Sanction on KGI Securities Co., Ltd. for Violation of Securities Management Related Laws and Regulations
2022-08-02
The Financial Supervisory Commission (hereinafter referred to as the “FSC”) approved the case of sanction on KGI Securities Co., Ltd. (hereinafter referred to as KGI Securities or the firm). When the FSC inspected the general business of China Development Financial Group (hereinafter referred to as the “CDF Group”), it was found that KGI Securities violated the principle of corporate governance and failed to implement its internal control system, which affected the operation of its securities business. These were in violation of the relevant provisions of the Securities and Exchange Act, and a fine of NT$2.4 million is imposed in accordance with subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act, and a correction is required in accordance with Article 65 of the same Act. In addition, in accordance with paragraph 5, Article 66 of the Securities and Exchange Act, the audit committee of the firm is ordered to take necessary measures for the deficiencies found in this inspection, with the relevant improvement reported to the board meeting, and the firm is ordered to reduce the monthly salary of the Chairman XX Hsu by 20% for three months from the day following the delivery of the sanction letter, and stop the business execution of the President XX Fang for six months in accordance with Article 56 of the Securities and Exchange Act.
I. Objects of sanction: KGI Securities Co., Ltd. and related personnel.
II. Legal basis for the sanction: Articles 56, 65, subparagraph 5, Article 66, and subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act, paragraph 1 and 3, Article 18 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms, paragraph 2, Article 2 of the Regulations Governing Securities Firms, and paragraph 2, Article 6 of the Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets.
III. Facts of violation:
(I) KGI securities has the fact of reporting the firm's financial and business information to or requested instructions from a person with no jurisdiction or responsibility over the firm:
1. XX Ku (hereinafter referred to as "Ku") only serves as the Chairman of CDIB Capital Group (hereinafter referred to as "CDIB Capital"), a 100% subsidiary of the CDF Group. However, personnel of KGI Securities reported the business status, operating performance and list of personnel to be promoted to Ku’s secretary for her onward transmission to Ku. In addition, the personnel of KGI Securities had the fact of reporting the performance appraisal information of the personnel at or above the senior manager level, and the appointment of consultants by the Hong Kong subsidiary to the directors or chairmen of several subsidiaries and sub-subsidiaries of CDIB Capital who are not employed by KGI Securities.
2. In December 2021, the secretariat manager of the board of directors of KGI Securities reported to the manager of the financial management division of the CDF Group the "2021.12.27 abnormal notice of external communications to KGI Securities and Futures" and the "2021.12.29 abnormal notice of external communications". However, according to the regulations of the firm’s established "Organization Rules", the manager does not have the authority to review or approve the deficiencies or improvement matters of financial inspections on subsidiaries.
(II) The staff canteen employees of the property management department of KGI Securities failed to comply with the firm's internal management regulations in terms of overseas business trips, expense reimbursement and business trip applications:
1. In the years of 2020 and 2021, some of the canteen employees of KGI Securities often applied for business trips to Hong Kong, Japan, the United States and France on the ground of "business needs", "business trip", "overseas food and beverage observation" and "technical exchange", with only the reason of "in accordance with the firm's arrangement" or "food and beverage observation" filled in the work plan on the business trip reporting form without specific supporting materials for their business trips, nor were they required to submit work reports for their business trips. In addition, during the inspection period, KGI Securities said that these personnel were responsible for handling the catering of Ku during his stay abroad, and their business trips had nothing to do with the firm's business.
2. For the aforementioned restaurant employees’ overseas trip expenses from July 2021 to December 2021, a "special monthly allowance (NT$60,000/month/person)" was granted in the name of good performance in their positions during the pandemic prevention period, which was inconsistent with the actual purpose of the special allowance.
3. The employees’ business trip period applied for was inconsistent with the actual trip period, and some of the employees withdrew the leave application form but did not apply again, and had no attendance record either; in addition, the employees applied for business leave, but actually went out to support the catering services of CDF Group’s affiliated enterprises Wokhei Restaurant, Isosei Restaurant or Ku’s guest house on Dunhua South Road.
(III) The facts that the employees of KGI Securities handled affairs unrelated to their duties or their firm, but the firm bore relevant expenses:
1. Employees of the firm applied for overtime and related expenses, but actually accompanied Ku to go abroad or went out to support affairs unrelated to the firm such as supporting Wokhei Restaurant, Isosei Restaurant or Ku’s guest house on Dunhua South Road.
2. Ku took the firm's employees as cooks on his private trips abroad and applied for business related expenses for them. Some of the travel expenses were remitted by the President of KGI Securities (Thailand) to the account of XX Fang, the President of the firm, and XX Fang then withdrew New Taiwan dollars for payment to the employees. For some other employees, the travel expenses were paid in the name of "special allowance for pandemic prevention", and the insufficient portion was paid in the name of "employee performance bonus" after the tax subsidy.
(IV) Some employees of CDIB Capital do not concurrently hold positions at KGI Securities, but have been working in the Dazhi head office of the firm for a long time.
IV. Sanction imposed:
(I) Company part: The above-mentioned deficiencies show that KGI Securities has seriously violated the principle of corporate governance, and failed to implement its internal control system; these have affected the operation of its securities business. Besides, the Chairman failed to fulfill his supervision and management responsibilities. These are verified to have violated the provisions of paragraph 2, Article 2 of the Regulations Governing Securities Firms, and a fine of NT$2.4 million is imposed in accordance with subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act, and a correction is required of the firm in accordance with Article 65 of the same Act. In addition, in accordance with paragraph 5, Article 66 of the Securities and Exchange Act, the audit committee of the firm is ordered to take necessary measures for the deficiencies found in this inspection, with the relevant improvement reported to the board meeting, and the firm is ordered to reduce the monthly salary of the Chairman XX Hsu by 20% for three months from the day following the delivery of the sanction letter.
(II) Personnel part: XX Fang, the President of the firm, approved the overseas travel of such employees, and the payment of performance bonuses and special allowances to the relevant personnel of the property management department involved in the case. He also agreed on the improper expense reimbursement arrangement that the travel expenses of the employees be remitted to his own account by KGI Securities (Thailand) and then paid to the employees in cash. Fang has been the President of KGI Securities since 2021 (previously served as the President and Acting President from 2016 to 2020). In addition to making himself an example for good corporate culture, Fang should have made the best interests of the firm as the priority, faithfully carried out the business, and fulfilled the duty of care of a good manager. Fang had the improper handling of approving the above-mentioned personnel’s related expenses of business trips, performance bonuses and special allowances, and failed to carry out business in accordance with the principles of ethics and good faith. These resulted in serious deficiencies in the firm's internal control system that are detrimental to the implementation of corporate governance, and sufficient to affect the normal execution of the firm’s securities business. It is verified that the firm has violated the provisions of paragraphs 1 and 3, Article 18 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms, and in accordance with Article 56 of the Securities and Exchange Act, the firm is ordered to stop the business execution of the President XX Fang for six months.
V. Other clarifications: The FSC reiterates that good corporate governance is the cornerstone of sound financial institution operations. The corporate governance system includes the establishment of a good corporate organization and culture, as well as the implementation of the company’s internal control system. The responsible persons and managers of a company should give the highest priority to the interests of the company when carrying out their businesses, and should not put the interests of major shareholders before the interests of the company. Securities firms should learn from the deficiencies in this case, and create a corporate culture of good corporate governance and internal control to ensure the sound operation of the company.
I. Objects of sanction: KGI Securities Co., Ltd. and related personnel.
II. Legal basis for the sanction: Articles 56, 65, subparagraph 5, Article 66, and subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act, paragraph 1 and 3, Article 18 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms, paragraph 2, Article 2 of the Regulations Governing Securities Firms, and paragraph 2, Article 6 of the Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets.
III. Facts of violation:
(I) KGI securities has the fact of reporting the firm's financial and business information to or requested instructions from a person with no jurisdiction or responsibility over the firm:
1. XX Ku (hereinafter referred to as "Ku") only serves as the Chairman of CDIB Capital Group (hereinafter referred to as "CDIB Capital"), a 100% subsidiary of the CDF Group. However, personnel of KGI Securities reported the business status, operating performance and list of personnel to be promoted to Ku’s secretary for her onward transmission to Ku. In addition, the personnel of KGI Securities had the fact of reporting the performance appraisal information of the personnel at or above the senior manager level, and the appointment of consultants by the Hong Kong subsidiary to the directors or chairmen of several subsidiaries and sub-subsidiaries of CDIB Capital who are not employed by KGI Securities.
2. In December 2021, the secretariat manager of the board of directors of KGI Securities reported to the manager of the financial management division of the CDF Group the "2021.12.27 abnormal notice of external communications to KGI Securities and Futures" and the "2021.12.29 abnormal notice of external communications". However, according to the regulations of the firm’s established "Organization Rules", the manager does not have the authority to review or approve the deficiencies or improvement matters of financial inspections on subsidiaries.
(II) The staff canteen employees of the property management department of KGI Securities failed to comply with the firm's internal management regulations in terms of overseas business trips, expense reimbursement and business trip applications:
1. In the years of 2020 and 2021, some of the canteen employees of KGI Securities often applied for business trips to Hong Kong, Japan, the United States and France on the ground of "business needs", "business trip", "overseas food and beverage observation" and "technical exchange", with only the reason of "in accordance with the firm's arrangement" or "food and beverage observation" filled in the work plan on the business trip reporting form without specific supporting materials for their business trips, nor were they required to submit work reports for their business trips. In addition, during the inspection period, KGI Securities said that these personnel were responsible for handling the catering of Ku during his stay abroad, and their business trips had nothing to do with the firm's business.
2. For the aforementioned restaurant employees’ overseas trip expenses from July 2021 to December 2021, a "special monthly allowance (NT$60,000/month/person)" was granted in the name of good performance in their positions during the pandemic prevention period, which was inconsistent with the actual purpose of the special allowance.
3. The employees’ business trip period applied for was inconsistent with the actual trip period, and some of the employees withdrew the leave application form but did not apply again, and had no attendance record either; in addition, the employees applied for business leave, but actually went out to support the catering services of CDF Group’s affiliated enterprises Wokhei Restaurant, Isosei Restaurant or Ku’s guest house on Dunhua South Road.
(III) The facts that the employees of KGI Securities handled affairs unrelated to their duties or their firm, but the firm bore relevant expenses:
1. Employees of the firm applied for overtime and related expenses, but actually accompanied Ku to go abroad or went out to support affairs unrelated to the firm such as supporting Wokhei Restaurant, Isosei Restaurant or Ku’s guest house on Dunhua South Road.
2. Ku took the firm's employees as cooks on his private trips abroad and applied for business related expenses for them. Some of the travel expenses were remitted by the President of KGI Securities (Thailand) to the account of XX Fang, the President of the firm, and XX Fang then withdrew New Taiwan dollars for payment to the employees. For some other employees, the travel expenses were paid in the name of "special allowance for pandemic prevention", and the insufficient portion was paid in the name of "employee performance bonus" after the tax subsidy.
(IV) Some employees of CDIB Capital do not concurrently hold positions at KGI Securities, but have been working in the Dazhi head office of the firm for a long time.
IV. Sanction imposed:
(I) Company part: The above-mentioned deficiencies show that KGI Securities has seriously violated the principle of corporate governance, and failed to implement its internal control system; these have affected the operation of its securities business. Besides, the Chairman failed to fulfill his supervision and management responsibilities. These are verified to have violated the provisions of paragraph 2, Article 2 of the Regulations Governing Securities Firms, and a fine of NT$2.4 million is imposed in accordance with subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act, and a correction is required of the firm in accordance with Article 65 of the same Act. In addition, in accordance with paragraph 5, Article 66 of the Securities and Exchange Act, the audit committee of the firm is ordered to take necessary measures for the deficiencies found in this inspection, with the relevant improvement reported to the board meeting, and the firm is ordered to reduce the monthly salary of the Chairman XX Hsu by 20% for three months from the day following the delivery of the sanction letter.
(II) Personnel part: XX Fang, the President of the firm, approved the overseas travel of such employees, and the payment of performance bonuses and special allowances to the relevant personnel of the property management department involved in the case. He also agreed on the improper expense reimbursement arrangement that the travel expenses of the employees be remitted to his own account by KGI Securities (Thailand) and then paid to the employees in cash. Fang has been the President of KGI Securities since 2021 (previously served as the President and Acting President from 2016 to 2020). In addition to making himself an example for good corporate culture, Fang should have made the best interests of the firm as the priority, faithfully carried out the business, and fulfilled the duty of care of a good manager. Fang had the improper handling of approving the above-mentioned personnel’s related expenses of business trips, performance bonuses and special allowances, and failed to carry out business in accordance with the principles of ethics and good faith. These resulted in serious deficiencies in the firm's internal control system that are detrimental to the implementation of corporate governance, and sufficient to affect the normal execution of the firm’s securities business. It is verified that the firm has violated the provisions of paragraphs 1 and 3, Article 18 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms, and in accordance with Article 56 of the Securities and Exchange Act, the firm is ordered to stop the business execution of the President XX Fang for six months.
V. Other clarifications: The FSC reiterates that good corporate governance is the cornerstone of sound financial institution operations. The corporate governance system includes the establishment of a good corporate organization and culture, as well as the implementation of the company’s internal control system. The responsible persons and managers of a company should give the highest priority to the interests of the company when carrying out their businesses, and should not put the interests of major shareholders before the interests of the company. Securities firms should learn from the deficiencies in this case, and create a corporate culture of good corporate governance and internal control to ensure the sound operation of the company.
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Update：
2022-08-09