Hong Kong’s securities regulator has reprimanded Sun On Tat Securities and fined it HK$1.6 million ($206,000) for internal control failings.
The Securities and Futures Commission (SFC) has also reprimanded Kwong Suk Yee, a responsible officer of Sun On Tat, and fined her HK$200,000 for managerial and supervisory failures.
The regulator began an investigation after an inspection of Sun On Tat in 2010 that identified a number of internal control deficiencies, some of which were similar to deficiencies turned up in an inspection of the firm in 2006.
The SFC’s investigation revealed serious failings including that:
- Sun On Tat used one client’s securities to settle another client’s transactions;
- the firm failed to promptly and properly deposit client securities that it received in appropriate segregated accounts;
- there was inadequate segregation of front- and back-office duties at Sun On Tat;
- Sun On Tat failed to promptly provide daily statements of accounts and contract notes to clients;
- Sun On Tat did not impose restrictions on access to trading documents; and
- management supervision of Sun On Tat’s business activities was not adequate.
“Inadequate management supervision, coupled with deficiencies in other areas of internal controls, makes Sun On Tat’s operations susceptible to abuse and malpractice to the prejudice of the firm’s and clients’ interests,” says the SFC.
“Particularly, Sun On Tat’s practice of allowing securities belonging to one client to be used for settling transactions of another client is directly contrary to the fundamental obligation of licensed corporations to keep client assets in safe custody. Such practice cannot be tolerated even if clients are made whole again.
The regulator found that Sun On Tat’s failures are attributable to the neglect of Sun On Tat’s senior management members and responsible officers. Kwong was responsible for overseeing all of Sun On Tat’s front- and back-office operations and its compliance function.
In deciding the sanctions, the SFC took into account all the circumstances, including:
- Sun On Tat had failed to take steps to rectify some of the internal control deficiencies identified during the 2006 inspection until similar deficiencies surfaced again in 2010;
- the firm has, since the 2010 inspection, engaged an independent accountant to review its internal controls, and the result of the review suggests that Sun On Tat has largely remedied its internal control deficiencies;
- some of the malpractices that existed at Sun On Tat are very serious and jeopardised its clients’ interests;
- Kwong’s inadequate management and supervision engendered a weak compliance culture at Sun On Tat, as illustrated by the fact that some of its internal control deficiencies had lasted at least four years;
- Sun On Tat and Kwong co-operated with the SFC in its investigation; and
- Sun On Tat has no disciplinary history with the SFC.
Kwong was a member of Sun On Tat’s senior management and one of its three responsible officers at the material time.
Sun On Tat is licensed under the Securities and Futures Ordinance holds a type 1 licence enabling it deal in securities, and Kwong is licensed to carry on type 1 activities.