In its latest regulatory sanction for misconduct by a licensed intermediary, the SFC heavily admonished the “pervasive dishonest behaviour” of CGMAL’s senior management and traders and described it as having “a culture that encouraged chasing revenue at the expense of basic standards of honesty”.4 The SFC pointed to serious lapses and deficiencies in CGMAL’s internal controls and compliance function, which fell far short of expectations. Consistent with the SFC’s focus on senior management’s accountability, the SFC noted that the breakdown in CGMAL’s internal controls exposed serious supervision failures on the part of CGMAL’s senior management.5
The SFC found that CGMAL failed to comply with the circular dated 14 February 2018 on client facilitation (2018 Circular).6 The 2018 Circular was issued to remind intermediaries that when they assume a risk-taking principal position in client facilitation activities, the nature of the trades should be disclosed to clients and clients’ prior consent should be obtained so that they are fully aware of the inherent conflicts of interest. The 2018 Circular also states that IOIs should contain sufficient details and should only be disseminated when they are based on a genuine client or proprietary intent to trade, and controls and monitoring with sufficient management oversight should be implemented to ensure they are accurate and updated in a timely manner.
In particular, in the course of the SFC’s investigation and CGMAL’s own internal investigation, which was triggered by a routine SFC on-site inspection, the following was uncovered:
The use of mislabelled IOIs
The SFC found that from 2008 (or before) to 2018, CGMAL’s Equities Sales Trading Desk adopted a practice of issuing IOIs labelled as ‘Natural’, ‘In Touch With’ and/or ‘P:1’ to clients, notwithstanding there was no actual client interest underlying such IOIs.7 The purpose of doing so was to provoke client enquiries under a purported belief that there were available opposite trades of active stocks on CGMAL’s trading platform. While the clients were under a misapprehension that it would be an agency trade, their orders were in fact routed to CGMAL’s Facilitation Desk when no counter-trade could be found on an agency basis.8 The resulting trades were therefore not of a riskless nature as expected for agency trades. It also exposed clients to possible conflicts of interest since CGMAL was assuming a risk-taking principal position rather than an agency position.
The SFC particularly noted:
- The contemporaneous correspondence showed that the heads and members of the trading desks, and CGMAL’s senior management were aware of the IOIs being mislabelled, and they were internally referred to as “fake flows” and “the fakes”.
- Various clients had raised complaints about the quality and accuracy of the IOIs. While such complaints were recorded and brought to the attention of senior management and the trading desks, no steps were taken to investigate or cease the practice. This suggests that the dissemination of the mislabelled IOIs was intentional.
- The mislabelling of IOIs was contrary to the relevant industry guidelines (which CGMAL asserted compliance with) and inconsistent with the general principles of being honest with clients, acting in the best interests of clients, disclosing conflicts of interest and taking all reasonable steps to ensure fair treatment of clients if conflicts of interest cannot be avoided, as required under the SFC’s Code of Conduct.9