Most Read Contributor in Hong Kong, September 2016
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
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.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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