No Compliance Control Over Staff Dealing in a Fund House

As announced on 24 Apr 2018, SFC reprimanded CN Capital Management Limited (CN Capital) and fined it $1,000,000 for failing to maintain an effective compliance function and satisfactory internal controls concerning employee account dealing.

SFC also reprimanded its RO, Mr George Chan Yee Lee and Mr Stephen Ng Wing Leung and fined them $100,000 each for failing to comply with the employee account dealing requirements under the Fund Manager Code of Conduct, breaching the basic principle that persons engaged in fund management business, when transacting for themselves, must give their clients priority and avoid conflicts of interest.

SFC’s investigation revealed that, between January 2011 and October 2016:

• none of the staff members of CN Capital had disclosed their personal investment holdings to CN Capital in writing;
• Chan and Ng conducted a total of 3,188 personal trades without obtaining any written pre-clearance from the designated officer of CN Capital;
• in 619 incidents, Chan or Ng held their personal investments for less than 30 days without prior written approval from the designated officer; and
• a total of 996 personal trades of Chan and Ng were conducted in the same stock and on the same day as the transactions conducted for the fund managed by CN Capital.

It appears that this asset management firm had no compliance control over staff dealings at all.

Market Disruption Caused by Algo Trading

As announced on 14 Feb 2018, SFC reprimanded and fined Interactive Brokers Hong Kong Limited (IBHK) $4.5 million after resolving concerns over IBHK's breaches of the Code of Conduct in its execution of market orders using electronic and algorithmic trading systems.

SFC's disciplinary action followed two market disruption incidents in 2015 and 2016 where the share prices of HK-listed O-Net Communications (Group) Limited and AAG Energy Holdings Limited were ramped up by 48.7% and 126% respectively, in less than two minutes.

In light of the incidents, SFC and IBHK jointly engaged an independent reviewer to review IBHK's electronic and algorithmic trading systems, in particular, the controls to monitor and prevent the generation of or passing to the market for execution order instructions which may interfere with the operation of a fair and orderly market.

The review found that, in the two incidents, IBHK executed market orders by placing the entire order volume to the market and repeatedly submitting the unexecuted part of the order at the next available price until the entire order was completed. It also found that IBHK did not take into account the liquidity of the market when executing the market orders. Furthermore, IBHK failed to put in place effective price and volume controls to prevent its execution of market orders from disrupting the market.

Para 3.3.1 of Schedule 7 to the CoC provides that a licensed person should have controls that are reasonably designed to monitor and prevent the generation of or passing to the market for execution order instructions from its algorithmic trading system which may interfere with the operation of a fair and orderly market.

In respect of IBHK's electronic and algorithmic trading systems, the review indicated that:

• IBHK's electronic trading system was developed by its head office in the United States, where its programming function was responsible for both development and quality assurance of the system. IBHK did not conduct adequate user acceptance testing on the system; and
• the technical design documents of the systems were high level and did not provide a detailed explanation of the components of the trading systems. A specific example is that IBHK did not keep adequate records in relation to the design, development, deployment or operation of the order cancellation functionality in its electronic trading system.

Para 3.2 of Schedule 7 to the CoC provides that a licensed person should ensure that the algorithmic trading system and trading algorithms it uses are adequately tested to ensure that they operate as designed. Para 1.3 and 3.4 provide that a licensed person should keep proper records on the design, development, deployment and operation of its electronic trading system.

This was a rare enforcement case against algo trading. For more technical details, please refer to the SDA.

Concealment of Error Trade

As announced on 13 Dec 2017, SFC banned Ms Abbie Yip Ka Ying, a former trader of BNP Paribas, Hong Kong Branch, from re-entering the industry for 18 months for breach of the Code of Conduct over her attempts to conceal a trade execution error.

Yip made multiple attempts to conceal an in-house foreign exchange spot trade execution error made by her on 24 Jun 2015 and the consequential loss of US$58,000 from the erroneous trade, including:

• requesting a trader of BNP Paribas to split the loss over two days so that it would be more difficult for other staff to detect the loss;
• manually re-booking the loss in the wrong portfolio so that it would become less detectable;
• failing to include the loss in the requisite daily reports; and
• failing to report the incident and misleading her supervisor when questioned.

In failing to report the incident to management promptly, Yip failed to comply with the internal guidelines and procedures of BNP Paribas HK on the reporting and escalation of material operational incidents.

In many cases I've seen, error trade was no big deal, but concealment of it would make a big deal.

Taking Advantage of Those Who Trust You

"Don't fear the enemy that attacks you, but the fake friend that hugs you."

As announced on 23 Nov 2017, SFC banned Mr Danny Fung Kwong Shing, a former account executive of Fulbright Securities Limited, from re-entering the industry for life and fined him $542,071.

SFC's investigation found that between Jan 2013 and May 2014, Fung had:

• conducted 772 unauthorized transactions in the account of his friend-cum-client, X, at Fulbright Securities;
• fabricated telephone order recordings to mislead Fulbright Securities into believing that the orders for the transactions conducted in X's account were placed by X; and
• impersonated another friend-cum-client, Y, and placed orders in Y's account at Enhanced Securities Limited by telephone.

The investigation also revealed that at least 53 of the above-mentioned unauthorized transactions were conducted by Fung under a premeditated scheme to secure profits for Y, with the result that Y made profits from these transactions at X's expense by selling shares to X at prices higher than the purchase prices.

X suffered a substantial loss of around $2.6 million as a result of all the unauthorized transactions.

"Don't fear the enemy that attacks you, but the fake friend that hugs you."

Private Funds and Discretionary Accounts

On 31 Jul 2017, SFC issued the circular "Irregularities and Deficiencies in Managing
Private Funds and Discretionary Accounts" expressing its concerns about the management of some private funds and discretionary accounts. During SFC’s supervision of licensed corporations engaged in the asset management business, a number of private funds and discretionary accounts with concentrated, illiquid and interconnected investments were found to have irregular features.

Among the irregularities cited in the circular, discretionary account holders held sizeable concentrated stock positions in their accounts and asset managers acted solely at the direction of their clients without exercising investment discretion. Additionally, some cases were found to involve related-party acquisition or disposal of listed company shares by bought and sold notes.

SFC also identified instances where fund investors or discretionary account holders were substantial shareholders, directors or affiliates of the listed companies invested by the funds or the discretionary accounts. In one case, a director of an asset manager was also a director or CEO of listed companies in which funds under the management of the asset manager were invested.

The nature and commercial substance of the practices highlighted in the circular are questionable and may conceal shareholdings in listed companies. In addition, SFC warns that undue concentration of illiquid or interconnected stocks may have a material adverse effect on the ability to meet investors’ redemption requests.

SFC's findings have revealed a novel type of market misconduct facilitated by asset management firms. It appears that some firms licensed for RA9 are not actually conducting a business of asset management, but operating a fraudulent scheme.

Job Rotation

There could be a ton of reasons for terminating licensed staff, given that the reason is accurately reported to SFC.

The Eastern Magistrates' Court convicted QMIS Securities Limited (QMIS) and its former RO, Mr Huang Kuang Cheng, of making false or misleading representations when submitting licensing information to SFC.

On 3 Jan 2014, QMIS submitted to SFC a form concerning the cessation of a staff member's status as a SFC-licensed representative.  In the form, "job rotation" was cited as the reason for the staff member to cease to be a SFC-licensed representative.

The form was designed for licensees to fill in to notify SFC of changes in the information that they have given to SFC in their initial applications as specified in S.135 of the SFO and Parts 1 to 3 of Schedule 3 to the S&F (Licensing and Registration) (Information) Rules, i.e. statutory requirements.

Huang declared that all information provided in the form was complete, true and correct.  However, the Court found that QMIS terminated the staff member's licensed status after he admitted to Huang that he had misappropriated client money, and as such, the provision of "job rotation" in the form as the reason for cessation was misleading.

Obviously QMIS attempted to cover up the client money misappropriation case for avoiding SFC investigation by providing the false reason of cessation. This is definitely unwise.

問世間合規何物

(以下情節，絕對真人真事，睇完勿笑。)


話說今日J君放假，陪阿媽去某本地銀行嘅新界分行。因為佢阿媽話想授權J日後可操作佢戶口。一項唔算好routine但亦唔算好複雜嘅指示，竟然攪咗粒半鐘，累到J兩母子畀後排苦等嘅客戶頻頻問候。問題所在，係J嘅職業！


以下係嗰位Teller小姐(T)同J嘅部分對答：

T：先生，想問返你嘅職業。

J：頭先你都check到我有戶口响你地度，上個月先更新過資料，仲要問？

T：係呀，要再問多次架。(答咗等於冇答)

J：Ok，compliance。

T：Compliance...即係咩？係咪即係audit嗰啲？

J：No，係compliance。(堅持自己嘅專業！)

T：咁compliance中文即係咩？

J：合規。(寫埋畀佢) 其實貴行都有compliance部門架，你地個職業分類表冇理由冇架？

T：(面有難色) 我去後台請示下。


10分鐘後，T同一名看似高級啲(其實係老啲)嘅同事(S)返埋counter。

S：先生，請問你嘅職位係咩？

J：Head of Compliance。

S：咩話？

J：Head of Compliance。(慢讀一次)

S：咁即係文員定經理呀？

J：係Department Head呀。(頂你！)


再過10分鐘，T最終响張授權form(之前已經撕咗幾張)上填咗J嘅職位係Compliance Manager。J二話不說簽完即閃(再唔走恐防畀後面班野獸斬死)，完。


結論：終於明白點解曾經有人叫我地呢行做「compli能」，因為呢行嘅社會知名度，真係把能！