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Nominal attention by compliance officer led to severe reprimand

BIScom Subsection: 
Editorial Staff

Hong Kong's Securities and Futures Commission has severely reprimanded Selina & Co Limited and reprimanded a director who, despite having responsibility for compliance matters, paid only nominal attention to those duties. It's the case that created new resolve at the SFC that compliance failures would no longer be dealt with by reprimand only.

In 2002, the Securities and Futures Commission began an investigation into alleged criminal conduct by an employee of securities dealer Selina and Co. Limited. It was alleged that the former settlements clerk had misappropriated clients' assets and acted in a deceptive manner. The clerk was referred for possible criminal prosecution.

The SFC investigated the company under s56 of the Securities Ordinance. According to a statement by the SFC "The SFC's investigation found that S&C had seriously inadequate internal controls and had almost no supervision. The dealing director, who is meant to take responsibility for supervision and regulatory compliance, was an appointee in name only and spent almost all her time on the Stock Exchange trading floor. She felt that, as all the staff had been with S&C for a long time, they were all trustworthy and did not need supervision. The owner and a director of S&C, appointed this dealing director not for carrying out supervisory functions but merely to fulfil the SFC's licensing requirements that each brokerage must appoint a dealing director.

"The owner and other directors played almost no supervisory role in S&C. She felt that all employees had been with S&C for a long time and were familiar with S&C's operation and did not need supervision. Even worse, almost all S&C staff knew or should have known the settlement clerk was dealing while unlicensed. It was the ability of the settlement clerk to both deal and settle trades, together with the lack of supervision, that allowed the settlement clerk to engage in her conduct."

The SFC "requested" that the company appoint an independent assessor to examine its systems and controls. The assessor "identified a number of serious weaknesses in S&C, which facilitated that settlement clerk's dishonest act. These included:

- failure to segregate settlement and operation of second terminal functions;
- failure to implement effective internal and compliance systems;
- failure to maintain comprehensive audit trails of trading orders;
- failure to deliver trading documents to clients;
- inadequate account opening controls;
- inadequate clearing and settlement procedures; and
- inadequate control procedures on access to internal computer system, second terminals and CCASS terminals.

"The SFC found that S&C and the owner had failed to discharge their functions properly in managing and supervising the operations of S&C."

The SFC's Executive Director of Enforcement said "This is one of the worst cases that we have seen of poor internal controls and inadequate supervision in a brokerage permitting staff misconduct. It is disheartening that we continue to encounter cases of such poor controls that permit staff to cheat clients. Elementary failures such as not segregating incompatible duties like trading and settlement and excessive trust of staff continue to occur with unacceptable frequency."

He went on to say that the SFC had had enough of companies failing to take compliance sufficiently seriously and that the SFC had decided that, from now own, it would do more than simply issue reprimands.

"For a long time the SFC reprimanded brokerages for such failings. Reprimands are obviously proving to be an inadequate deterrent. Under the SFO, the SFC may fine and partially suspend or revoke licences. In future, in cases of internal control supervision failings facilitating serious misconduct harming clients, the SFC will consider imposing heavier sanctions. In the most severe cases, we will consider suspending a brokerage's licence for a long period or even revoking it. Investor protection demands this. This is the last case in which the SFC will merely reprimand brokerages for such failings. Brokerages should take this as a last opportunity to implement the most essential internal controls that the law and investor protection require."