HONG KONG: SFC Fine Morgan Stanley for Short-Selling & Internal Control Failures

Thursday August 25 2016

The Securities and Futures Commission of Hong-Kong (SFC) has fined Morgan Stanley Hong Kong Securities Limited (MSHK) $18.5 million for internal control failures, including non-compliance with disclosure requirements of short-selling orders.

The internal control failures of MSHK related to avoidance of conflicts of interest; comprehensive documentation of its electronic trading systems; disclosure of approx. 29,000 short selling transactions between January to November 2014; compliance with position limits and reporting of Large Open Positions; and execution of client instructions in connection with futures and stock options contract reporting obligations.

Under SFC rules, firms should avoid apparent and potential conflicts of interest by establishing and maintaining adequate “Chinese Walls.” This will help them keep the dealers that handle discretionary orders separate from those that handle principal accounts.

In reaching the resolution, the SFC took into account that:

• MSHK co-operated with the SFC in resolving regulatory concerns;
• MSHK agreed to engage an independent reviewer to conduct a forward-looking review of its internal controls to ensure compliance with the relevant regulatory requirements; and
• MSHK has no disciplinary record in respect of the present failures.

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