Selling obligations reminder: The SFC has recently reminded intermediaries that sell complex and high-yield bonds of their suitability obligations and disclosure requirements after it identified some common issues in routine onsite inspections. See the circular of 25 March 2014. This follows a more detailed reminder in November 2012 on the selling of fixed income products.
The SFC commented that complex and high yield bonds usually carry additional risks due to their lower investment grade and / or embedded special features and emphasised that such risks should always be communicated to investors. In conducting product due diligence on complex or high yield bonds, the SFC prompted intermediaries to make reference to, and provide the relevant offering memorandum or prospectus to investors. Intermediaries have also been reminded that unless sales staff thoroughly understand the products, they will not be able to provide proper product specific or risk disclosures or perform risk assessment and classification.
The SFC reminded licensed corporations of the pre-sale disclosure requirement in relation to any monetary benefits received on back-to-back transactions (now clearly including both buy and sell transactions) and their capacity (whether principal or agent).
Separately licensed corporations need to implement adequate supervisory controls such as annual investor profile reviews and staff training to ensure ongoing compliance with the requirements of the Code of Conduct for Persons Licensed by or Registered with the SFC.
Currently, some of these steps including suitability can be waived if a HNW or corporate investor can be treated as a professional investor but in order to do so licensed corporations must conduct proper investor assessments and keep proper records of the same.
The SFC urged licensed corporations to take this opportunity to review their policies and procedures to ensure proper compliance with these obligations. The SFC will continue monitoring licensed corporations' compliance and take appropriate regulatory action where necessary.