Hong Kong regulator fines RHB Securities for failures related to supervision of account executives
RHB Securities Hong Kong Limited was fined $6.4 million for its failures to comply with regulatory requirements on conflicts of interest and supervision of account executives.
Hong Kong’s Securities and Futures Commission (SFC) today announces that it has reprimanded and fined RHB Securities Hong Kong Limited (RHBSHK) $6.4 million for the company’s failures to comply with regulatory requirements on conflicts of interest and supervision of account executives.
The regulator explains that the Code of Conduct provides that a licensed corporation must:
- ensure order instructions received from clients should be recorded in writing or tape recorded;
- ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf;
- be satisfied on reasonable grounds the identity of the person ultimately responsible for originating the instruction in relation to a transaction, and should not effect a transaction unless the identity of the person originating the order is satisfied; and
- not effect a transaction for a client unless before the transaction is effected the client has specifically authorized the transaction or authorized in writing the licensed corporation to effect transactions for the client.
During the SFC’s inspection in 2016, the company was not able to produce telephone order records for the securities trading account of a client. Eventually, RHB Securities claimed that the account executive involved was verbally authorized at account opening to discretionarily trade for the client in July 2014.
The company said that the discretionary trading went undetected because the client account and the account executive were not selected in its sample telephone recording checking. The sample checking only involved checking the order records of 10 trades each month.
According to the SFC, the frequency and extent of review should be commensurate with the size of business. At the material time, the company had over 70 account executives, its sample checking of 10 orders each month was found to be inadequate to offer any meaningful control for the detection and prevention of irregularities stemming from missing telephone recordings of order instructions.
Further, RHB Securities’s failure to detect the account executive’s discretionary trading activities in the client account which lasted for 23 months also indicate that it had not taken adequate steps to satisfy itself about the identity of the person ultimately responsible for originating the order instructions in the client account.
The SFC has also found that the company failed to effectively implement its policy for avoiding actual and potential conflicts of interest between its research reports and investment banking relationships and failed to adequately disclose its investment banking relationship with a listed company covered in a research report.
In determining the sanction, the regulator considered a variety of factors, including RHB Securities’s:
- failures were not detected until an SFC’s inspection;
- steps to remediate its internal control deficiencies; and
- cooperation with the SFC to resolve the disciplinary proceedings.