Diploma in Investment Compliance

Last week the Chartered Institute for Securities & Investment (CISI), the ICMA Centre at the Henley Business School and the FINRA of the US announce that they have joined forces to support and enhance education, training and certification in financial compliance.

The CISI is the largest and most widely respected professional body for those who work in the securities and investment industry in the UK and abroad and has developed a suite of well recognized and supported programs centered around product knowledge and regulation to support practitioners in the financial services industry. Since 2006, the ICMA Centre and FINRA have developed and offered a highly regarded Diploma in Capital Markets Regulation and Compliance aimed at mid-level securities professionals. With the development of the CISI 's Diploma in Investment Compliance, the industry was faced with two separately recognized routes to certification,and it was agreed that, by joining forces, the parties can work together to better enhance the professional credentials of capital markets practitioners in the UK.

The agreement will mean that those who have already achieved the Diploma in Capital Markets Regulation and Compliance will become members of the CISI and those with a partially completed qualification will receive appropriate exemptions from the jointly supported Diploma in Investment Compliance. In addition, the ICMA Centre will work with the CISI to deliver advanced certification for those who have completed the Diploma in Investment Compliance and whose needs are for expanded coverage of topics required by senior compliance staff in financial institutions.

(Jack's comment: Hong Kong financial industry doesn't have such kind of compliance qualification for the practitioners. Why don't SFC and HKSI work with CISI to promote the Diploma in Investment Compliance?)

Mystery Shopping Programme

Following the Minibond incident, both HKMA and SFC have proposed the use of mystery shopping to detect sales malpractices. Last week they jointly issued an invitation to tender for the Mystery Shopping Programme (MSP) for the sale of unlisted securities and futures investment products in Hong Kong.

Scope:

• The MSP is a market wide exercise focusing on the retail market and capturing experiences from different types of Intermediaries in the banking sector and the securities sector selling investment products.
• The regulators want to ascertain if the sales consultants follow their rules and regulations during the sales process, including but not limited to making of recommendations and/or solicitation on investment products. The MSP will focus on a number of areas, including "know your client" procedures, risk disclosure and suitability of investment recommendation.In addition to the audio recordings, all completed questionnaires and materials received by the shoppers must be handed over to the service provider, which will in turn, be provided by the service provider to the regulators at the conclusion of the MSP. No copies may be retained by the shoppers or the service provider. The regulators may require the service provider to certify that all the audio recordings, completed questionnaires and materials received by the shoppers have been returned to the Regulators. During the MSP, the regulators may request for documents and audio-records of particular samples for testing or review purpose.
• The MSP will cover shoppers of various age groups and with specific investment objective, investment experience, financial position and attitude to risks.

Sample size:

• The target Intermediaries will be determined by the regulators and the sample size will cover (i) the banking sector which includes large, medium and small banks; and (ii) the securities sector which includes securities brokers and investment advisers.
• The exact number of target Intermediaries and sample size are to be determined but tenderers should give separate quotations in multiples of 50 samples starting from 400 up to 700 samples (total for both banking and securities sectors).

Methodology and main duties of the MSP service provider:

• All shoppers are to be sourced, recruited and trained by the MSP service provider. It is expected that the shoppers will use their real personal identity and act as potential clients. In relation to the method of initial approaches to the sales consultants within targeted Intermediaries, it is expected that there will be a mix of approaches from "walk in", telephone and/or responding to advertising or marketing.
• The regulators may request all mystery shopping interviews to be audio-recorded and the recordings to be handed over to the regulators. No copies may be retained by the shoppers or the service provider.
• The service provider will undertake to comply with the Personal Data (Privacy) Ordinance in performing the MSP.
• A shopper questionnaire will be designed by the regulators and mandatory for shoppers to complete and to submit the same to the regulators upon request. This questionnaire will document the shoppers' experiences and consist mainly of closed-end questions requiring yes/no answers with some open-end questions requiring opinions from the shoppers.
• Training provided by the service provider should cover posing as potential clients. The service provider should also provide training and simulations on how to audio-record mystery shopping interviews, carry out assessment process, complete questionnaire, etc.
• All the mystery shopping meetings must be face-to-face. It is expected that a number of meetings may be conducted before reaching a point where investment recommendation on investment products will be provided, and the shoppers would not be required to make any investment. In the event that a shopper makes an investment out of his own volition, the shopper has to bear his own costs and risks. The regulators will under no circumstances be liable for any investment and related expenses and for any loss or damage incurred by the shopper.
• During the mystery shopping exercise, the service provider will perform on a regular basis quality control on the completed questionnaires, which will include reviewing samples of completed questionnaires by checking the answers of the completed questionnaires against the relevant audio-recordings and provide the regulators with statistics of the answers in the completed questionnaires.
• The service provider will administer the mystery shopping interviews (e.g. follow up with the shoppers on completion of the questionnaire, debrief the shoppers after the first few mystery shopping interviews to resolve any unanticipated problems and perform quality control on data gathered, which includes but is not limited to an independent review on the completeness and accuracy of all the completed questionnaires).
• After the first two weeks of commencement of interviews conducted by the mystery shoppers, the regulators will select samples conducted during that period, review the documents received by, and questionnaires (if any) completed by, the shoppers and listen to the audio recordings to test the adopted working approach carried out by shoppers and other elements of the MSP and provide feedback to the service provider.
• The service provider should establish and maintain such measures and procedures to provide for the safe custody and proper handling of information (including audio recordings and materials received by the shoppers) obtained in the MSP and to prevent unauthorised access to, or use of, such information. The service provider shall also comply with all instructions of the regulators relating to the handling and storage of the information obtained in the MSP.
• The service provider will provide bi-weekly status report to the regulators summarising issues identified, and task progress, etc.
• The service provider will analyse the results of the completed questionnaires and summarise the findings for the purpose of preparing reports to the regulators.

(Jack's comment: Thanks HKMA and SFC for creating employment opportunities. I am interested in assisting the service providers for training the mystery shoppers.)

Misleading Investors About Subprime Mortgage Investments

SEC recently charged Boston-based State Street Bank and Trust Company with misleading its investors about their exposure to subprime investments while selectively disclosing more complete information to specific investors. State Street has agreed to settle SEC's charges by paying more than $300 million that will be distributed to investors who lost money during the subprime market meltdown in 2007. This payment is in addition to nearly $350 million that State Street previously agreed to pay to investors in State Street funds to settle private claims.

According to SEC's complaint, State Street established its Limited Duration Bond Fund in 2002 and marketed it as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors.

By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives that magnified its exposure to subprime securities. But State Street continued to describe the fund to prospective and current investors as having better sector diversification than a typical money market fund, and failed to disclose the extent of the fund's concentration in subprime investments.

State Street sent investors a series of misleading communications beginning in July 2007 concerning the effect of the turmoil in the subprime market on the Limited Duration Bond Fund and other State Street funds that invested in it. At the same time, however, State Street provided particular investors with more complete information about the fund's subprime concentration and other problems with the fund. These other investors included clients of State Street's internal advisory groups, which provided advisory services to some investors in this fund and related funds.

Based on this more complete information, State Street's internal advisory groups subsequently decided to recommend that all of their clients including the pension plan of State Street's publicly-traded parent company (State Street Corporation) redeem their investments from the fund and the related funds. State Street sold the fund's most liquid holdings and used the cash it received from these sales to meet the redemption demands of better informed investors, leaving the fund and its remaining investors with largely illiquid holdings.

(Jack's comment: Packaging subprime investments as a money market fund is no different from telling investors that Minibond is equivalent to time deposit.)

SFC and Minibond Fiasco

(Reproduced from SCMP 2010.01.27)

The Lehman Brothers minibond mess could have been avoided had the Securities and Futures Commission imposed the measures needed to properly vet their sale and suitability to investors, a former senior manager with the regulator said.

Harold Ko Ping-chung, the commission's former head of insurance-related policies and products, told lawmakers that he believed different standards used by the commission's investment products and corporate finance departments, and lax supervision and staff inexperience contributed to the Lehman minibond fiasco.

Minibonds were handled by the corporate finance department, which only required that necessary product information be disclosed, and not the investment products department, which looked at whether the various parties involved in the product were suitably qualified.

Since leaving the commission about five months ago, Ko has been keen for lawmakers to hear his evidence. He testified publicly yesterday for the first time before the Legislative Council subcommittee investigating what went wrong. He also met the subcommittee last week behind closed doors.

The collapse of Lehman Brothers in September 2008 left holders of minibonds linked to it virtually worthless. Minibonds are not corporate bonds, but are high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.

Ko spent much of his two decades with the commission vetting investment products. His deep understanding of the regulator's work in authorising Lehman minibonds is seen as invaluable as lawmakers prepare to summon banking representatives to testify.
Ko is no stranger to politics. In the 1990s he was a core member of United Ants, a grass-roots human rights group. He also ran unsuccessfully for a seat in Legco in 1995.

(Jack's comment: This is not a unified regulatory body. It consists of different operating units pursuing their private interests by all means. This is the misfortune of the Hong Kong securities industry. Salute to Mr Harold Ko.)