Hong Kong Securities And Futures Commission Reprimands And Fines RHB Securities Hong Kong Limited $6.4 Million

The Securities and Futures Commission (SFC) has 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 (Note 1).

The disciplinary action followed an SFC investigation which 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 (Note 2);
• adequately disclose its investment banking relationship with the listed company covered in a research report (Note 3); and
• effectively monitor the trading activities of its research analysts (Note 4).

The SFC further found that RHBSHK did not have adequate controls to supervise its account executives.  In particular, the frequency and extent of its sample checking procedures for ensuring that client orders received by account executives 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 (Notes 5 & 6).

In deciding on the disciplinary sanctions, the SFC took into account all relevant circumstances, including RHBSHK's:

• failures were not detected until an SFC's inspection;
• steps to remediate its internal control deficiencies; and
• cooperation with the SFC to resolve the disciplinary proceedings.

Notes:

1. RHBSHK, formerly known as RHB OSK Securities Hong Kong Limited, is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
2. Paragraph 16.7 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) requires a licensed corporation that issues research reports to establish, maintain and enforce a set of written policies and control procedures to eliminate, avoid or manage actual and potential analyst conflicts of interest.
3. Paragraph 16.5(d) of the Code of Conduct provides that a firm that has an investment banking relationship with the issuer or the new listing applicant should disclose that fact in the research report.  Any compensation or mandate for investment banking services received within the preceding 12 months would constitute an investment banking relationship.  Paragraphs 16.3(f) and 16.10 of the Code of Conduct require such disclosure to be complete, timely, clear, concise, specific and prominent.
4. Paragraph 16.4(b) of the Code of Conduct provides an analyst should not deal in or trade any securities in respect of an issuer that the analyst reviews: (i) in a manner contrary to his outstanding recommendation; or (ii) within 30 days prior to and 3 business days after the issue of investment research on the issuer.
5. Paragraph 4.2 of the Code of Conduct provides that a licensed corporation should ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.
6. Paragraph 7.1 of the Code of Conduct provides that a licensed person should not effect a transaction for a client unless before the transaction is effected: (i) the client has specifically authorized the transaction; or (ii) the client has authorized in writing the licensed person or any person employed by the licensed person (who must in turn be a licensed person) to effect transactions for the client without the client's specific authorization.