and Internal Controls Guidelines for Persons Licensed by or Registered with the SFC published under the SFO.
- Under section 114(3) of the SFO, no person shall perform any regulated function in relation to a regulated activity except a licensed representative. General Principle 7 of the Code of Conduct provides that a licensed corporation should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market. Paragraphs 12.1 and 4.1 of the Code of Conduct provide that a licensed corporation should ensure compliance with the relevant law and regulations, and should ensure that any person it employs to conduct business is fit and proper and qualified to act in the capacity so employed.
- General Principle 2 and paragraph 4.3 of the Code of Conduct provide that a licensed corporation should conduct its business activities with due skill, care and diligence, and in the best interests of its clients, and should have internal control procedures to protect its operations and clients from financial loss arising from dishonest acts.
- Section II of the Internal Control Guidelines provides that key duties and functions shall be appropriately segregated. Specifically, paragraph 2 stipulates that operational functions, including sales and settlement, should be effectively segregated to minimise the potential for conflicts, errors or abuses which may expose the firm or its clients to inappropriate risks.