On 31 March 2016, Hong Kong's Securities and Futures Commission (SFC) issued a reminder to Licensed Corporations (LCs) that bonds listed under Chapter 37 of the Main Board Listing Rules (Chapter 37 Bonds) are for professional investors (including high net worth investors) and are unsuitable for retail investors.
When distributing Chapter 37 Bonds or unlisted private placement bonds (together, "Bonds"), LCs should put in place adequate polices and procedures to conduct proper due diligence, appropriately identify the target investor group, provide sufficient and accurate information about the Bonds and fully disclose to their clients the risks specific to the Bonds such as illiquidity and the potential absence of a secondary market. LCs providing misleading or inaccurate information to their clients about the nature and/or risk of the Bonds, inconsistent with the requirements of the Code of Conduct on selling practices, may commit an offence under section 107 of the Securities and Futures Ordinance.
The SFC warns that LCs should not, during the selling process, represent that the listing status of Chapter 37 Bonds is an endorsement of the offer. As highlighted by the SFC, Hong Kong Exchanges and Clearing Limited (HKEx) only vets Chapter 37 Bonds for compliance with its listing eligibility criteria. The HKEx is also responsible for checking that the disclaimer and responsibility statements are in a prescribed form and that there is statement limiting distribution of the listing document to professional investors. Accordingly, the listing status of Chapter 37 Bonds should not be taken as an endorsement of the commercial merit, credit quality or quality of disclosure.
The SFC also criticises the LCs' practice of asking clients 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. 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 client agreement requirements. Under the New Professional Investor Regime (in the form of a new paragraph 15 of the Code of Conduct), effective 25 March 2016, LCs are bound by the suitability requirement in relation to high net worth individual clients. They will also be subject to client agreement and risk disclosure statement requirements effective 9 June 2017.
Originally published 5 April 2016
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