The Securities and Futures Commission (SFC) has reprimanded CIC Investor Services Limited (CIC) and fined it $4 million for its failures to comply with regulatory requirements in treating clients as professional investors and to keep adequate records of its investment advice to clients (Note 1).
An SFC investigation revealed that CIC failed:
- to evidence that the clients had met the requisite requirements under the Securities and Futures (Professional Investor) Rules (Note 2);
- to adequately assess the investment experience of its clients as required under the Code of Conduct (Notes 3 and 4); and
- to obtain signed declarations from clients who agreed to be treated as professional investors as required under the Code of Conduct (Note 5).
In addition, CIC failed to maintain adequate documentary records of its investment advice given to clients (Note 6).
In agreeing to resolve the case, CIC has agreed to engage an independent reviewer, to be agreed by the SFC, to review its internal controls in relation to identification and treatment of professional investors and the provision of investment advice. CIC has also agreed to implement all recommendations to be made by the reviewer.
In deciding the disciplinary sanction, the SFC took into account:
- the duration of CIC’s failures, i.e. between 2004 and 2010;
- CIC has a clean disciplinary record; and
- CIC co-operated in resolving these disciplinary proceedings.
Notes:
- CIC is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
- The SFO and in particular section 3 of the Securities and Futures (Professional Investor) Rules in force at the material time provide that, among various categories of professional investors, a professional investor who is an individual should, either alone or with any of his associates on a joint account, has a portfolio of not less than $8 million or its equivalent in any foreign currency, as evidenced by a certificate issued by an auditor or certified public accountant within the last 12 months or one or more custodian statements issued in the last 12 months.
- Paragraph 5.1 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) provides that a licensed corporation should take all reasonable steps to establish the investment experience of each of its clients.
- Paragraph 15.3 of the Code of Conduct provides that intermediaries have to know and assess the investment experience of the professional investors in terms of the investment products they have traded, the frequency and size of their trades, the years of experience in the relevant market, and their awareness of risks involved in the relevant market. One of the consequences of being treated as a professional investor is that certain provisions of the Code of Conduct designed to protect investors can be waived. One of the key provisions that intermediaries can waive when dealing with professional investors is the requirement under the Code of Conduct (paragraph 5.2) to ensure that, when recommending, giving advice or soliciting the sale of a financial product, the product is suitable for the customer.
- Paragraph 15.4 (b) of the Code of Conduct provides that, before treating a client as professional investor, intermediaries should obtain from the client a written and signed declaration acknowledging that a written explanation of the risks and consequences of being treated as a professional investor and the right to withdraw from being treated as such had been given and that the client agrees to be treated as professional investor.
- The Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC provide that a licensed corporation in its provision of investment advice should document the rationale of the advice or recommendations and provide the clients a copy of the advice.
- A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.