HK regulator fines China Rise for regulatory breaches and internal control failures

Maria Nikolova

The regulatory breaches relate to short selling orders, cross trades and keeping of records.

Hong Kong’s Securities and Futures Commission (SFC) today announces that it has fined and reprimanded China Rise Securities Asset Management Company Limited, formerly known as China Rise Securities Company Limited. The fine of $6.3 million stems from internal control failures and regulatory breaches related to short selling orders, cross trades and keeping of records.

The regulator found that China Rise’s former chief executive officer and responsible officer, Mr Sammy Shiu Kin Keung, placed 199 illegal short selling orders on listed securities for his personal account and a client’s discretionary account from January to May 2014. This happened without the knowledge of China Rise.

China Rise became aware of the short selling orders placed by Shiu when the Hong Kong Exchange and Clearing Limited made enquiries about some of the transactions. However, even after receiving the enquiries, China Rise still failed to detect and prevent further short selling activities in Shiu’s account.

Shiu was eventually convicted on June 8, 2017 for illegal short selling in the shares of three listed companies between April and May 2014.

China Rise also executed a number of cross trades between the account of a member of its senior management (X) and a client’s discretionary account pursuant to X’s instructions, with the result that the transactions were executed at a price to X’s advantage and to the client’s detriment when compared with the nominal price at the time of the transactions.

The SFC’s investigation found that China Rise failed to:

  • put in place adequate system and control procedures to detect and prevent illegal short selling by its staff;
  • implement effective internal controls to monitor cross trades between its staff members and clients that gave rise to conflicts of interest, and ensure fair treatment of clients; and
  • report the relevant cross trades to The Stock Exchange of Hong Kong Limited (Exchange) in compliance with the Rules of the Exchange on four occasions.

In addition to that, the SFC found that China Rise failed to maintain proper records of order instructions and its compliance checks. In particular, China Rise failed to locate the dealing tickets in relation to at least 100 orders placed by X from January to May 2014 and keep records of order instructions for over 1,000 client orders between February and August 2016.

The SFC has determined that China Rise was in breach of the Code of Conduct and the Management, Supervision and Internal Controls Guidelines.

In deciding the sanction, the SFC considered a range of circumstances of the case, including that China Rise:

  • has taken steps to remediate some of the above internal control deficiencies;
  • cooperated with the SFC in accepting the SFC’s findings and resolving the disciplinary proceedings;
  • has an otherwise clean disciplinary record.

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