Recent Disciplinary Actions in Hong Kong, including the recent suspension of Sandra Cheung, demonstrate the increasing emphasis the Securities and Futures Commission (SFC) is placing on employee dealing compliance.
While outright dishonesty and willful regulatory violations cannot be fully prevented, it is a firm’s responsibility to implement suitable controls and processes to mitigate the risks of employee misconduct. With the appropriate compliance culture in place, one bad apple needs not spoil the bunch.
SFC Regulatory Requirements
The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, General Principles (GP) 12.2(b) Employee Dealings states the following:
In the event that employees of a licensed or registered person are permitted to deal or trade for their own accounts in securities, futures contracts or leveraged foreign exchange contracts:
(i) the written policy should specify the conditions on which employees may deal for their own accounts
(ii) employees should be required to identify all related accounts and report them to senior management
(iii) employees should generally be required to deal through the licensed or registered person or its affiliates
(iv) if the licensed or registered person provides services in securities or futures contracts listed or traded on a recognized stock market or a recognized futures market June 2012 28 or in derivatives, including over-the-counter derivatives written over such securities or futures contracts, and its employees are permitted to deal through another dealer, in those securities or futures contracts, the licensed or registered person and employee should arrange for duplicate trade confirmations and statements of account to be provided to senior management of the licensed or registered person
(v) any transactions for employees’ accounts and related accounts should be separately recorded and clearly identified in the records of the licensed or registered person
(vi) transactions of employees’ accounts and related accounts should be reported to and actively monitored by senior management of the licensed or registered person who should not have any beneficial or other interest in the transactions and who should maintain procedures to detect irregularities and ensure that the handling by the licensed or registered person of these transactions or orders is not prejudicial to the interests of the licensed or registered person’s other clients
Recent Disciplinary Action
On October 28, 2020, the SFC issued the suspension of Sandra Cheung Wing Yi, a former licensed representative of Mason Securities Limited (MSL). The SFC suspended Cheung’s license for 12 months due to misconduct and violations of GP 12.2.
Cheung failed to obtain approval for an external securities trading account through which she conducted 66 personal trades. She also provided false declarations to MSL on multiple occasions stating that she did not have any personal trading accounts with other licensed corporations.
Additionally, Cheung breached MSL’s internal control policies and prevented MSL from actively monitoring her trading activities to protect market integrity. Because Cheung’s conduct was willful and dishonest, her behavior called into question her fitness and properness to be a licensed person.
What Went Wrong
These violations are examples of overt employee misconduct and dishonesty. When asked to attest to and certify her personal holdings, Ms. Cheung provided MSL with inaccurate and misleading information, causing a breach in internal policies as well as a violation of regulatory requirements.
What Went Right
The SFC did not take disciplinary actions against MSL. The firm established a written policy for employee dealing compliance that requires employees to identify all personal dealings through a certification. Because MSL monitored all of Cheung’s known accounts, the firm was able to document and evidence regulatory compliance.
Tips for Maintaining Firm-Level Employee Dealing Compliance
It is important for organizations to manage compliance risk with a top-down approach. More specifically:
- Each employee should complete a comprehensive certification process upon onboarding and periodically, going forward.
- Management should have the ability to track and monitor brokerage statements for employee dealings to compare against well-documented lists of restricted trades.
- Firms must maintain robust record-keeping processes, comprising of all approval and denials of employee dealings and other requests that may have specific regulatory restrictions.
- Policies and procedures, including a Code of Conduct should be easily accessible to staff and to regulatory agencies and auditors upon request.
Is your organization concerned about employee dealings compliance? Regulatory Technology can simplify and streamline risk management workflows.
ComplySci offers the following features to automate and simplify compliance management:
- A Statement Tracking Solution to track the collection and entry of digital brokerage statements
- A Data Entry Service to enter statement data on behalf of our clients
- Automated Certifications that pull in system data so employees can certify to all account information on record
- Restricted List Management and rules processing for streamlined approval or denial of trade requests
- Ability to Monitor Other Employee Requests (Gifts and Entertainment, Initial Public Offerings, Private Placements, marketing materials, etc.)
- A centralized Document Repository for immediate access to firm policies and code of ethics