Dealing with frontline conflicts of interest

Hong Kong’s SFC recently reminded licensees, at the request of the Independent Commission Against Corruption (ICAC), to take note of the ICAC’s Sample Anti-Bribery Code of Conduct: SFC circular dated 13 February 2015. This is a timely reminder for SFC licence holders to consider whether their anti-bribery policies, procedures and compliance are adequate.

More generally, licensees can take this opportunity to remind themselves where the conflicts of interest exist in their businesses and to ensure they are handling them properly. In this article we describe some conflict of interest situations which frontline personnel may face and highlight some of the issues raised.
 
The basic obligation, set out in paragraph 10.1 of the SFC’s Code of Conduct, is that a licensee is prohibited from handling a transaction without:

• disclosing any material interest or conflict to the client and
• taking all reasonable steps to ensure fair treatment of the client

Conflicts between licensees and clients:

• Broker selection – A licensed person places business with a broker with whom they have a personal relationship without complying with firm’s policy on broker selection.

  A firm’s broker selection policy would normally require the submission of a declaration of conflict of interest form. A sample form for this purpose is available in Annex 3 of the ICAC’s sample code.

• Unfilled orders – A licensed representative advises a client to purchase a listed stock at a certain price and aggregates the client’s order with an order for himself or his firm but the aggregated order cannot be filled. The representative then allocates the shares on a pro-rata basis between the client and himself.

  The client order should be given priority and filled completely before the licensed representative allocates any shares for his or the firm’s account.

Conflicts between employees and licensee:

• Lavish or frequent entertainment – Staff should not accept lavish or frequent entertainment from persons with whom the firm has business dealings or subordinates, which might be perceived to place him/her in a position of obligation.

  The firm’s entertainment policy should cover these situations and should be complied with.

• Extravagant gifts or advantages – A director or staff member accepts gifts or advantages, in return for his showing favour or disfavour to any persons, in connection with the conduct of the firm’s business.

  This may involve an offence under the Prevention of Bribery Ordinance and it may also be an offence to offer gifts or advantages for such purposes. Firms should adopt a gift policy and adopt procedures to monitor compliance.

• Misuse of official position – An employee misuses his official position in the firm for his own private (personal or financial) interest or those of his family members, relatives, close personal friends or business associates.

  Prohibited under paragraph 11 of the ICAC’s sample code.