Hong Kong’s Securities and Futures Commission (SFC) today announces the imposition of a HK$ 3.6 million fine on Fulbright Securities Limited. The penalty stems from the firm’s internal control failures relating to short selling and its failure to report related short selling incidents to the SFC in a timely manner.

In April 2016, the SFC received a complaint that Fulbright illegally short sold the shares of Ngai Shun Holdings Limited (stock code: 1246) on April 8, 2016. As a result of the complaint, the SFC made preliminary enquiries with Fulbright and found 10 other oversold transactions during the period from January to March 2016.

Fulbright explained that the oversold transactions were identified by its Risk Management System, an in-house online real time computer system, when those executed transactions exceeded the relevant stocks held by the client at the time of execution.

In July 2016, the regulator opened an investigation into the conduct of Fulbright in relation to short selling.

The SFC investigation revealed that during the period from October 2015 to March 2016, there were at least 93 instances of short sales executed by Fulbright. Out of these 93 short sales, 83 were executed via the Multi-Workstation System (MWS) and at least 9 were executed via Broker Supplied System (BSS).

At all material times, Fulbright did not report the short sales to the SFC until the SFC made enquiries or during its investigation.

In determining the disciplinary sanction, the regulator took into account a variety of factors, including that:

• adequate and effective internal control systems are fundamental to the fitness and properness of a licensed corporation;
• Fulbright’s short selling failures lasted for at least six months;
• Fulbright’s cooperation in resolving the SFC’s concerns and acceptance of the findings and disciplinary action of the SFC;
• Fulbright had taken measures to rectify its internal control deficiencies in relation to the detection and prevention of short selling after the incidents; and
• Fulbright had an otherwise clean disciplinary record.