Summary Review of SFC's Disciplinary Action against Swiss-Asia

On 8 November 2022, SFC fined Swiss-Asia Asset Management (HK) Limited $3 million for internal control failings and regulatory breaches in relation to the monitoring of trading activities in discretionary accounts and record keeping.

In mid-April 2015, a client signed an asset management mandate granting Swiss-Asia full discretionary power to manage the account, subject to certain management restrictions, e.g.

• Swiss-Asia could sell covered call options on existing securities and option strategies which have defined risk.
• It should not include any option strategies that involved uncapped risk or purchase options as a speculative strategy for the portfolio.

In late August 2016, the client complained to Swiss-Asia that its licensed representative conducted option trading in the account which was much riskier than agreed.

From May 2015 to August 2016, the licenced representative placed a total of 869 options trades in the account. Swiss-Asia only submitted to SFC in April 2017 that it had identified 225 of these options trades to be outside the management restrictions.

Swiss-Asia asserted that its responsible officers would randomly select five to seven portfolios on a monthly basis and conduct rough high-level reviews on them, which is considered inadequate by SFC. It did not maintain records of such random sample checks.

As a result of this case, Swiss-Asia has revised its internal control policies and procedures such that post-trade checks would be conducted on all accounts on a weekly basis. Any breaches in investment strategies or exceptions in the investment restrictions would be documented and escalated to executive management.

Swiss-Asia claimed that it operated with the support of the three lines of defence, i.e. (1) management supervision, (2) oversight by the legal and compliance team, and (3) audit by external auditors. SFC questions how legal and compliance as well as external auditors could perform their functions properly and effectively without records of the sample checks. I also question if legal and compliance (rather than risk management) would have the expertise in option strategies to identify breaches of investment mandate.

SFC highlights that the monitoring of trading activities are important for the detection and prevention of potential market misconduct (i.e. not just breaches of investment mandate). If this case involved also market misconduct, the penalty would be much higher.

SFC's Statement of Disciplinary Action is found here.