Press Release
LCQ10: Investigations conducted on intermediaries by SFC
Wednesday, January 15, 2003
Following is a question by the Hon Henry Wu and a written reply by the Secretary for Financial Services and the Treasury, Mr Frederick Ma, in the Legislative Council today (January 15):
Question:
Regarding investigations conducted on intermediaries by the Securities and Futures Commission (SFC), will the Government inform this Council whether it knows:
(a) the types of investigation conducted by SFC other than routine and sampling investigations, as well as the purpose and sampling method of each type of investigation;
(b) whether SFC has issued to its investigating officers the procedures or guidelines for conducting each type of investigation; if it has, of the details; and whether it has made public or notified the investigation targets of such procedures or guidelines; if it has not made them public or notified the investigation targets, of the reasons for that;
(c) of the number of such investigations conducted by SFC in each of the past three years, together with a breakdown by the types of intermediaries and investigations;
(d) for cases in which no breaches were found upon completion of the investigation, whether SFC has notified the investigation targets of the completion;
(i) if it has, of the manner of notification; and among those investigations which were completed within the past three years, of the average, longest and shortest duration taken by SFC from the commencement of investigation to notifying the targets of the completion, together with a breakdown by the types of intermediaries and investigations; and
(ii) if not, of the reasons for that, and
(e) of the number of such investigations completed by SFC in each of the past three years, as well as the number among these investigations in which no breaches were found but SFC has not yet notified the targets of the completion in writing so far?
Madam President,
In response to the Honourable Member's question, we have sought relevant information from the Securities and Futures Commission (SFC), as follows -
(a) The Enforcement Division of the SFC conducts investigations when there are suspected breaches of the laws relating to the securities and futures industry, e.g. on market manipulation, insider dealing and unregistered activities. The Enforcement Division does not conduct routine or sampling investigations and does not confine their investigations to registered intermediaries.
The Intermediaries Supervision Department (ISD) of the SFC conducts routine inspections of intermediaries to assess general compliance with rules and regulations. The ISD also conducts special inspections which include -
* Theme inspections - these refer to the review of a selected sample of intermediaries with common features. The objective is to identify possible common compliance problems in respect of certain regulatory requirements and any systemic risk factors in order to develop the appropriate regulatory response and policies. Examples in the past include theme inspections on margin financing activities, Internet trading and introducing brokers.
* Other special inspections - these may be performed when the SFC receives information suggesting possible regulatory breaches by a registered intermediary which may pose significant risks to its clients or the market. In other situations that are deemed necessary by the ISD, special inspections would also be performed. For example, the ISD would conduct a special inspection to review the financial situation of an intermediary in default to ensure that client interests and assets are protected.
The ISD uses a risk-based approach in selecting intermediaries for inspections. The criteria to assess risk include compliance history, standard of internal controls, complaints received by the SFC, information on financial returns and opinion in auditor's reports.
(b) The inspection procedures to be followed by the inspection staff are detailed in the ISD's Operating Manual. The Operating Manual covers procedures for the whole inspection cycle, including planning and pre-inspection work, fieldwork control and review, and the issue of letters to the management of inspected intermediaries post-inspection. The Operating Manual is for the internal use of ISD staff who are subject to a statutory secrecy regime. The Manual is not made public because by doing so may compromise the effectiveness of the SFC's inspection of the intermediary concerned. The SFC's operating procedures are however subject to scrutiny by the Process Review Panel (PRP) which may make recommendations to the SFC for improvements.
In general, intermediaries that are selected for inspections are informed of the purposes and scope of inspections in advance and ISD staff will communicate the process of the inspection at the opening meeting before commencing inspection.
(c) The number and types of inspections conducted by ISD staff in the past three financial years are summarised at Annex A.
(d) and (e)
Generally the completion of the inspection fieldwork is signalled by a meeting at the end of fieldwork visit where the inspection team will inform the management of the intermediary of any concerns, including any identified breaches.
If deficiencies have been identified following the inspection, the ISD will send a letter of deficiencies to the intermediary setting out the identified breaches and deficiencies which the inspection staff have discussed with the intermediary. The intermediary is normally required to provide a written response to state the rectification actions which have been or will be taken.
If ISD staff has not identified any areas of concern following the inspection, a thank-you letter would be sent to the inspected intermediary advising it the completion of the inspection and expressing appreciation for its co-operation.
A total of 750 routine inspections and 197 special inspections were conducted by the ISD in the past three financial years. As of 31 December 2002, there are 37 routine inspections and 7 special inspections that have not been completed. All of these inspections were commenced in 2002. The information on the duration of inspections is summarised in the table at Annex B.
Irrespective of whether breaches have been identified, the inspected intermediaries are always informed of when the inspections are completed.
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