The Hong Kong Securities and Futures Commission (SFC) has recently announced a disciplinary action against a licensed corporation and its manager-in-charge (MIC) for internal control failures relating to its placing activities and recording of client order instructions.
This marks the SFC’s first disciplinary action against an MIC since the implementation of its MIC regime in 2017. For an overview of the regime and its requirements, please refer to our briefing of December 2016.
The SFC imposed a fine of HK$3.3 million on Fulbright Securities Limited (FSL) and a 6-month suspension on Eric Liu Chi Ming. At the time of the breaches, Mr Liu was FSL’s MIC (Overall Management Oversight) and MIC (Key Business Line), as well as FSL’s responsible officer (RO), director and deputy general manager.
The SFC’s investigation found that Mr Liu was responsible for managing and supervising FSL’s business operations in regulated activities at the material time, and that the firm’s failures were attributable to Mr Liu’s failure to discharge his duties as an RO and a member of FSL’s senior management.
Under section 193(2)(a) of the Securities and Futures Ordinance (SFO), where an intermediary is (or was at any time) guilty of misconduct as a result of the commission of any conduct occurring with the consent or connivance of, or attributable to any neglect on the part of (i) an RO of a licensed corporation, or (ii) a person involved in the management of the business of a licensed corporation, the conduct shall also be regarded as misconduct on the part of that other person. A “person involved in the management of the business of a licensed corporation” includes an MIC.
Key takeaways and looking ahead
The SFC will continue to use the MIC regime as a “roadmap” to identify senior individuals responsible for misconduct – There will no doubt be more disciplinary actions against MICs, consistent with the SFC’s approach in sanctioning both licensed corporations that are in breach as well as the individuals who are responsible for such breaches under section 193(2)(a) of the SFO. Indeed, the SFC has indicated in the last two years that it had been investigating a number of MICs.
The SFC is empowered to sanction non-licensed individuals – Although Mr Liu was a licensed person, it is important to bear in mind that a “person involved in the management of the business of a licensed corporation” (which includes MICs) encompasses non-licensed individuals.
The SFC has been conducting thematic reviews relating to MICs – These were announced in 2018 and include (a) a review of licensed corporations’ management structure and effectiveness (including board governance and the responsibilities of MICs based in and outside of Hong Kong, and how such responsibilities are discharged), and (b) a review of the risk governance and oversight frameworks of selected licensed corporations as well as the roles and responsibilities of MICs of risk management. The SFC will likely publish its observations from the reviews after they are completed.
FSL’s breaches and Mr Liu’s involvement
Brief details of FSL’s breaches and Mr Liu’s involvement are set out below.
FSL was found to have breached a number of requirements under the SFC’s main code of conduct, the Guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, the SFC’s Guideline on Anti-Money Laundering and Counter-Financing of Terrorism, the Securities and Futures (Keeping of Records) Rules, and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC.
Mr Liu breached General Principle 9 of the SFC’s main code of conduct, on the basis that as a member of FSL’s senior management, he did not ensure that FSL had maintained appropriate standards of conduct and adhered to proper procedures.
The SFC found that FSL, when acting as a placing agent in the share placement of a Hong Kong-listed company in August 2018, had failed to exercise due skill, care and diligence and continuously monitor its business relationship with clients when processing the placement subscription applications. Among other things:
FSL had accepted the applications despite various red flags (such as four pairs of clients sharing the same residential address, and a number of clients depositing funds into their FSL accounts that were incommensurate with the financial positions stated in their account opening documents); and
FSL only reported suspicious transactions to the Joint Financial Intelligence Unit a year later.
The SFC also found that FSL had failed to act in the best interests of its clients during the placement. Despite clear indications that the placement might not be suitable for the majority of the placees (such as most placees not meeting the investor profile set by FSL, and the placement being inconsistent with many placees’ investment goals, risk preferences and/or financial position), FSL did not make any follow-up enquiry and readily accepted the subscription applications.
Mr Liu approved and signed the placement documents and was the key decision-maker in FSL’s acceptance of the subscription applications.
Recording of client order instructions
Among other things, the SFC found that FSL had failed to:
properly record and maintain order instructions in relation to a large number of client orders;
effectively implement policies and procedures and diligently supervise its account executives to ensure that client orders were handled in compliance with applicable order handling regulatory requirements;
establish and maintain appropriate and effective procedures for its telephone order recording compliance reviews; and
report immediately to the SFC after it became aware of its account executives’ breaches of the applicable telephone order regulatory requirements.
Mr Liu was involved in the telephone order recording compliance reviews and should have been aware that FSL did not effectively implement the telephone order regulatory requirements. However, he did not take any steps to rectify the situation.