Views on improving the integrity of global capital markets
12 January 2015

Hong Kong Regulator Brings in Outside Market Monitoring; SEC Considers Doing the Same


Regulators must balance their available budgets with the challenges of ensuring sufficient oversight of their markets. Given that staff hours are limited and their responsibilities continue to grow as the firm numbers increase and new products are launched, some regulators are looking towards external resources for assistance.

The Hong Kong Securities and Futures Commission (SFC) recently announced the results of a second mystery shopping study. The SFC hired the Hong Kong Productivity Council to conduct about 150 “shopping” visits of 10 selected licensed corporations that included fund management, investment advisory, and brokerage firms between April and September 2014. The study was a follow-up to one conducted in 2010 to see if prior deficiencies had been addressed.

These mystery shopping visits focused on three key requirement areas of the SFC’s Code of Conduct:

  • Know your client
  • Explanation of product features and risk disclosures
  • Suitability assessment

While some improvements had been made, other deficiencies remained a concern in the 2014 study. These include deficiencies centered on the suitability of some investments. In certain cases, the clients’ relevant circumstances were not fully considered when making a suitability determination. In others, the products being recommended were not properly explained as to why they were suitable for potential clients.

According to an SFC press release, beyond the recurring themes noted above, “the 2014 programme identified the following major deficiencies in selling practices:

  • inadequate or inaccurate explanation of the features of, or disclosure of the risks of, high-yield bonds and derivative products;
  • failure to assess clients’ knowledge of derivatives; and
  • failure to provide relevant and material information about the recommended products to clients, eg, product key facts statements.”

Studies of this nature allow the SFC to provide guidance to its constituents to meet the requirements of its Code of Conduct. By using outside resources, the study received an unfiltered view of the activities of the targeted corporations. The SFC received information through the study as it was directly provided to clients.

At the US Securities and Exchange Commission (SEC), Chair Mary Jo White is looking into using third-party auditors to assist in the examination of investment advisers. In a 16 December 2014 letter responding to US Congressman Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, White addressed concerns he had raised previously.

In her letter, White highlights improvements the SEC has made over the past year in regards to the examinations of investment advisers. “As a result of these and other efforts, the number of investment adviser examinations conducted in fiscal year 2014 increased approximately 20% to 1,164 from 964 in fiscal year 2013, with staffing levels remaining relatively stable. In those two fiscal years, the investment advisers examined by OCIE (Office of Compliance Inspections and Examinations) staff managed approximately 25% and 30% respectively of the total assets under management by all registered investment advisers.”

To undertake additional examination, other activities will be considered. The SEC will allow the continuation of reviews by some broker-dealer examiners of both the broker-dealer and registered investment adviser operations of selected jointly registered firms. In the letter, White has instructed the staff to review “permitting third-party audits or compliance reviews of investment advisers.” She has asked the staff to do a “current evaluation of the third-party compliance review concept,” as the industry had raised several concerns when private-sector options were previously considered in 2003.

Both the US and Hong Kong securities regulators are looking for effective methods to meet obligations to their markets. The mystery shopping program assists the SFC with improving the integrity of the market. For the SEC, the benefits of third-party audits will have to be weighed against the cost and quality of the outside reviews. Ultimately, any regulatory use of external resources should support the long-term interest of investors and promote market integrity.

If you liked this post, consider subscribing to Market Integrity Insights.

Photo credit:

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, was a director of professional standards for CFA Institute. His responsibilities included providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He was a co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.