The Securities and Futures Commission (SFC) has issued a public reprimand to President Securities (Hong Kong) Limited (President Securities) and fined it $2 million for failing to act in the best interests of its clients when accepting subscriptions for a number of Lehman Brothers related structured products by 21 Taiwanese clients in 2008 (Note 1).
An SFC investigation found that the selling process of the products gave rise to a number of regulatory concerns:
- The Taiwanese clients were referred to President Securities by its parent company in Taiwan, President Securities Corporation. They opened accounts with President Securities before they purchased the products, but the account opening process was handled by President Securities Corporation.
- President Securities staff signed as witnesses on the Taiwanese clients’ account opening documents when, in fact, they had never met the clients.
- No one from President Securities contacted the Taiwanese clients to verify their identities, explain the account opening documents to them, establish their financial situation, investment experience, and investment objectives, and make risk disclosure to them.
- President Securities did not sufficiently ensure that the Taiwanese clients understood the products and accepted the risks associated with them before accepting their subscriptions for the products. It relied on standard risk disclaimers signed by the Taiwanese clients even though no explanation of the disclaimers had been given to the clients.
- A number of the products prescribed minimum subscription requirements to restrict the categories of investors eligible to invest in them. Since some of the Taiwanese clients’ subscriptions amounts did not meet the minimum subscription requirements, President Securities pooled their orders together so as to meet the minimum subscription requirements. However, President Securities did not inform such clients that their orders would be pooled together.
In view of these concerns, President Securities has failed to comply with the regulatory standards in relation to opening client accounts for the Taiwanese clients. Its unquestioning acceptance of the Taiwanese clients’ subscriptions for the products and its pooling of client orders that did not meet the minimum subscription requirements reflect that it has failed to act in the best interests of its clients. The SFC considers that President Securities’ breaches are prejudicial to the interest of the investing public.
“Once again, we have had to take action against an intermediary over poor internal controls and practice causing loss and damage to customers. Intermediaries must demonstrate they have learned the lessons of the past four years to avoid harsher measures being imposed against them,” the SFC’s Executive Director of Enforcement, Mr Mark Steward said.
In deciding the disciplinary sanction, the SFC took into account all relevant circumstances of the case which included:
- the SFC had previously issued a warning letter to President Securities about certain aspects of its account opening procedures, in particular its failure to obtain all necessary information about clients before approving the opening of their accounts;
- the manner in which President Securities accepted the Taiwanese clients’ subscriptions for the products and pooled together clients orders that did not otherwise meet the minimum subscription requirements reflect a fundamental disregard for the clients’ best interests; and
- President Securities agreed to engage an independent audit firm to review its internal control system and account opening procedures.
Notes:
- President Securities is licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
- Please refer to the Statement of Disciplinary Action for further details of President Securities’ misconduct and the disciplinary action taken against it.