ATTENTION BUSINESS EDITOR
FOR IMMEDIATE RELEASE
29 August 1996

Enclosed please find three Press Releases despatched by the Securities and Futures Commission ("SFC") today in relation to Jardine Fleming Investment Management and certain related companies. They are -

  1. A Joint Press Release by IMRO (Investment Management Regulatory Organisation) in the United Kingdom and the SFC;
  2. A Press Release by the SFC; and
  3. A Press Release by IMRO.

The Press Releases are despatched simultaneously by IMRO in London.

For further enquiries, please contact Chan Chi Keung or Bill Weeks of the SFC’s Corporate Communications Division at 2840-9287.

(1) JOINT PRESS RELEASE BY IMRO AND THE SFC

29 August 1996

IMRO AND SFC DISCIPLINE:

Jardine Fleming Asset Management Limited ("JFAM")

Fleming Investment Management Limited ("FIM")

Fleming Investment Trust Management Limited ("FITM")

Save & Prosper Securities Limited ("S&PS")

Jardine Fleming Investment Management Limited ("JFIM")

The former Chief Executive of JFAM and JFIM and

A former Senior Fund Manager and Director of JFIM

IMRO and the SFC today announced that they have taken disciplinary action against JFAM, FIM, FITM, S&PS and JFIM ("the Firms") for breaches of IMRO Rules and Principles and the SFC Code of Conduct. In addition IMRO and the SFC have disciplined Mr Robert Thomas, former Chief Executive of JFAM and JFIM for supervisory failings and the SFC has disciplined Mr Colin Armstrong, a former Senior Fund Manager and Director of JFIM for misconduct. The disciplinary action resulted from a joint investigation by IMRO and the SFC into the investment management business delegated by FIM, FITM and S&PS to JFIM and the conduct of fund management business and dealing practices of the fund managers of JFAM and JFIM between 1993 and 1995.

FIM, FITM and S&PS are part of the Robert Fleming group. JFAM and JFIM are part of the Jardine Fleming group, jointly owned by the Jardine Matheson and Robert Fleming groups. JFAM, FIM, FITM and S&PS ("the IMRO-regulated Firms") delegated the fund management for 19 customers whose funds were invested in Asian markets to JFIM, which is regulated by the SFC. JFIM managed approximately £2 billion (HK$24 billion) on behalf of the IMRO-regulated Firms and another £12 billion (HK$144 billion) for other customers during the period under investigation.

The Firms have co-operated with the regulators throughout the investigation. The Firms, jointly with IMRO and SFC, appointed KPMG Peat Marwick ("KPMG") in April 1996 to carry out an independent review of dealing practices of JFIM’s fund managers.

Mr Phillip Thorpe, IMRO’s Chief Executive and Mr Gerard McMahon, Executive Director, Enforcement and Member of the Commission of the SFC said, "This case demonstrates the value of international co-operation between regulators in relation to intermediaries which have business in more than one jurisdiction. IMRO and the SFC have co-operative arrangements with various overseas counterparts, through joint inspections, exchanges of information and assistance in investigations, and continue to develop the effectiveness of investor protection through these arrangements."

(2) SFC PRESS RELEASE

SFC Disciplines Jardine Fleming Investment Management Limited ("JFIM") following investigation

The Securities and Futures Commission ("SFC") announced today that it had reached agreement with JFIM for JFIM to make voluntary payments to compensate three accounts managed by JFIM, following a 5-month investigation by the SFC into practices by JFIM fund managers between 1993 and 1995.

The investigation indicated that Mr Colin Armstrong, a former senior fund manager and director of JFIM, had engaged in late allocation of deals after changes in the price of the instruments traded had occurred. Moreover there emerged a pattern of preferential late allocation in his trading regarding Japanese exchange traded optionsinstruments, which was reflected in:

    - allocations to his personal account and one particular client account of deals in respect of which there had been favourable price movement between execution and allocation;
    - allocations to the three compensated accounts of deals in respect of which there had been unfavourable price movement between execution and allocation.

The accounts considered to have been disadvantaged are 2 publicly-held funds (JF Pacific Securities Trust ("PST"), an authorised unit trust in Hong Kong, and FFF - FlemingFlagship Fund Pacific Fund, a subfund of Fleming Flagship Fund ("FFF"), a fund established and authorised in Luxembourg) and one other client account. JFIM has agreed with the SFC, without admitting liability, to make voluntary payments totalling HK$148.96 million to compensate these clients. The SFC is of the opinion, based upon the results of a review by the accountancy firm of KPMG Peat Marwick, that this sum is fair and reasonable. The Trustee of PST and the Board of Directors of FFF have agreed the method of allocation to those investors who are considered to have been affected and payment is in the process of being made.insufficiently material to require historical re-pricing.]

Management Regulatory Organisation Ltd to manage appear to have been disadvantaged in this respect.

The SFC has issued a public reprimand to JFIM for breaches of the SFC Code of Conduct. The breaches relate to JFIM’s inadequate and ineffective internal controls and compliance monitoring over the period under investigation. In particular JFIM:

    failed to adopt dealing procedures whereby the fund managers’ intended allocation for a particular trade was recorded prior to or at the time of placing the trade;
    failed to ensure compliance at all times with the JF Dealing Rules requiring fund managers to record in writing their intention to trade through their personal accounts prior to or at the time of placing the trade;
    lacked an effective audit trail to monitor compliance, and, where misconduct is suspected to have taken place, to facilitate investigation;
    failed to ensure that adequate resources, training and managerial support were devoted to compliance monitoring; and
    when it became aware of the failings in dealing procedures failed to take sufficient action to remedy the situation.

JFIM has, since March 1996, banned all personal account dealings by its fund managers. It has, in the past year, substantially improved its internal control procedures and compliance capabilities. It also commissioned an independent compliance review in March 1996, which review did not reveal serious deficiencies in the way JFIM conducted its business at the time of the compliance review.

The preferential late allocation by Mr Armstrong enabled his personal account to make substantial profits from trading in Japanese exchange traded options. Mr Armstrong has co-operated and made payment to JFIM of the amount of this profit and JFIM have in turn utilised this money as part of the voluntary payments which they have agreed to make to the compensated funds.

The SFC has revoked Mr Armstrong’s registrations as an investment adviser and securities dealer under the Securities Ordinance and as a commodities trading adviser under the Commodities Trading Ordinance, on the grounds of misconduct.

Mr Robert Thomas, former Managing Director of JFIM, has agreed to accept revocation of his registrations with SFC on the grounds that he, as the chief executive of JFIM during the period under investigation, required by SFC rules.bore ultimate responsibility for JFIM’s internal control and compliance failings.

The SFC’s disciplinary action regarding JFIM and Mr Robert Thomas took into account their co-operation and JFIM’s remedial actions and agreement to make appropriate payments to the accounts considered to have been disadvantaged.

The investigation into the business of JFIM by the SFC is now concluded.

Mr Gerard McMahon, Executive Director, Enforcement and Member of the Commission of the SFC commented: "The SFC is committed to maintaining Hong Kong’s reputation as an investment management centre in which bad practice will not be tolerated. Proper supervision and a strong compliance culture are critical to this process. Fund management companies are required to adopt dealing procedures which ensure that client orders are allocated in accordance with the fund manager’s intention at the time of placing the order. They should take this opportunity to review their internal controls and procedures to ensure their operations are properly protected against misconduct by their staff."

For specific enquiries in relation to unitholder repayment contact Jardine Fleming Unit Trust at Customer Services Line 2978-7937.

(3) IMRO PRESS RELEASE

IMRO Disciplines : Jardine Fleming Asset Management;

Its Former Chief Executive; and Three Companies in the

Robert Fleming Group

IMRO has today announced that it has fined Jardine Fleming Asset Management Limited £400,000 and three companies in the Robert Fleming group £100,000 each for breaches of IMRO Rules and Principles.

The discipline relates to investment management business delegated by each of the companies to Jardine Fleming Investment Management Limited ("JFIM") in Hong Kong, an associate.

    Hong Kong based Jardine Fleming Asset Management Ltd ("JFAM"), is fined £400,000. In addition because of the seriousness of the compliance failings, JFAM has accepted the termination of its authorisation. The Jardine Fleming and Robert Fleming groups will offer JFAM’s 10 customers alternative arrangements within the Jardine Fleming and Robert Fleming groups.
    Mr Robert Thomas, former Chief executive of JFAM and JFIM, has accepted that he bore ultimate responsibility for the compliance failings in the companies, which have led to IMRO’s charges against JFAM. In view of the seriousness of the charges against JFAM and Mr Thomas’ position, Mr Thomas has accepted the termination of his registration.
    London based Fleming Investment Management Limited, Fleming Investment Trust Management Limited, and Save & Prosper Securities ("FIM", "FITM", and "S&PS") are each fined £100,000.

BACKGROUND

    JFAM delegated fund management of £810 million to an associated company, JFIM, for 10 customers, whose funds were invested in Asian markets. JFIM is a member of the Jardine Fleming group, which is jointly owned by the Jardine Matheson and Robert Fleming groups.
    Mr Thomas was Chief Executive of both JFAM and its delegate JFIM, and therefore has accepted ultimate responsibility for the compliance failings in the companies.
    FIM, FITM and S&PS also delegated fund management of £1.2 billion to JFIM, for 9 customers, whose funds were invested in Asian markets.
    IMRO’s investigation, which began in November 1995, has been carried out in conjunction with the Hong Kong Securities and Futures Commission ("SFC").
    IMRO’s case is not against JFIM, which is regulated by the SFC, but against the IMRO-regulated Firms. The SFC has today announced that it has publicly reprimanded JFIM and revoked Mr Thomas’ registration, for breaches of the SFC’s Code of Conduct.
A copy of that announcement is attached.

John Manser, Group Chief Executive Officer of Robert Fleming, said :

"It has become apparent to us in the course of our review and IMRO’s investigation, that until December 1995 some structural weaknesses and failings of reporting mechanisms meant, that the non-compliance by JFIM with certain IMRO rules was not addressed, with sufficient urgency, within Robert Fleming at a senior enough level, for effective remedial action to take place.

"Robert Fleming accepts that the procedural problems within Jardine Fleming meant that there was a potential for customer disadvantage. These procedural issues should have been identified and dealt with sooner and Robert Fleming should have been more active in monitoring its delegate to ensure detailed compliance with IMRO rules. Our associated company, Jardine Fleming, has taken all necessary corrective action."

Phillip Thorpe, IMRO’s Chief Executive said:

"IMRO’s investigation has amply illustrated the danger of firms paying insufficient attention to the responsibilities that arise when they delegate business to another entity, whether in the United Kingdom or overseas. Other firms would be well advised to review thoroughly their own arrangements relating to delegated functions."

HONG KONG - JFAM CHARGES

Dealing and Compliance Systems and Procedures

Failing to Supervise

JFIM, the delegate, did not have in place adequate procedures for compliance monitoring of dealings. Where procedures were in place, they were not always followed, and this was not adequately addressed by JFIM’s management. The weaknesses at JFIM meant that there was a potential for customers to be disadvantaged. However, investigation by independent accountants has not found any losses to the customers of JFAM or the Robert Fleming companies from these failings.

JFAM:

  1. failed adequately to monitor business delegated to JFIM;
  2. failed to ensure that JFIM put in place adequate systems and procedures to ensure and demonstrate, the timely and fair allocation of customer, personal and house account deals;
  3. failed to ensure that JFIM adequately supervised and enforced its fund managers’ observance of JFIM’s own internal dealing procedures; and
  4. failed to ensure that JFIM had well defined compliance procedures that would be enforced.

Failing to Take Action

IMRO’s investigation established that when JFAM learnt of weaknesses in, and non-compliance with, dealing procedures at JFIM, it did not take adequate steps to remedy the failings and to remove the potential for customer disadvantage. Alternatively, JFAM could have terminated the investment management arrangement with JFIM and have reallocated the investment management of the delegated funds to another fund manager, but failed to do so.

When JFAM learnt about the above problems, the steps it took over a two year period were inadequate to rectify them in a timely manner.

The failings detailed under Dealing and Compliance Procedures were in breach of SIB Principles 2 and 9.

Undisclosed Commissions

Although total commissions charged were disclosed to JFAM’s customers, JFAM did not disclose that some of those commissions were retained by an associated broker. This associate dealt with third party brokers on behalf of JFAM’s customers and in some cases was remunerated for this action. In one instance the retention of these commissions was prohibited by JFAM’s customer agreement.

The retained commissions totalled HK$26,329,494 (approx. £2.2 million at current exchange rate).

This was in breach of IMRO Rule 4.5(5)(a) of Chapter II of the IMRO Rules 1991.

Disclosures to IMRO

When JFAM became aware of the failings of JFIM in December 1993, it failed to inform IMRO that investment business had been delegated to a firm which had dealing and compliance procedures which did not meet IMRO standards. In 1994 it also suggested to IMRO that there were no significant concerns about compliance.

In addition, when it subsequently lodged a Statement of Representation with IMRO in 1994, the failings were not disclosed despite JFAM being aware that the failings outlined above remained uncorrected. However, disclosure of some failings was made in the 1995 Statement of Representation, leading to the investigation.

This was in breach of SIB Principle 10.

The failings of JFAM are of particular significance because JFAM, in essence, operated only through JFIM. JFAM and JFIM shared a common chief executive, common directors, common staff and common office space. Therefore, JFAM was, or should have been, aware of the weaknesses in the systems and the non-compliance with the dealing procedures in JFIM. JFAM, as a result of this interconnected relationship could have easily taken steps to remedy JFIM’s failings more quickly than it did.

LONDON - FIM, FITM AND S&PS CHARGES

FIM, FITM and S&PS had the same compliance obligations for delegated business, despite the practical difficulties arising from the fact they were in a different geographical location from JFAM and JFIM.

Dealing and Compliance Systems and Procedures

Failing to Supervise

The specific failings of FIM, FITM and S&PS involve their failure to ensure that JFIM carried out specific duties.

FIM, FITM and S&PS :

  1. failed adequately to monitor business delegated to JFIM;
  2. failed to ensure that JFIM put in place adequate systems and procedures to ensure and demonstrate, the timely and fair allocation of customer, personal and house account deals; and
  3. failed to ensure that JFIM had well-defined compliance procedures that would be enforced.

Failing to Take Action

IMRO’s investigation established that FIM, FITM and S&PS also had failings in their internal procedures. When they learnt of weaknesses in dealing procedures at JFIM, they did not take adequate steps over a 2 year period to remedy the failings and to remove the potential for customer disadvantage. Alternatively, FIM, FITM and S&PS could have terminated the investment management arrangement with JFIM and have reallocated the investment management of the delegated funds to another fund manager, but failed to do so.

The failings detailed under Dealing and Compliance Procedures were in breach of SIB Principles 2 and 9.

Undisclosed Commissions

Although total commissions charged were disclosed to customers, FIM, FITM and S&PS did not disclose that some of those commissions were retained by an associated broker. This associate dealt with third party brokers on behalf of FIM, FITM and S&PS’s customers and in some cases was remunerated for this action.

The retained commissions totalled HK$71,172,427 (approx. £5.9 million at current exchange rate).

This was in breach of IMRO Rule 4.5(5)(a) of Chapter II of the IMRO Rules 1991, or in the case of S&PS, in breach of Regulation 10.02 of the Regulated Schemes Regulations and consequently Rule 7.6(1) of Chapter II of the IMRO Rules 1991.

Disclosure to IMRO

FIM, FITM and S&PS failed to inform IMRO that investment business had been delegated to a firm which had dealing and compliance procedures which did not meet IMRO’s standards.

In addition, when they subsequently lodged Statements of Representation with IMRO, the failings were not disclosed despite the fact that they remained uncorrected.

This was in breach of IMRO Rule 2.1(5) of Chapter VI of the IMRO Rules 1991.

CORRECTIVE ACTION

In respect of their customers, all of the Firms have undertaken :

    to make any necessary compensation; and
    to disclose commission paid to an associated broker.

The Robert Fleming and Jardine Fleming groups have undertaken substantial remedial action of their own accord, including reviewing and revising their procedures.

COSTS

The Firms will also pay IMRO’s costs of £122,000.

    IMRO was set up under the Financial Services Act as the regulatory organisation covering the field of investment management. It regulates some 1,100 firms and 18,000 individuals. The firms include fund management organisations, banks, pension fund managers, unit trust managers, trustees, (including trustees of unit trusts) and investment trust managers. Funds managed by IMRO regulated firms have an estimated total value of £1,000 billion.
    Press enquiries and request for a set of Notes to Editor can be made to Judy Delaforce/Kate Cockerill on: 0171 390 5503 or after business hours: 0486 527 922/0374 860 476.

Last Updated on 18 Aug, 1998