What you need to know
- The former RO had submitted a form to the SFC on behalf of QMIS declaring that an employee of QMIS had ceased to be a licensed representative because of a "job rotation". The employee had in fact been terminated due to his misappropriation of client money.
What you should do
- Intermediaries must ensure that they provide clear and unambiguous disclosure to the SFC of the reasons for any changes in the licensing status of employees, particularly if this is due to employee misconduct identified by the institution. Failure to do so could result in criminal liability for the institution and its officers.
- Requests by departing employees to negotiate the reasons for the departure that are provided to the SFC or any desire to avoid self-reporting an issue should be resisted. The potential benefits of avoiding threatened employee litigation or a regulatory investigation are likely to be significantly outweighed by the risks of criminal sanction.
Background
In January 2014, QMIS submitted a form to the SFC which cited "job rotation" as the reason for cessation of the employee's status as a SFC-licensed representative. QMIS' former RO declared in the form that all information contained within was complete, true and accurate. The information in the form was in fact not correct, and the employee had been terminated after admitting to the former RO that he had misappropriated client money.
QMIS was charged with providing false or misleading information under section 384(1) of the Securities and Futures Ordinance ("SFO"). The Hong Kong Eastern Magistrates' Court convicted QMIS of this offence, holding that providing the answer "job rotation" in the form as the reason for cessation of the staff member's licensed status was misleading.
The former RO was also convicted of an offence under section 390 of the SFO as the Court found that commission of the offence by QMIS was aided, abetted, counselled, procured or induced by, or committed with the consent or connivance of, or attributable to the recklessness of, the former RO.
QMIS and the former RO were both fined $10,000 and ordered to pay the SFC's investigation costs.
Analysis
The SFC has emphasised that it expects licensed persons and institutions to make full and accurate disclosure of information required in licensing forms. This criminal prosecution emphasises that where staff have been terminated due to misconduct, intermediaries should provide complete and unambiguous disclosure to the SFC of this, rather than gloss over or attempt to sanitise the reasons for doing so. This issue can arise where there is a desire to avoid self-reporting issues related to an employee's misconduct, or perhaps more commonly, where the employee or their legal advisers seek to negotiate the reasons for departure submitted to the regulator in the context of threatened potential Labour Tribunal proceedings.
The decision to charge the former RO under section 390 of the SFO is also consistent with the SFC's enforcement priority of holding senior employees accountable as well as the principles contained in the SFC's new Manager-in-Charge regime. Senior officers of intermediaries should be aware that they risk personal criminal liability if they do not ensure that information provided to the SFC on behalf of the company is complete, clear and accurate. Companies and persons who are found to have committed the offence of providing false or misleading information to the SFC face penalties upon conviction of a fine of up to $1 million and imprisonment for two years.
