Lesson learned from a recent disciplinary action by SFC – Don’t go too far in facilitating a share offer

Breaches revealed by SFC’s investigation

• ICBCI Securities failed to conduct know-your-client (KYC) checks of placees– Some of the placees (Placees) were friends and families introduced by Powerlong. ICBCI Securities considered that ICBCI Capital should have been satisfied with the background of such Placees before referring them to ICBCI Securities, while ICBCI Capital considered that it was ICBCI Securities’ responsibility to fulfil the KYC requirements. Further, none of the responsible account executives of ICBCI Securities were aware of either the regulatory requirements or the requirements set out in ICBCI’s compliance manual requiring them to obtain clients information about their financial situation, investment experience and investment objectives. As a result, no KYC checks of the Placees were conducted.
• ICBCI Securities failed to perform ongoing scrutiny of transactions in the Placees’ accounts – Upon the request of Powerlong, ICBCI Capital informed ICBCI Securities that extensive margin financing would have to be extended to four Placees so that subscriptions under their accounts could be increased to prevent the listing from falling through. Consequently, ICBCI Securities extended margin financing at a ratio of as high as 50% to those four Placees, despite it was apparent that such Placees’ subscriptions far exceeded their declared net worth.
• ICBCI Capital and ICBCI Securities turned a blind eye to the lack of independence of the Placees and extended high level of margin financing to them – There were “red-flags” which tend to show that the Placees relied upon Powerlong for financial assistance in their subscriptions, for example, (a) the Placees were referred by Powerlong to ICBCI Capital, (b) Powerlong had been actively involved in updating ICBCI Capital on the size of the Placees’ orders, (c) it was apparent that some of the Placees lacked the financial capability to settle their allocations of offer shares; and (d) various telephone recordings between personnel of ICBCI Securities and the Placees / persons contacting personnel of ICBCI Securities on behalf of the Placees indicated, that some of the Placees might be financially dependent on Powerlong and/or its management / controlling shareholders. Nevertheless, none of ICBCI Securities’ staff questioned the source of funds of the Placees and high levels of margin financing, which were not generally available to clients in international primary placings, were extended to them. Worst still, in order to circumvent the internal policies, ICBCI Securities’ personnel at times advised the Placees to make payment by way of cash or cashier’s orders so that the identity of the third party depositor could not be traced. Further, after the sudden increase in the subscriptions of four Placees, a responsible officer of ICBCI Capital suspected that there were issues of independence of some of the Placees and escalated the same to his supervisor, but no follow-up action was taken to ascertain the independence of the Placees.
• ICBCI Capital and ICBCI Securities failed to use reasonable efforts to ensure that submissions to the Stock Exchange were true, accurate and not misleading – At the time of filing of “Marketing Statement” (Form D), ICBCI Securities had not received independence confirmations from all the Placees. In relation to “Sponsor’s Declaration” (Form E), ICBCI Capital did not take any steps to ascertain whether the public float requirement under Listing Rule 8.08 had indeed been complied with.

Sanctions

Given the above breaches, the SFC was of the view that ICBCI was guilty of misconduct and/or not a fit and proper person to remain licensed.

The SFC reprimanded and fined ICBCI Capital and ICBCI Securities HK$12.5 million respectively, having taken I nto account ICBCI’s otherwise clean record and cooperation with the SFC, as well as ICBCI’s commitment to engage a firm of independent reviewers to undertake a comprehensive review of its systems and controls and to implement the recommendations made by the reviewer to the satisfaction of the SFC.

Lesson to be learned

This disciplinary action sends a clear message to investment banks involved in IPOs that while they are performing their functions in making an IPO a success, they should always bear in mind that they also owe an obligation to help ensure the integrity of the market, and failure to do so can attract severe consequences.

The full text of the Statement of Disciplinary Action can be accessed via the link below: http://www.sfc.hk/web/EN/files/ER/PDF/14PR58_s.pdf