SFC reprimanded and fined a brokerage firm for regulatory breaches and internal control failures

A brokerage firm (the “Firm”) has recently been reprimanded and fined $3.4 million by the Securities and Futures Commission (the “SFC“) for various regulatory breaches and internal control failures relating to segregation of client money and provision of statements of accounts to clients.

From May 2015 to August 2017, the Firm:-

(i). under-segregated client money amounting to HK$300 to HK$1.05 million by withdrawing client money held in its segregated client accounts to meet the settlement obligations of five clients when there were negative or insufficient account balances for each of the clients in the segregated client accounts to cover the settlement amounts, in violation of the Firm’s internal policies and the Securities and Futures (Client Money) Rules (the “Client Money Rules”);

(ii). delayed transferring client money from its house account to segregated client accounts, thus breaching section 4(4) of the Client Money Rules which requires client money to be paid into segregated client accounts within one business day of receipt;

(iii).  issued inaccurate statements of accounts to three clients, which the Firm explained was the result of the negligence or inadvertence of the officers who prepared those statements manually; and

(iv). failed to provide statements of accounts to several clients within the prescribed time limit under section 11(4)(b) of the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules (the “Contract Notes Rules”).

A failure to ensure that client money is protected adequately in accordance with the regulatory requirements is a serious matter. It can be seen from disciplinary actions, including the abovementioned case, relating to segregation of client money and provision of statements of accounts, that the SFC has made it a high priority to ensure that licensed corporations are complying with the Client Money Rules and the Contract Notes Rules. In this regard, it would be prudent for licensed corporations to perform regular reviews on the adequacy of controls to protect client money, identify any deficiencies and put in place measures to ensure full compliance.

7 August 2023
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