On 31 March 2016, the Securities and Futures Commission (“SFC”) issued a circular (“Circular”) to licensed corporations (“LCs”) regarding their distribution of bonds listed under Chapter 37 of the Main Board Listing Rules (“Chapter 37 Bonds”) and unlisted private placement bonds issued by Hong Kong listed companies (collectively, “Bonds”).
The Circular serves to remind LCs that Chapter 37 Bonds are meant to be targeted only at professional investors (including high net worth investors) as defined under the Securities and Futures Ordinance (“SFO”), and are unsuitable for sale to retail investors and that LCs should put in place adequate policies and procedures in respect of their distribution of the Bonds.
The SFC will take appropriate regulatory action against LCs who are found to have breached the SFO, provisions on selling practices under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”), and/or the requirement to act in the best interests of their clients, and will continue to use a range of supervisory tools, including inspections and mystery shopping programs, to monitor compliance.
LCs are reminded to take note of the following “Dos” and “Don’ts” in their distribution of the Bonds as highlighted in the Circular:
- DO conduct proper product due diligence to ensure that they appropriately understand the important aspects including the complex features and risks of the Bonds, and properly communicate them to their sales staff before recommending the Bonds to clients. LCs may not fulfill the suitability requirements of the Code of Conduct if they recommend the Bonds to clients outside of the appropriate risk categories due to inadequate understanding of the Bonds.
- DO provide sufficient and accurate information about the Bonds to clients and always present balanced views and not focused on beneficial terms of the Bonds when making the solicitation or recommendation of the Bonds.
- DO fully disclose to clients and draw their attention to the risks specific to the Bonds such as the lack of liquidity and secondary market of the Bonds, and DO explain any key complex features of the Bonds to help clients make an informed investment decision. LCs may be in breach of their suitability obligations if the liquidity risk of the Bonds is not taken into account when LCs solicit or recommend the Bonds to their clients.
- DO appropriately identify the target investor group taking into account any selling restrictions and ensure that the risk return profile of recommended Bonds matches with the financial situation, investment objectives, investment experience, risk tolerance and other relevant circumstances specific to the clients.
- DO note that Chapter 37 Bonds should only be offered to professional investors (including high net worth investors).
- In distributing Chapter 37 Bonds, DO draw clients’ attention to the prescribed disclaimer statement in the listing document (i.e. the Hong Kong Stock Exchange takes no responsibility for the contents of the listing document) in order to assist clients make an informed decision.
- DO NOT provide potentially misleading or inaccurate information to clients about the nature and/or risk of the Bonds, which appeared to be inconsistent with the requirements of the Code of Conduct on selling practices. This might constitute an offence under section 107 of the SFO.
- DO NOT solely focus on beneficial terms of the Bonds such as high coupon rates or yields when making the solicitation or recommendation to, and assessing suitability for clients.
- DO NOT ask clients to whom the LCs had solicited or recommended the Bonds to sign declarations or acknowledgements that the LCs had not recommended the Bonds or solicited clients and/or the clients had not relied on any recommendation from the LCs.
- DO NOT contain terms in client agreements which misdescribe the actual services to be provided to the client. Such terms and statements might not comply with the Code of Conduct obligation to act in the best interests of clients and would be in breach of the new client agreement requirements to be effective on 9 June 2017.
- In distributing Chapter 37 Bonds, DO NOT take the listing status to denote any commercial merit, a low product risk rating or high credit quality in the due diligence review, and DO NOT represent the listing status as an endorsement of the offer or the Chapter 37 Bonds during the selling process. The SFC reminded LCs that as the Hong Kong Stock Exchange only vets applicants for compliance with listing eligibility and checks listing documents only for compliance with the obligations to include disclaimer and responsibility statements in prescribed forms and a statement limiting distribution of the document to professional investors only, the listing status of Chapter 37 Bonds should not be treated as an endorsement of the commercial merit or credit quality of the Chapter 37 Bonds or quality of disclosure in the listing documents of the Chapter 37 Bonds.