The Securities and Futures Commission (SFC) has reprimanded The Bank of East Asia, Limited (BEA) and fined it $4.2 million for regulatory breaches related to its failure to segregate client securities (Note 1).
Following a referral from the HKMA and a self-report by BEA, the SFC conducted an investigation which found that BEA had failed to segregate its client securities from proprietary securities in accounts maintained at two external custodians, the Central Clearing and Settlement System and Sumitomo Mitsui Banking Corporation, Tokyo, respectively, from 1 April 2003 to 15 December 2016 (Notes 2 to 4).
Although BEA had identified the client securities in its internal electronic accounting records, it did not comply with the regulatory requirements in that licensed corporations are required to safe-keep client securities in a segregated account designated as a trust account or client account.
In deciding the sanction, the SFC took into account all relevant circumstances, including:
- there is no evidence of client loss as a result of BEA’s regulatory breaches;
- BEA has segregated its client securities from proprietary securities following discovery of the regulatory breaches;
- BEA’s remedial actions to enhance its internal systems and controls to avoid recurrence of similar breaches; and
- BEA’s co-operation in resolving the SFC’s concerns and acceptance of the findings and disciplinary action of the SFC.
- BEA is registered under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities. It is also an authorized institution under the supervision of the Hong Kong Monetary Authority (HKMA).
- Section 5(1) of the Securities and Futures (Client Securities) Rules provides that an intermediary or an associated entity of an intermediary which receives any client securities shall ensure that client securities are deposited in safe custody in a segregated account which is designated as a trust account or client account established or maintained in Hong Kong by the intermediary or associated entity for the purpose of holding client securities with an authorized financial institution, an approved custodian or other intermediaries licensed for dealing in securities, as soon as reasonably practicable.
- General Principle 8 (Client assets) and paragraph 11.1(a) (Handling of client assets) of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) requires a licensed corporation or registered institution to ensure that client assets are promptly and properly accounted for and adequately safeguarded.
- General Principle 7 (Compliance) and paragraph 12.1 (Compliance: in general) of the Code of Conduct requires a licensed corporation or registered institution to comply with, and implement and maintain measures appropriate to ensuring compliance with, relevant regulatory requirements.