The Securities and Futures Commission (SFC) has reprimanded and fined Deutsche Bank Aktiengesellschaft (DB) $23.8 million for various regulatory breaches, including overcharging clients on management fees, incorrect assignment of product risk ratings, and failure to disclose investment banking relationships in certain research reports (Note 1).
The SFC’s disciplinary action stemmed from investigations triggered by self-reports made by DB between December 2020 and December 2023.
Overcharging clients on various fees
The SFC’s investigation found that during various periods between November 2015 and November 2023, DB:
- failed to apply the discounted management fee rates agreed with clients to 39 Discretionary Portfolio Management accounts due to shortcomings in DB’s processes and failures in their implementation, resulting in these accounts being overcharged management fees;
- incorrectly valued 392 floating rate debt instruments by applying “fixed” interest rates which in turn affected the portfolio valuations of clients’ accounts, resulting in 92 clients being overcharged custodian and management fees since the fees were calculated on a portfolio valuation basis; and
- overstated or understated the valuations of 16 private equity funds and three real estate funds in monthly statements sent to 233 clients due to a combination of an external vendor’s oversight and DB’s lack of appropriate controls to ensure that prices of the funds were duly updated by an external vendor, causing 32 clients to be overcharged custodian fees which were calculated based on the valuation of the relevant funds.
In total, DB overcharged client fees of approximately $39 million as a result of these issues.
Non-disclosure of investment banking relationships in research reports
The SFC also found that DB failed to disclose its investment banking relationships with various Hong Kong-listed companies in 261 single stock company reports and 1,590 industry reports issued between September 2014 and September 2021, due to the failure of its research disclosure system to take into account certain mandates for investment banking services.
Incorrect assignment of product risk ratings
The SFC further found that DB incorrectly assigned a lower product risk rating to 40 exchange-traded funds (ETFs) between August 2012 and December 2020, impacting 93 clients and 265 transactions. After applying the correct product risk rating to these ETFs, risk mismatches were identified in 10 transactions where the product risk level was higher than the clients’ risk tolerance level.
In light of the above-mentioned findings, the SFC considers that DB has failed to:
- act with due skill, care and diligence, in the best interests of its clients and the integrity of the market;
- ensure that any representations made and information provided to its clients are accurate and not misleading;
- ensure compliance with the disclosure requirement in its research reports; and
- comply with all relevant regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients (Note 2).
In deciding the sanctions, the SFC took into account all relevant circumstances, including:
- DB has conducted reviews to identify the root causes and extent of the breaches;
- DB has remediated the issues and strengthened its internal controls and systems upon identifying the breaches;
- DB has refunded the overcharged fees to affected clients;
- DB’s breaches were inadvertent and did not involve any deliberate or intentional misconduct; and
- DB’s cooperation with the SFC in resolving the SFC’s concerns and its acceptance of the SFC’s findings and disciplinary action.
Notes:
- DB is registered under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
- Details of the relevant regulatory requirements are set out in the Statement of Disciplinary Action.
A copy of the Statement of Disciplinary Action is available on the SFC website
