SFC Fines Fulbright Securities $3.5 Million for Short Sale Violations

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Hong Kong’s Securities and Futures Commission (SFC) has reprimanded and fined Fulbright Securities Limited HK$3.5 million ($450,000) for violating ‘naked short selling’ rules.

According to the SFC’s filing, the incident in question occurred between October 2015 and March 2016, when Fulbright executed at least 93 short sales. The review found lapses in its internal controls and systems, adding that the company failed to put in place controls to detect and prevent illegal trades.

Additionally, the SFC found that Fulbright failed to ensure the accuracy of the information it submitted to the SFC and did not report these incidents immediately upon discovering them.

Short selling, which allows investors to make gains in a falling market by borrowing a security they do not own, selling it and agreeing to buy it back at a lower price, plays an important role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.

Hong Kong’s regulations require firms to deliver the shares, after completion of a short sale transaction, on the settlement date or take affirmative action to close out the ‘failure to deliver’ shares by purchasing or borrowing the securities. To limit ongoing naked short positions, the broker has no choice but to reject any additional sale orders if the securities were not delivered or closed out within legally required time frames.

Fulbright Has No Previous Disciplinary Record

Fulbright Securities Limited were among three brokers the SFC prohibited last year from accepting or placing orders listed on derivative warrants in client accounts that are linked to suspected market misconduct.

While the SFC did not identify who it suspects to have committed this market misconduct, it highlighted that it was not investigating the three brokers in question. In fact, the regulator stated that the three companies have cooperated with its ongoing investigation.

In reaching its decision, the SFC said Fulbright Securities had been cooperative during its investigation, and there is no evidence that failures were deliberate.‎ Furthermore, the company had taken positive and extensive remediation work. Furthermore, it has conducted a forward-looking review of its internal controls to ‎ensure compliance with the relevant regulatory requirements.

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