SFC notifies the industry of a circularization exercise on clients’ accounts

28 Jul 2017



The SFC announced the commencement of a circularization exercise1 on clients’ accounts of selected securities brokers.  An accounting firm has been engaged by the SFC to carry out the exercise which comprises a high-level review of the brokers’ client assets protection and obtaining direct written confirmation from selected clients.

Recent inspection findings

Client assets protection has been and remains one of the major focuses in SFC’s supervision of licensed firms. Despite the SFC reminder to brokers in our previous circular2 to protect client assets against internal misconduct, in our recent inspections we have still identified the following deficiencies in brokers’ internal controls:

The circularization exercise 

In view of the control deficiencies identified, an industry-wide and risk based circularization exercise is considered appropriate through which the SFC as well as brokers’ management could obtain direct confirmations from investors on their account positions and identify any potential misconduct such as unauthorized transactions and misappropriation of client assets.

To facilitate the conduct of the exercise, brokers are reminded to ensure that the personal information of their clients is accurate and up-to-date.  Before sending out the letters of confirmation, the accounting firm engaged by the SFC may seek assistance from the brokers to call the selected clients to (i) confirm the clients’ identities and contact details; (ii) request the clients to check their account positions; and (iii) sign and return their replies directly to the accounting firm.

Furthermore, the exercise will cover a high-level review of the brokers’  internal control systems that are designed to protect client assets such as controls over client information maintenance, client money and client securities reconciliation as well as account statements and trade documents distribution.

Brokers are expected to have put in place effective and robust controls to protect client assets.  These may include the followings:

Where appropriate, the SFC may share the findings of the circularization exercise with the industry.

Should you have any questions regarding the contents of this circular, please contact Ms Denise Chan at 2231 1188.

Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

End

SFO/IS/025/2017


1 Similar exercises were performed in 2012 and 2006. The SFC inspection staff may also perform similar procedures during onsite inspections of securities brokers.
2
Please refer to our circular titled “Circular to Licensed Corporations Licensed for Dealing in Securities – Protecting Client Assets against Internal Misconduct” issued on 5 February 2016. http://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=16EC8


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Page last updated : 28 Jul 2017