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Following is a question by the Hon Cheung Man-kwong and a written reply by the Secretary for Financial Services, Mr Rafael Hui, in the Legislative Council today (Wednesday):
Question :
According to the Securities and Futures Commission's ("SFC") 97/98 Annual Report, a total of 197 Investment Advisers and 51 Commodity Trading Advisers were found to have breached the Code of Conduct in the course of routine inspections carried out by SFC during the year. In this connection, will the Government inform this Council whether it knows:
(a) the breakdown of the cases by the provisions in the Code of Conduct;
(b) how the SFC has followed up these cases; and whether the offenders have been penalized; if so, the details of the penalties imposed; and
(c) the Ordinances under which the SFC can take disciplinary actions against the offenders?
Reply:
Madam President,
(a) The Code of Conduct for persons registered with the Securities and Futures Commission ("SFC") is a non-statutory guideline in accordance with which the SFC performs its function of ensuring that all registered persons are fit and proper in relation to the manner in which they conduct the business for which they are registered. The Code of Conduct highlights seven principles including honesty and fairness, diligence, capabilities, information about clients (Note 1), information for clients, conflict of interest and compliance. These principles have been developed and recognised by the International Organisation of Securities Commissions and are fundamental to the undertaking of a registered person's business.
In the 1997-98 financial year, a total of 197 Investment Advisers and 51 Commodity Trading Advisers were found to have breached the Code of Conduct. Breakdown of number of breaches is as follows :
Commodities
Investment Trading
Advisers Advisers
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Information about clients
(Note 1) 26 2
Inadequate information
provided to clients
relating to transactions
conducted for them 15 7
Agreement signed by clients
before providing advisory
services to clients 42 10
Lax management supervision
and weak internal control 61 15
Failure to comply with
staff dealing policy laid
down by the firm 38 8
Soft dollar policy (Note 2) 14 -
Others 1 9
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197 51
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(b) Follow-up actions in relation to breaches of Code of Conduct vary, depending on the nature of the breaches. If the suspected breaches compromise investor interests and/or market integrity, they will be pursued by the Enforcement Division or Licensing Department of the SFC. The Enforcement Division will carry out investigations, collect evidence to support prosecutions or instigate disciplinary proceedings under section 56 of the Securities Ordinance and section 33 of the SFC Ordinance in respect of misconduct by the relevant licensed intermediaries and advisers in the securities and futures markets.
Depending on circumstances of each case, disciplinary actions could include revocation/suspension of registration, reprimand and prosecutions for breaches of the various laws administered by the SFC. Alternatively, the Licensing Department may carry out an enquiry under section 56 of the Securities Ordinance and section 33 of the SFC Ordinance. (Please refer to item (c) below for further details.)
In the 1997-98 financial year, three cases of breaches in the Code of Conduct required further investigations. The remaining cases involved minor technical breaches where investor interests had not been prejudiced and "Letters of Deficiencies" were issued in respect of them. These letters require registrants to rectify the breaches and/or to improve their controls and systems as a matter of priority, and request a response within a specified timeframe in writing indicating proposed actions and a schedule of implementation for the remedial actions. Follow-up visits were also undertaken on a random sample basis to ensure proper implementation.
The approach adopted in relation to the majority of findings of rule breaches and/or non-compliance of regulatory codes and best practice standards has been remedial in nature to ensure that the intermediary population operates and is managed in accordance with the highest standards required to promote market integrity and to protect investors.
(c) Under section 56 of the Securities Ordinance (Cap. 333), SFC is empowered to conduct an inquiry to determine whether a registered person under the Ordinance, including investment adviser, has been guilty of misconduct or whether the person is fit and proper for the purpose of registration with SFC.
Furthermore, section 33 of the SFC Ordinance (Cap. 24) empowers the SFC to conduct investigations into the conduct of a person if it has reason to believe that that person may have committed a defalcation or other breach of trust, fraud or misfeasance in, inter alia, giving advice as regards the acquisition, disposal, purchase or sale or otherwise investing in any security or futures contracts.
The above two ordinances also provide for disciplinary actions to be administered by the SFC.
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Note 1: Information about clients : a registrant is required to take reasonable steps to establish its client identity, financial situation, investment experience and objectives.
Note 2: Soft dollar policy : "soft dollars" refer to goods or services such as research and advisory services and portfolio analysis offered. Under the SFC Code of Conduct, a registered person acting for a client in the exercise of investment discretion may receive such goods or services (i.e. soft dollars) from a broker only under certain prescribed circumstances for example, where the goods or services are of demonstrable benefit to the registered person's client or the client has consented in writing to the receipt of such goods and services.
End/Wednesday, June 2, 1999
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