News & Insights

SFC compliance and licensing hints: price tag for system and control failure and failure to report in a timely manner

On 31 May 2016, the SFC reprimanded and fined a licensed company HK$1.7 million for failure to have effective control procedures in place to detect and prevent short selling, and another HK$1 million for failure to report system failures to the SFC in a timely manner.

The enforcement action stemmed from complaints alleging staff and clients of the licensed company had engaged in uncovered short selling activities and the trading system (developed by the licensed company) used by them could not detect, prevent or reject short sales. The control measures used / implemented by the licensed company did not detect short sales effectively, and did not deter / prevent staff from continuing to engage in short selling. The licensed company did not report to the SFC when it became aware of defects in its trading systems: it only provided information regarding the errors in response to SFC enquiries.

The investigation occurred before Paragraph 18 and Schedule 7 of the Code of Conduct on electronic trading came into effect under which licensed companies must effectively manage and adequately supervise the design, development, deployment and operation of their electronic trading systems. The SFC has issued circulars to draw attention to the requirement as mentioned in “Tips for regulatory inspections” featured in our last newsletter.

The reporting requirement in Paragraph 12.5 of the Code of Conduct is not limited to notifying the SFC of any material failure, error or defect in the operation or functioning of trading systems or equipment: licensed companies also need to notify the SFC immediately of any actual or suspected material breach, infringement or non-compliance by it or its staff of any laws, regulations or codes administered by the SFC or of other regulatory authorities. It also extends to any suspected material breach of the market misconduct provisions (in the SFO) by clients.

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