Hong Kong’s Securities And Futures Commission Reprimands And Fines Lee’s Securities Company Limited $520,000 For Internal Control Failings

The Securities and Futures Commission (SFC) has reprimanded and fined Lee’s Securities Company Limited (Lee’s Securities) $520,000 for internal control failings relating to segregation of duties and handling of client securities (Note 1).    

The disciplinary action follows an SFC investigation into Lee’s Securities’ internal controls after an SFC inspection of the firm in 2015. 

The investigation found that Lee’s Securities:

• failed to segregate key duties of its front office and back office, which had first been identified by the SFC during an inspection in 2010, and allowed account executives who handled client orders to perform back office duties (Notes 2 to 7); and
• failed to obtain clients’ written instruction before carrying out their instructions to transfer their securities to external brokerage accounts, and to withdraw their physical scrips from the Central Clearing and Settlement System (Notes 5 to 9).

In deciding the sanction, the SFC took into account all relevant circumstances of the case, including:

• Lee’s Securities’ failure to obtain clients’ prior written instructions for dealings in their accounts lasted around 10 years from 2004 to 2015;
• Lee’s Securities’ continuing failure to take remedial measures to rectify the inadequate segregation of its front office and back office functions which had first been identified by the SFC’s inspection in 2010;
• Lee’s Securities’ co-operation in engaging an independent external accountant to conduct a client circularisation to confirm their stock and cash balances;
• there is no evidence of clients having suffered any losses;
• Lee’s Securities’ co-operation with the SFC in resolving the disciplinary proceedings;  and
• Lee’s Securities has no prior disciplinary history with the SFC.

Notes:

1. Lee’s Securities is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) regulated activity.
2. During an SFC inspection in 2010, the SFC had advised Lee’s Securities that its segregation of front office and back office functions was inadequate.  However, during the 2015 inspection, the SFC found that Lee’s Securities continued to allow account executives to verify trade details in clients’ daily statements before dispatching to clients.
3. Part II of the Management, Supervision and Internal Controls Guidelines for Persons Licensed by or Registered with the SFC provides that key duties and functions shall be appropriately segregated.  Specifically, paragraph 2 provides that operational functions, including sales and settlement, should be effectively segregated to minimise the potential for conflicts, errors or abuses which may expose the firm or its clients to inappropriate risks.
4. General Principle 2 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) provides that a licensed corporation should act with due skill, care and diligence, in the best interests of its clients and the integrity of the market in conducting its business activities.
5. General Principle 7 of the Code of Conduct provides that a licensed person should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of its clients and the integrity of the market.
6. Paragraph 12.1 of the Code of Conduct provides that a licensed corporation should comply with, and implement and maintain measures appropriate to ensuring compliance with the applicable regulatory requirements.
7. Paragraph 4.3 of the Code of Conduct provides that a licensed corporation should have internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients and other licensed or registered persons from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.
8. Section 6(1)(b) of the Securities and Futures (Client Securities) Rules (CSR) provides that a licensed corporation should only withdraw client securities in accordance with the clients’ written direction from designated segregated accounts in Hong Kong or registered in the name of the client on whose behalf the client securities have been received.
9. The “Suggested Control Techniques and Procedures for Enhancing a Firm’s Ability to Comply with the CSR and the Securities and Futures (Client Money) Rules” issued by the SFC in April 2003 provides that a licensed corporation should ask its clients to give written instructions in all their dealings with the licensed corporation.  Instructions written on paper should bear the client’s signature.  A licensed corporation should also require clients to give written instructions for any collection of their physical scrips and for clients to sign an acknowledgement of receipt upon collection. 

A copy of the Statement of Disciplinary Action is available on the SFC website