SFC malpractice probes rise 24pc amid concerns about slackness at brokerages

PUBLISHED : Thursday, 17 May, 2001, 12:00am
UPDATED : Thursday, 17 May, 2001, 12:00am

In a crackdown on market misconduct, the number of brokerages and investors investigated for malpractice by the Securities and Futures Commission has jumped by nearly a quarter.

And the market watchdog expressed concern yesterday at the weakness of internal controls in many brokerages.

The commission completed 352 investigations in the year to the end of March, compared with 283 for the previous 12 months, a rise of more than 24 per cent, according to its annual report.

It also took more disciplinary actions - 127, or an increase of 22 per cent.

Legislators welcomed the figures, saying the SFC should take a more active role in investigating malpractice to help enhance investor protection.

But they also called for the commission to relax the secrecy surrounding its investigations, to reassure the public of the proper exercise of its power.

SFC chairman Andrew Sheng said its investigations were focusing increasingly on the internal control systems of brokerage houses.

Under the SFC code of conduct, all brokers have to maintain internal controls to ensure their staff handle clients' assets properly and to prevent theft of clients' assets.

Brokers are also liable to compensate clients who suffer loss as a result of employee malpractice.

'We found that many brokers do not have a sound internal control system. This is a matter of concern,' Mr Sheng said. 'The SFC has stepped up efforts to educate brokers to be aware of the risks of the lack of internal controls.'

Mr Sheng said the SFC investigated both small and large brokerage houses.

At least three disciplinary actions last year were against big international names.

The market watchdog also investigated 28 alleged cases of insider dealings, with four cases referred to the financial secretary to decide whether to call for a tribunal hearing.

It also prosecuted four market manipulations.

Legislator Eric Li Ka-cheung said the SFC should take steps to increase the transparency of its investigations.

'At present, the public have very little [knowledge] about SFC investigations. This makes it very difficult for the public to check if the SFC uses its power properly,' Mr Li said.

But Mr Sheng said the law required that SFC investigations must be carried out in secret.

He also said the Government had set up a 12-member process review panel in November last year to check that SFC staff adhered to proper procedures.

'The SFC has reported 812 completed cases and 59 on-going investigations outstanding for more than one year to the panel,' Mr Sheng said.

From this year the SFC will release its unaudited financial results every three months - instead of once a year.

This sets an example to the market, as the commission is planning to require all listed companies to do quarterly reporting.

'As a regulator, we believe in practising what we preach,' Mr Sheng said.

The commission added a corporate governance section to this year's annual report to explain measures to ensure it is exercising its power properly.

Mr Sheng said the commission would suspend the search for a deputy chairman to replace Laura Cha Shih May-lung as it must first focus on finding two executive directors to replace Paul Bailey and David Stannard, who will leave in September.