Hong Kong's Securities and Futures Commission flexed its muscles for a second time this week on Tuesday as it fined Citigroup HK$4 million ($500,000) over regulatory breaches in the management of its alternative liquidity pool.
Having also reprimanded the investment banking arm of China Construction Bank on Monday for its shoddy due diligence on the initial public offering of Fujian Dongya Aquatic Products in 2014, the watchdog is ramping up its surveillance of financial intermediaries and pushing hard to clear its backlog of case files, say market sources contacted by FinanceAsia.
The SFC said that due to an incorrect system setting of client profiles, over 130 clients had accessed Citi’s dark pool without being assessed as to whether they were qualified investors.
Citi, which was also fined $7.2 million in May for failing to conduct adequate due diligence on another IPO, took remedial action to rectify the situation shortly after identifying the incorrect system setting and subsequently implemented enhanced measures to ensure compliance.
“Citi co-operated fully with the SFC and has agreed to resolve this legacy issue relating to alternative liquidity pools (ALP) in Hong Kong,” Citi said in an emailed statement. The New York-headquartered bank added that no Citi clients suffered a financial loss as a result of the error.
The dark pool requirements came into force in Hong Kong on December 1, 2015. Upon discovery of the technical issue in July 2016, Citi took remedial action in August 2016.
CCB International was the last entity to fall foul of Hong Kong's effort to crackdown on IPO sponsor failures when it was slapped with a HK$24 million ($3 million) fine for sub-standard due diligence work during the Fujian Dongya IPO.
In a public statement, the SFC said CCBI had failed to conduct all reasonable due diligence on Fujian Dongya before submitting the listing application. CCBI was the sole sponsor of Fujian Dongya’s IPO.
Monday’s fine against CCBI is the third disciplinary action undertaken by the SFC in five months as the securities watchdog ups its scrutiny of IPO sponsors in order to improve the quality of newly listed companies.
It is likely that more penalties are on the way after SFC chief Thomas Atkinson said in March that the regulator was investigating as many as 15 sponsor firms. It has already issued eight proceedings.
In the case of Fujian Dongya, the SFC said the investment banking arm of China Construction Bank had failed to follow up on a number of red flags it discovered with regards to indirect payments from overseas clients.
"The sponsor's submission fails to illustrate clearly how the sponsor and the reporting accountants could ascertain the identity of the indirect payers,” the SFC said. “lt appears that neither the sponsor nor the reporting accountants has interviewed the indirect payers and the sponsor has not conducted site visits to any of the relevant customers and indirect payers.”
In addition, CCBI has failed to verify the genuineness of the signatures in certain contracts that appeared to have been signed by the same person on behalf of different customers, the regulator said.
It also failed to conduct proper customer due diligence and keep a proper audit trail or written record of its due diligence work, the SFC said.
In drawing up the resolution, the SFC said it accepted that CCBI’s failures were not intentional and noted that it cooperated with the regulator throughout the review process. The SFC also took into account that CCBI has an otherwise clean disciplinary record.
However, it is worth noting that CCBI was also the sole sponsor of another troubled IPO -- that of Fujian Nuoqi. Trading in the troubled apparel retailer’s shares has been suspended since July 2014, just six months after it made its debut in January.
In a filing to the Hong Kong stock exchange, Fujian Nuoqi said its chairman Hui Ding was found missing just days after the company’s listing. Ding had ordered an unauthorised transfer of Rmb232 million – more than 90% of the IPO proceeds – out of the company’s coffers before he went missing.
Fujian Nuoqi is now placed in the third de-listing stage under Hong Kong listing rules.
This story has been updated to add no Citi clients suffered any financial loss as a result of the dark poll technical issue