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The Securities and Futures Commission (SFC) has reprimanded Sun On Tat Securities Company Limited (Sun On Tat) and fined it $1,600,000 for internal control failings in a number of aspects of its operations (Note 1).
The SFC has also reprimanded Ms Kwong Suk Yee, a responsible officer of Sun On Tat, and fined her $200,000 for managerial and supervisory failures (Note 2).
An SFC investigation into Sun On Tat’s internal controls was commenced following an inspection at Sun On Tat in 2010, which identified a number of internal control deficiencies, some of which were similar to internal control deficiencies identified during an earlier inspection at Sun On Tat in 2006.
The SFC’s investigation revealed that:
- Sun On Tat used one client’s securities to settle another client’s transactions;
- Sun On Tat failed to promptly and properly deposit client securities that it received in appropriate segregated accounts;
- there was inadequate segregation of front office and back office duties at Sun On Tat;
- Sun On Tat failed to promptly provide daily statements of accounts and contract notes to clients;
- Sun On Tat did not impose restrictions on access to trading documents; and
- management supervision of Sun On Tat’s business activities was not adequate.
Sun On Tat’s internal control failings are serious. Inadequate management supervision, coupled with deficiencies in other areas of internal controls, makes Sun On Tat’s operations susceptible to abuse and malpractice to the prejudice of the firm’s and clients’ interests without the transgressions being noticed by management. Particularly, Sun On Tat’s practice of allowing securities belonging to one client to be used for settling transactions of another client is directly contrary to the fundamental obligation of licensed corporations to keep client assets in safe custody. Such practice cannot be tolerated even if clients are made whole again.
The SFC found that Sun On Tat’s failures are attributable to the neglect of Sun On Tat’s senior management members and responsible officers. In particular, Kwong was responsible for overseeing all of Sun On Tat’s front and back office operations and its compliance function (Note 3).
In deciding the sanctions, the SFC took into account all the circumstances including:
- Sun On Tat had failed to take steps to rectify some of the internal control deficiencies identified during the SFC’s 2006 inspection until similar deficiencies surfaced again at the SFC’s 2010 inspection;
- Sun On Tat has, since the SFC’s 2010 inspection, engaged an independent accountant to review its internal controls, and the result of the review suggests that Sun On Tat has largely remedied its internal control deficiencies;
- some of the malpractices that existed at Sun On Tat are very serious and jeopardised its clients’ interests;
- Kwong’s inadequate management and supervision engendered a weak compliance culture at Sun On Tat, as exampled by the fact that some of its internal control deficiencies had lasted at least four years;
- Sun On Tat and Kwong co-operated with the SFC in its investigation; and
- Sun On Tat has no disciplinary history with the SFC.
End
Notes:
- Sun On Tat is licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) regulated activity.
- Kwong is licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity. Kwong is a responsible officer of Sun On Tat.
- Kwong was a member of Sun On Tat’s senior management and one of its three responsible officers at the material time. In August 2010, one of the responsible officers left Sun On Tat. In May 2011, another responsible officer passed away.
- A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.
