Introduction

On 30 July 2015, the SFC reprimanded and fined the Japanese bank Nomura’s local headquarters Nomura International (Hong Kong) Limited (“Nomura HK”) HKD4.5 million for failing to immediately report misconduct by a former trader, in breach of the self-reporting requirements under paragraph 12.5 of the SFC Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”). Subsequently on 14 October 2015, the SFC announced further disciplinary measures against the trader in question – Masashi Yonezawa, who is now banned from re-entering the industry for 30 months.

The decision highlights the importance of strict compliance with the self-reporting requirements by licensed or registered entities. Any misconduct or suspected misconduct that comes to the knowledge of the entities must be reported to the SFC immediately upon discovery, not when internal investigation has been concluded or when legal advice has been obtained.

Background

Masashi Yonezawa (“Yonezawa”) was a former trader on the Delta One trading desk of Nomura HK who was on secondment from Nomura in Japan (“Nomura Japan”). His role was to conduct trading for hedging purposes. On 23 May 2013, he reported to his supervisors that he had incurred a 3.3 million USD trading loss and provided an explanation of the loss to the management. However, on or about 30 May 2013, Nomura HK discovered that Yonezawa’s explanation was inconsistent with his actual trading activities on 23 May 2013. Before Nomura HK’s internal inquiry was completed, Yonezawa was repatriated to Nomura Japan on 5 June 2013.

On 5 June 2013, Yonezawa admitted in an interview with Nomura Japan that he had made manual adjustments in Nomura HK’s risk management system in order to avoid showing the real level of risk exposure resulting from his trading activities. The content of that interview was relayed to Nomura HK on 10 June 2013.

On 11 June 2013, Nomura HK reported to the SFC the 3.3 million USD trading loss incurred by Yonezawa on 23 May 2013 (“11 June Report”). However, Nomura HK did not inform the SFC of Yonezawa’s misconduct, namely that he made false entries in the risk management system of Nomura HK, despite Yonezawa’s admission on 5 June 2013. Nomura HK also failed to provide to the SFC a copy of the draft preliminary report or any information therein concerning its investigation on Yonezawa’s activities, which was completed on 19 June 2013.

It was only until 17 July 2013, in a response to the SFC’s further enquiries, that Nomura HK informed the SFC of Yonezawa’s misconduct for the very first time.

Breaches of SFC Regulatory Requirements
and Reasons for Action

Nomura HK’s failure to report Yonezawa’s misconduct in its 11 June Report constituted a breach of paragraph 12.5 of the Code of Conduct, which requires licensed entities to report to the SFC immediately upon

“any material breach, infringement of or non-compliance with any law, rules, regulations and codes administered or issued by the SFC…or where it suspects any such breach, infringement or non-compliance…by itself or persons it employs or appoints to conduct business with clients or other licensed or registered persons”.

In concluding that Nomura HK was in breach of paragraph 12.5 of the Code of Conduct, the SFC rejected Nomura HK’s argument that it needed to conclude its investigation into Yonezawa’s conduct in order to finalize its report and determine whether the matter was reportable to the SFC. Instead, the SFC was of the view that paragraph 12.5 of the Code of Conduct requires licensed entities to report misconduct or suspected misconduct to the SFC immediately upon discovery, not when they have completed their own investigations or when legal advice has been duly obtained.

In addition, section 129(1)(c) of the Securities and Futures Ordinance (“SFO”) also provides that in considering whether a person is fit and proper, the SFC may consider the person’s “ability to carry on the regulated activity competently, honestly and fairly, and the reputation, character, reliability and financial integrity of the person”.

The SFC thus concluded that Yonezawa was in breach of section 129(1)(c) of the SFO, by making fictitious entries in Nomura HK’s risk management system to conceal the real risk exposure resulting from his trading activities, as such act was deliberate, dishonest and had also prevented Nomura HK from monitoring the trading activities of its Delta One trading desk.

The Disciplinary Decision

Accordingly, the SFC reprimanded and imposed a HKD4.5 million fine on Nomura HK under section 194 of the SFO which allows it to impose sanctions where it considers that a licensed or registered entity is not fit and proper to remain licensed or regulated. Recently on 14 October 2015, the SFC has also decided to ban Yonezawa from re-entering the industry for 30 months pursuant to section 194 of the SFO.

Conclusion

The SFC’s press release dated 30 July 2015 quoted the words of Mr. Mark Steward, the SFC’s Executive Director of Enforcement that “Intermediaries must report problems to us immediately – not after internal investigation, not after legal advice has been obtained but straightaway, without leaving any important information”. Such reminder comes timely on the back of an earlier SFC circular to intermediaries regarding compliance with notification requirements that was published on 11 May 2015.  

The decision sends a clear message to licensed or regulated entities that there is a need to strictly comply with paragraph 12.5 of the Code of Conduct and report to the SFC immediately once they become aware of suspicious circumstances of any suspected misconduct. It is improper to report any misconduct or suspected misconduct to the SFC only after internal investigation is completed or only after legal advice is sought. Entities must also be reminded that acts requiring timely report to the SFC include not only obvious or admitted misconducts (as in the current case), but also suspected misconducts, despite the fact that it may be difficult to make judgements on whether a suspicion is concrete enough to justify a report to the SFC.