Disciplinary action highlights the need for compliance with sales and suitability regulations and licensing conditions

The SFC’s recent public reprimand and fine of HK$6.3 million against a licensed corporation (the Company) brings various provisions of the Code of Conduct and Internal Control Guidelines to the forefront. It also highlights the need for licensed corporations to fully comply with any licensing conditions. Outlined in this article are the key facts of this case and a summary of what licensed intermediaries can learn from this disciplinary action.

Factual background leading up to the disciplinary action

The Company, which holds type 1, 4 and 9 licences, was subject to the following licensing conditions:

• shall not hold client assets; and
• for Type 1 regulated activity, shall not conduct business other than: (i) communicating offers to effect dealings in securities to a corporation that is licensed by or registered with the SFC for Type 1 regulated activity, in the names of the persons from whom those offers are received; and (ii) introducing persons to a corporation that is licensed by or registered with the SFC for Type 1 regulated activity in order that they may effect dealings in securities or make offers to deal in securities.

The SFC found that the Company had breached its licensing conditions by:

• providing discretionary account management services to eight clients in seven client accounts in return for an annual management fee;
• procuring 36 clients directly to subscribe for six unlisted bonds directly from four listed companies, totalling about HK$108 million.

Following the SFC’s investigation, a number of other significant findings were made relating to product due diligence, suitability of recommendations, documentation of investment advice, and disclosure of monetary benefits. As a result, the fitness and properness of the Company to carry on regulated activities were called into question.

Key reminders to licensed intermediaries

The various breaches committed by the Company should be a stark reminder to other licensed intermediaries that, in addition to adherence to licensing conditions, they need to have systems and controls in place ensuring:

• adequate product due diligence is conducted before recommending products to clients;
• a client’s risk tolerance is assessed and recommendations and solicitations are suitable and reasonable;
• records of investment advice and recommendations are maintained;
• clients are provided with written investment advice and recommendations; and
• a disclosure is made to a client when commission is received.