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$200,000 fine for RO who mishandled clients' money in Hong Kong

Chris Hamblin, Editor, London, 17 March 2016

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Hong Kong's Securities and Futures Commission has fined Unicorn Securities $3 million and its former responsible officer, Mr Chan Hoi Shu, $200,000 in relatiion to failures in handling clients’ money and securities.

Chan was primarily responsible for the failures of Unicorn Securities and was also suspended for a period of 15 months until 11 June 2017. The SFC found that between March 2011 and December 2013, Unicorn Securities mishandled its clients’ dividend entitlements of shares of HSBC Holdings plc by going against clients’ instructions in their choices between cash or scrip dividends (i.e. HSBC shares) when submitting their instructions to Hong Kong Securities Clearing Company Limited, and giving the clients’ dividends to others.

On seven occasions, Unicorn Securities chose and received scrip dividends for all clients, regardless of their various instructions. After allocating the dividends to clients who said that they wanted to receive scrip dividends, Unicorn Securities deposited the remaining scrip dividends into the account of Chan or the account of a client. Chan then sold these HSBC shares in the market and pay Unicorn Securities an amount equivalent to the clients’ cash dividend entitlements for making payments to the clients who chose cash dividends. Chan kept the profit arising from the difference between the amount he received from selling the HSBC shares and the amount he had to pay to the firm.

Unicorn Securities also chose and received cash dividends for all the clients on two occasions. For clients who opted for scrip dividends, Unicorn Securities gave the clients’ cash dividends to Chan, who then bought HSBC shares on the market to meet clients’ requests for scrip dividend, making a profit in the process.

The SFC also found that Unicorn Securities had connived in Chan’s transfer of clients' money into his personal account and withdrew securities from a client’s account without the necessary written order from the client.

Sections 5, 6 and 10 Securities and Futures (Client Securities) Rules and section 4 Securities and Futures (Client Money) Rules require an intermediary to ensure that client securities and client money should be segregated and dealt with in accordance with the clients’ instructions and cannot be transferred to officers or employees of the firm. This is what Unicorn Securities failed to do.

The SFC says that Unicorn Securities, led by Chan, had abused the trust that its clients placed in it. When the regulator began to discipline it, however, it co-operated well and Chan admitted to his misconduct also. It has hired an external consultant to review its compliance systems and controls and has set up an automated system to reduce the risk of fraud. There is no evidence that clients suffered any loss as a result of the malpractice.

It is the job of responsible officers in SFC-regulated companies to oversee regulated activities. According to one advertisement, a typical RO supervises and manages daily securities brokerage operations for local markets, including the account opening process, account maintenance and customer services; he advises top managers about strategic activities and daily operations in compliance with applicable regulations and laws and about credit and risk control management. He acts as the primary contact person with the SFC, the Hong Kong Exchange and other relevant regulators and he helps others in the company write and maintain documents about all operations, policies and procedures, including operational and risk control procedures. He also has to put the business development and marketing plan into operation.

Chan was a 'type 1' RO, who dealt in securities. Other types include advising in securities (type 4) and asset management (type 9).

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