Hong Kong’s Securities and Futures Commission (SFC), the country’s paramount securities regulator, has issued a fine to Merrill Lynch Far East Limited (MLFE) and Merrill Lynch (MLAP) Limited for $15 million, following a series of internal control failures, according to a regulatory statement.
The fine stemmed from multiple internal control failures at both MLFE and MLAP, with the SFC also reprimanding them for breaches in its Code of Conduct and the Internal Control Guidelines.
MLFE is currently licensed under the Securities & Futures Ordinance (SFO) to carry on business in securities and futures contracts, as well as advising on securities, corporate finance, and automated trading services regulated activities. By extension, MLAP is licensed under the SFO to carry on business in dealing in securities, and advising on securities, and other regulated activities.
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The aggregated fine totaled $15.0 million, following on the heels of an independent review last quarter of 2016. More specifically, the SFC, MLFE and MLAP jointly engaged an independent reviewer to review MLFE’s and MLAP’s internal controls related to its reporting of Large Open Positions (LOP), electronic trading systems, and distribution of research reports.
The review revealed a number of findings, such as that MLFE had failed to ensure compliance with requirements for LOP reporting under the Securities and Futures (Contracts Limits and Reportable Positions) Rules and the Rules of the Hong Kong Futures Exchange in multiple instances since May 2006.
Moreover, the group failed to enact specific policies and procedures when the electronic trading regulations under the Code of Conduct came into effect on 1 January 2014 – this code focused on effectively managing, supervising, and keeping proper records on the design, development, deployment and operation of the electronic trading system.
In terms of MLAP, the group failed to comply with the legal requirements needed to obtain a license for regulated activities before carrying on business in advising on futures contracts between May 2005 and August 2016. The prompt cooperation of MLFE and MLAP helped expedite the process, resulting in a lower fine and faster resolution, according to the SFC.