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SFC suspensions put new communication technologies under the spotlight

Two recent disciplinary actions taken by Hong Kong’s Securities and Futures Commission (“SFC”) emphasise the importance of effective employee monitoring in securities trading.  These actions also illustrate the means by which employees may attempt to circumvent such monitoring through new communication technologies.

The perils of Whatsapp

Fabiano Mascolo, an equities trader at, joined BTIG Hong Kong Limited (“BTIG”) in 2011.  BITG had in place an electronic communication policy to which Mascolo assented.  This policy prohibited the use of electronic communications relating to BTIG’s business, unless the communications were transmitted via BTIG’s authorised systems.

In order to perform his duties, Mascolo received a mobile phone from BTIG, on which he installed the popular messaging program “Whatsapp”.  In breach of BTIG’s policy, Mascolo used Whatsapp to communicate with a client about an order.  Once BTIG became aware of this breach they informed the SFC.

When questioned by the SFC about his use of Whatsapp, Mascolo claimed to have thought that BTIG could monitor his Whatsapp communications, as they were sent via a BTIG mobile phone.  However, one of the messages retrieved from his phone read:

“Let’s talk here, email monitored.”

As the SFC surmised, Mascolo knew that BTIG could not monitor his Whatsapp communications.  Indeed, it appears that he used Whatsapp for this very reason.

The plot thickens …

The SFC’s investigation into Mascolo’s Whatsapp communications also revealed that Mascolo had allowed his friend, Steven Barrett, to use his personal trading account from 2010 to 2013.

Barrett, a licensed representative employed by Black’s Link Capital Limited (“Black’s Link”) and Myriad Asset Management Limited (“Myriad”), used the account to conduct his personal trades.

Paragraph 12.2(c) of the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“SFC Code”) provides that:

“A licensed or registered person should not knowingly deal in securities or futures contracts for another licensed or registered person’s employee unless it has received written consent from that licensed or registered person.”

Mascolo did not seek the required consent from either of Barrett’s employers before allowing him to conduct trades through his personal trading account.

Mascolo admitted to knowing that Barrett was a licensed representative of Black’s Link and Myriad.  But he claimed ignorance of Paragraph 12.2(c) rather than any desire to conceal Barrett’s trades from his employers.  Nonetheless, Mascolo’s failure to obtain consent meant that neither of Barrett’s employers could monitor his personal trades.  This prevented them from assessing whether any conflicts of interest arose between his business and personal trades (as required under General Principle 6 of the SFC Code).

For breaching BTIG’s communications policy, and for breaching Paragraph 12.2(c) of the SFC Code, the SFC banned Mascolo from re-entering the financial industry for 3 months from 21 December 2015.  However, the SFC took into account Mascolo’s clean disciplinary record when determining the suspension period.

Collateral investigation

The investigation into Mascolo precipitated a collateral investigation into Barrett.  The SFC found that Barrett had also contravened his employers’ internal policies regarding personal trading.

Black’s Link had in place a personal trading policy that required its employees to report any securities in which they have an interest, either directly or beneficially.  Myriad imposed the same reporting obligation on its employees, with an additional requirement that Myriad’s prior approval was required before conducting personal trades.  These policies generally reflect the provisions of Paragraphs 12.2(a) and (b) of the SFC Code.

The SFC found that Barrett had not sought approval for his personal trading.  Nor did he report it.  Further, the SFC concluded that his conduct was deliberate, dishonest and calculated to evade his employers’ monitoring.  This inevitably called into question his fitness and properness to be a licensed person.

On the 13 January 2016, the SFC banned Barrett from re-entering the financial industry for 10 months.

Comments

These two actions illustrate how seemingly ‘minor’ compliance oversights can expose licensed corporations to SFC investigations.  These investigations can uncover more substantial failures, both within the entity under investigation, and in other licensed entities.  This emphasises the importance of strong compliance culture amongst staff to manage regulatory risk.

Equally essential is effective employee monitoring.  As the SFC noted in Barrett’s Statement of Disciplinary Action:

“…monitoring of employee trading by licensed corporations is vital to protect the integrity of the market.  Without this [monitoring], licensed corporations would not be able to detect malpractices arising from employee trading such as front running, insider dealing and market manipulation.”

The proliferation of new technologies presents monitoring challenges, as entirely new means of communication and trading have become readily available.  Financial institutions should consider which of these technologies can be monitored.  If they cannot be monitored effectively, they must not be used for business activities, with employees clearly informed and compliance enforced.

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