On 30 July 2015, the Securities and Futures Commission (SFC) announced that it had reprimanded and fined Nomura International (Hong Kong) Limited (Nomura Hong Kong) HK$4.5 million for failing to report significant misconduct by a former trader in a timely manner.
This case underlines and reinforces the importance of the self-reporting obligations contained under Paragraph 12.5 of the SFC’s Code of Conduct1, which requires intermediaries to report misconduct and suspected misconduct to the SFC immediately upon discovery, not when they have concluded internal investigation or obtained legal advice on the matter.
1. Factual Background
On 11 June 2013, the SFC was notified by Nomura Hong Kong that a trader on secondment from Nomura Securities Co., Ltd in Japan had incurred a US$3.3 million trading loss on 23 May 2013, and had been repatriated to Japan on 5 June 2013 (11 June Report). At that time, Nomura Hong Kong also informed the SFC that a review of the trader’s activities was being undertaken and it would update the SFC further should any issues be identified.
At the time the 11 June Report was made, Nomura Hong Kong was already aware that the trader had made false entries in Nomura Hong Kong’s risk management system to conceal the real risk exposure of his trades and had provided false information to Nomura Hong Kong. However, these facts were not disclosed to the SFC in the 11 June Report, and (as explained below) their eventual proper disclosure did not take place until a follow up request was received from the SFC.
Further, a draft preliminary investigation report into the trader’s activities was available by 19 June 2013. However, Nomura Hong Kong did not provide the draft preliminary report nor its subsequent drafts (nor the information contained therein) to the SFC until the SFC made follow-up enquires in relation to Nomura Hong Kong’s 11 June Report. As a result, it was not until 17 July 2013 that Nomura Hong Kong first informed the SFC that the trader had engaged in inappropriate conduct. The draft preliminary investigation report was then subsequently provided to the SFC on 19 July 2013.
This case is a timely reminder of the importance of the SFC’s self-reporting requirements, and comes on the back of the 11 May 2015 circular issued by the SFC providing further guidance to intermediaries in relation to the scope of various notification requirements under the Code of Conduct and legislation (SFC Circular).
Compliance or non-compliance with self-reporting obligations has played a part in the SFC’s determination of appropriate sanctions in recent disciplinary cases. In October 2011, the SFC fined an institution HK$6 million and suspended its former responsible officer as a result of internal control and supervisory failures as well as its delay in reporting suspected misconduct of a former licensed representative, which meant that the SFC and other law enforcement agencies had no opportunity to interview him or secure his whereabouts for the purposes of the investigation. In April 2014, a bank had its fine reduced for internal control failures, as the SFC gave credit to the bank’s swift reporting, which prevented the wrongdoer from leaving Hong Kong.
3. Practical tips
The comments made by the SFC and its actions in this case are a clear indication that the SFC will continue scrutinising intermediaries’ compliance with their self-reporting obligations. Significantly, the SFC rejected Nomura Hong Kong’s argument that it needed to conclude its internal investigation into the trader’s activities and finalise its internal report before it could determine whether a reporting obligation had been triggered. Intermediaries are reminded that they are expected to report misconduct and suspected misconduct to the SFC immediately upon discovery, not when they have concluded their own internal investigation or after obtaining legal advice.
Intermediaries are also reminded to make full disclosures in any report to the SFC, without leaving out any important information that may prejudice a subsequent regulatory investigation.