The latest regulatory action renews concerns about governance at Deutsche Securities only two years after the brokerage was sanctioned for spending too lavishly on client entertainment.
On Tuesday, the Securities and Exchange Surveillance Commission recommended that the Financial Services Agency take “administrative action” against Deutsche Securities, a phrase which often implies a business improvement order or a temporary suspension of operations. The SESC did not clarify what type of administrative penalty it is seeking.
According to the SESC, an unidentified equity analyst at Deutsche Securities received information at the end of 2014 that the operating profit of a Japanese company might fall below market expectations before the official figure was announced. On that same day, the analyst provided the information on the company, which is listed on the Tokyo Stock Exchange’s first section, to 21 salespeople and a client without going through a formal compliance process.
Two of the sales staff flagged the information and recommended trading activity to three clients, including domestic and foreign institutional investors, who then sold the company’s shares before the earnings release, the SESC said.
The SESC said Deutsche Securities violated Japanese laws by mishandling and sharing the information to solicit business. “The root cause of the problem is found in the weakness of the company’s governance and compliance structures. We urge action against this global issue,” the SESC said in a statement.
Deutsche Securities said it self-identified the problem and reported the matter to Japanese regulators. In a statement, the brokerage said it “has determined and implemented thorough remedial action addressing the cause of the incident.”
It declined to provide additional information on the analyst in its equity research division who mishandled the information, and how it found the violation.
The penalty comes after the FSA issued Deutsche Securities with a business improvement order in December 2013 to address improper client entertainment practices. In a statement on Tuesday, the brokerage said it “continues to reinforce its internal controls”.
Japanese regulators have strengthened a crackdown on information breaches after 2012 when several brokerages, including Nomura and Daiwa, were found to have leaked advance information of share offerings, allowing certain clients to profit before the formal announcement.
The SESC is also taking a tougher line on a broad range of violations in market activity especially with prime minister Shinzo Abe putting priority on corporate governance reforms as part of his growth strategy.
A day earlier, the securities regulators sought their biggest fine to date of $59.8m against Toshiba for falsifying financial documents and vowed to monitor the company following a $1.3bn accounting scandal.
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