RHB Securities and Inadequate Compliance Monitoring

On 2 Jan 2020, SFC reprimanded and fined RHB Securities Hong Kong Limited (RHBSHK) $6.4 million for its failures to comply with regulatory requirements on conflicts of interest and supervision of account executives.

SFC found that RHBSHK failed to:

• effectively implement its policy for avoiding actual and potential conflicts of interest between its research reports and investment banking relationships;
• adequately disclose its investment banking relationship with the listed company covered in a research report; and
• effectively monitor the trading activities of its research analysts.

SFC further found that RHBSHK did not have adequate controls to supervise its account executives (AEs).  In particular, the frequency and extent of its sample checking procedures for ensuring that client orders received by AEs through telephone are tape-recorded are not commensurate with the size of RHBSHK's business.  As a result, the discretionary trading activities without written authorization of an account executive went undetected for 23 months.

The Statement of Disciplinary Action of this case revealed that:

• RHBSHK explained 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.
• At the material time, RHBSHK had over 70 AEs, its sample checking of 10 orders each month is inadequate to offer any meaningful control for the detection and prevention of irregularities stemming from missing telephone recordings of order instructions.

I am not sure to what extent the penalty imposed on RBHSHK was attributable to the inadequate compliance monitoring to detect trading irregularity.  This case may shed some light on SFC's benchmark of effective sample checking.  Would SFC sanction RHBSHK's MIC of Compliance later?


Subsequent update on 29 Jan 2020:

• SFC announced the suspension of RHBSHK's AE Mr Shiu Yau Wah for 5 months, because he conducted trades involving over $1.62 billion worth of shares for a client account on a discretionary basis for almost two years between 2014 and 2016 without obtaining the client's written authorization.

Subsequent update on 6 Feb 2020:

• SFC announced that it has banned Mr Christopher Tse, a former research analyst at RHBSHK, from re-entering the industry for 12 months.
• Tse conducted trades through his father's securities trading account held at another brokerage between August 2013 and October 2015 without informing RHBSHK, and traded in a stock on RHBSHK's restricted list on two occasions. 
• Some of the trades conducted by Tse through his father's account between November 2013 and July 2015 were: (a) in a manner contrary to his recommendations; and (b) in the shares of companies covered in some of his research reports within 30 days prior to or three days after the issue of the reports.  
• Tse also failed to disclose his financial interests in his father's account in relation to four companies in a number of research reports between September 2013 and June 2015.