Repurchase of Minibonds

The most shocking compliance news immediately before the Chinese New Year should be the "agreement" entered into by Sun Hung Kai Investment Services Ltd (SHK) with SFC under s201 of SFO to resolve disciplinary cases without completing the formal hearing process. Simply speaking, Sun Hung Kai agrees with SFC to repurchase Lehman Brothers Minibonds from its clients. This case is comparable to the ex-gratia payments made by Towry Law in 2004.

SFC also issued a reprimand to Sun Hung Kai in respect of internal systems and controls relating to its sales since 2002 of Lehman Brothers Minibonds to its clients, following SFC's investigation. Sun Hung Kai has agreed to make a voluntary offer to purchase all outstanding Minibonds bought by eligible Sun Hung Kai clients at original value, with the following exceptions:

• those clients who purchased Minibonds only from the secondary market on an execution only basis and had not previously purchased Minibonds through Sun Hung Kai in primary offerings
• professional investors (PIs), including financial institutions, insurers and other corporations falling under paragraphs (a) to (i) of the definition of "professional investor" in Part 1 of Schedule 1 to SFO [Then how about those PIs defined under S&F (Professional Investors) Rules?]
• those clients who had already commenced legal action against Sun Hung Kai unless the clients are willing to stay or end the legal action
• those clients who had concluded a settlement with Sun Hung Kai and already received payments that exceeded the principal they invested

SFC estimates the total amount of the repurchase offer will be up to $85 million.

The decision follows an investigation by SFC which raised a number of concerns with Sun Hung Kai, specifically with respect to:

• the adequacy of product due diligence on Minibonds before they were distributed to eligible clients;
• the adequacy of training given to Sun Hung Kai retail sales staff on Minibonds to enable them to understand the product and all its material risks;
• the assessment of the level of risk for each particular series of Minibonds, the communication of those risk ratings to its retail sales staff and the measures that ought to have been taken to ensure that its sales staff gave reasonably suitable advice by matching the risk-return profile of each series of Minibonds with the personal circumstances of each eligible client; and
• the record-keeping of investment advice given to eligible clients and any queries raised by them.

Sun Hung Kai does not admit any liability or wrongdoing arising from these matters but acknowledges the seriousness of these concerns. Given the high public interest in resolving these issues quickly, to avoid unnecessary costs and expenses and to affirm its commitment to the highest standards of conduct, Sun Hung Kai has also agreed with SFC to the following:

• to offer to its eligible clients to purchase all outstanding Minibonds bought through Sun Hung Kai at a price equal to the principal amount invested by those clients (the eligible clients will retain all coupon payments received to date) with payments to be made within 30 days of the date of acceptance, and each eligible client who accepts this offer will be required to transfer their Minibonds (or entitlement thereto) to Sun Hung Kai and sign a release and waiver of claims they may have against Sun Hung Kai;
• to engage an independent audit firm to conduct a review of Sun Hung Kai's internal control and compliance systems;
• if, within 18 months from the completion of Sun Hung Kai's current enhancement exercise (which shall be completed within 6 months from the date of this agreement), SFC finds the same concerns of a materially serious nature as those identified by it in this investigation, Sun Hung Kai's licence will be partially suspended for a period of three years to the extent that Sun Hung Kai will not be allowed to sell or distribute unlisted or structured products to clients and provide advice to clients in relation to these products; and
• continue to support and cooperate fully with SFC.

Let's wait and see what actions HKMA and SFC will take against those retail banks which had distributed Minibonds.