The Securities and Futures Commission (the “SFC“) has recently suspended the licence of a former account executive (the “Former Account Executive“) of a licensed corporation (the “Licensed Corporation“) for 15 months in relation to (i) failure to obtain written authorization prior to allowing a third party to operate a client’s securities account and (ii) carrying out his personal trades in the client’s securities account.
The background is that a client opened a securities account (the “Account“) with the Licensed Corporation in 2009, at which time the client verbally authorized a third party (the “Third Party“) to place orders and make investment decisions on his behalf and to communicate with the Former Account Executive directly as regards matters concerning the Account. However, written authorization of such was never procured by the Former Account Executive or the Licensed Corporation.
Further, the Former Account Executive permitted the Third Party to place his personal trades in the Account for convenience, holding the belief that the Third Party and the account holder would agree among themselves on the apportionment.
Besides, the Former Account Executive carried out more than 260 pairs of cross trades (the “Cross Trades“) in an attempt to delay settlement of his personal trades, involving approximately $3 million, and to generate client transactions when business was slow. This was achieved by selling on the T+1 day the shares bought on the T day to the client and buying them back on the same day immediately, such that he would only have to settle difference between the purchase price and the sale price on the T+2 day, and settlement of the purchase price could wait until the T+3 day. By repeatedly doing so, the Former Account Executive could roll over payment of the purchase price of the subsequent Cross Trades with the effect of delaying settlement of his trades. Eventually the Cross Trades materialised in loss-making transactions of around $70,000, which was borne by the Former Account Executive himself without causing any financial impact on the client.
By way of the above, the Former Account Executive violated paragraph 7.1(a) of the Code of Conduct and constituted a breach of General Principle 2 of the Code of Conduct.
This case serves as a reminder of the risks relating to “unauthorised trades”. Licensed corporations are required to have internal controls in place to reduce the risk of unauthorised trading, such as blatant conduct by an account executive who conducts his personal trades through his clients’ accounts without the clients’ knowledge. There were also many cases and disputes relating to alleged verbal authorisations, and the lack of a written authorisation is a red flag, which points to misconduct by licensed persons.