The Securities and Futures Commission (SFC) has reprimanded and fined Swiss-Asia Asset Management (HK) Limited (Swiss-Asia) $3 million for internal control failings and regulatory breaches in relation to the monitoring of trading activities in discretionary accounts and record keeping (Notes 1 to 6).
The disciplinary action follows an SFC investigation into the internal controls of Swiss-Asia after a client’s complaint. The complaint centred on option trading by a former licensed representative of Swiss-Asia in the client’s discretionary account. The client claimed that some of the trades were much riskier than agreed and fell outside the scope of her asset management mandate agreement with Swiss-Asia between April 2015 and August 2016.
The SFC’s investigation found deficiencies in internal controls of Swiss-Asia, in that it failed to:
- properly monitor the trading activities in the client’s discretionary account for around 15 months;
- have procedures in place to ensure proper supervision of the operation of discretionary accounts; and
- maintain proper records of its compliance checks on discretionary accounts.
In deciding the sanction, the SFC took into account all relevant circumstances, including:
- the duration of Swiss-Asia’s failures;
- Swiss-Asia’s cooperation in resolving the SFC’s concerns; and
- Swiss-Asia’s otherwise clean disciplinary record.
- Swiss-Asia is currently licensed under the Securities and Futures Ordinance to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities.
- General Principle 2 (Diligence) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) requires a licensed person to act with due skill, care and diligence, in the best interests of its clients and the integrity of the market.
- Paragraph 4.3 (internal control, financial and operational resources) of the Code of Conduct requires a licensed person to 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.
- Paragraph 7.1(e) of the Code of Conduct requires a licensed person to implement internal control procedures to ensure proper supervision of the operation of discretionary accounts.
- Paragraph 6 of Part IV of the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC (Internal Control Guidelines) provides that management should establish and maintain effective record retention policies which ensure that all relevant legal and regulatory requirements are complied with, and which enable the firm, its auditors, and other interested parties such as the SFC to carry out routine and ad hoc comprehensive reviews or investigations.
- Paragraph 2 of Part VII of the Internal Control Guidelines provides, among others, that where the firm exercises discretionary authority over a client’s account, procedures should be used to ensure that only transactions which are consistent with the investment strategies and objectives of the relevant client, are effected on the client’s behalf.