Fraudulent Conduct at Advisory Firm

Last week US SEC charged Houston-area businessman Daniel Frishberg with fraudulent conduct in connection with promissory note offerings made to clients of his investment advisory firm.

SEC alleges that Frishberg's firm Daniel Frishberg Financial Services (DFFS) advised clients to invest in notes issued by Business Radio Networks (BizRadio), a media company founded by Frishberg where he hosts his own show under the nickname "The MoneyMan."

Frishberg agreed to the SEC's charges by paying a $65,000 penalty that will be distributed to harmed investors. He will be barred from future association with any investment adviser.

According to the SEC's complaint, at least $11 million in promissory notes were issued by BizRadio and Kaleta Capital Management (KCM), which is owned by Frishberg's associate Albert Fase Kaleta. Frishberg and Kaleta jointly controlled BizRadio.

SEC charged Kaleta and his firm with fraud in 2009, and the court appointed a receiver to marshal the assets of KCM and relief defendants BizRadio and DFFS.

Frishberg authorized Kaleta to recommend the notes to DFFS clients, and clients were not provided with critical disclosures. Investors were not told of BizRadio's poor financial condition and the likely inability of KCM and BizRadio to repay the notes. Nor were investors informed about Frishberg's significant conflicts of interest in the note offerings because the proceeds funded his salary as a BizRadio talk show host.

Frishberg chose Kaleta to recommend the BizRadio notes even though he was aware of complaints about Kaleta's lack of truthfulness in sales presentations regarding other investments.

Jack's comment: This guy is really a great "financial actor"!

Listed RMB Securities Business

Last week SFC issued a circular to SEHK Exchange Participants and CCASS Participants by attaching a checklist to facilitate their review of readiness to conduct listed RMB securities business. The checklist recaps the key areas that Participants should consider during their readiness review.


Participants conducting the RMB Readiness Test are advised to summarize in the checklist the conclusions of their review of readiness in those applicable areas set out in the checklist. Participants should also keep a copy of the completed checklist for record.


Participants are reminded to prudently assess their readiness and be satisfied that they have already prepared themselves properly before confirming their readiness to HKEx.


Brokers providing currency conversion service to their clients should ensure the relevant exchange rate and / or basis of fixing the exchange rate has been clearly disclosed to and agreed with the clients. Brokers should also clearly disclose to the client their role in the transaction (as agent or principal) and ensure compliance with the Code of Conduct's requirements relating to conflicts of interest and compliance.


Those brokers who fail to ensure their readiness should refrain from dealing in RMB securities to be listed on the SEHK or clearing transactions in such securities. They should put in place measures to prevent inadvertent trading of, or acceptance of client trading instructions on, listed RMB securities. For example:

• Notify all staff in writing that no client trading instructions on listed RMB securities should be accepted
• Explain to clients clearly that no services in listed RMB securities are offered by your firm currently upon clients' enquiries
• Closely monitor trading activities. If inadvertent transaction in listed RMB securities is identified, contact HKEx immediately to discuss any need for taking remedial action

Brokers conducting trading / clearing activities in RMB securities to be listed on the SEHK without having ensured their readiness for conducting such activities shall be liable to regulatory scrutiny of their conduct.


Jack's comment: The checklist provided by SFC, asking only a lot of general questions, is basically useless. But SFC would claim they have got their job done.

Enhanced Regulatory Requirements on Selling of ILAS

This week HKMA issued a circular to state the necessity to further enhance the regulatory requirements for the sale of Investment-Linked Assurance Scheme (ILAS) products by the banks. The following control measures are set out in the Annex of this circular:


Competence of staff and registration

• Banks and their staff who sell ILAS products should ensure that they are properly registered as insurance agencies and technical representatives of the principal insurance companies respectively.
• Banks should provide sufficient training to ensure that staff engaged in the selling of ILAS products (i) have adequate knowledge and skills to provide explanations, recommendations or advice to customers about such products; (ii) are conversant with the selling procedures and relevant controls; and (iii) are aware of the relevant regulatory requirements that they need to comply with.

Product due diligence

• Banks should develop sufficient understanding of the nature and structure of ILAS products, including the underlying investments, the insurance protection, lock-in periods, fees and charges, penalty for early encashment, the credibility and capability of the insurance companies issuing the ILAS products, and other factors that may have an impact on the risk and benefit profiles of the ILAS products.
• The independent risk management function should be involved in the product approval and review processes to ensure that the risks of ILAS products are well understood and adequately assessed. All relevant departments, e.g. risk control, legal and compliance, should be consulted as appropriate.
• Banks should conduct their own product due diligence and not to merely rely on the risk assessment conducted by the issuing insurance company. Banks should also perform a continuous review of the risk ratings it has assigned to the underlying investment options of ILAS products and make revisions to such risk ratings as appropriate. Where a review results in a higher risk rating, the affected customers should be notified through a monthly statement or a separate letter.
• Banks should assess and determine the tenor of an individual ILAS product, and match it with a potential customer's preferred investment horizon. In general, ILAS products are longer-term products designed to be held by the policyholder for a relatively long period (e.g. at least five years or above). Banks should take into account, among other things, the lock-in period (the period during which penalties or charges will apply in the event of early encashment) for determining the tenor of an ILAS product.

Use of gifts

• To avoid distracting customers' attention from the nature and risks associated with ILAS products, banks should not offer financial or other incentives (e.g. gifts) for promoting ILAS products. Discount of fees and charges, and the offering of any gifts for brand promotion, relationship building or other purposes not directly related to the promotion of ILAS products will not fall foul of this requirement.

Selling activities to be conducted inside investment corner

• Any solicitation, recommendation, discussion on ILAS products and sale of ILAS products to customers should be carried out only inside banks' investment corners.

Product disclosure

Banks should make adequate disclosure to customers through proper explanation of the nature and risks of ILAS products, including, among other things:

• Product nature – Banks should make it clear to customer at the outset that the product is an investment-linked insurance product. ILAS products should not be misrepresented, for example, as savings plans or deposits, or investment funds without any insurance element. Both the investment and insurance elements should be properly disclosed. Any description that disguises the insurance element, e.g. describing ILAS as "investment funds with complimentary insurance or life protection", is inaccurate and unacceptable.
• Investment options and risks – Banks should disclose and explain the nature and risks of the investment options under each ILAS product. Banks should make it clear, where applicable, that there is no guarantee of the repayment of principal.
• Credit risk – Banks should disclose the name of the insurance company, the fact that the premiums the customer pays will become part of the assets of the insurance company and that the customer will not have any rights to or ownership of the underlying investment assets, and thus he or she is subject to the credit risk of the insurance company.
• Insurance protection – Banks should disclose and explain the amount and/or the basis of determining the death benefit, including the fact that the amount is subject to the market risk and the foreign exchange risk of the ILAS product, where applicable, and that the death benefit payable may be significantly less than the premiums paid and may not be sufficient for the customer's estate planning purpose.
• Premium payment – Banks should disclose the amount, frequency and duration of premium payments. Banks should also explain the circumstances under which a premium holiday can be exercised and its consequence (e.g. the value of the ILAS product may be reduced due to the continuing fees and charges; the entitlement to loyalty bonus may be affected; and the ILAS product may be terminated and the policyholder may be subject to a surrender penalty if he or she fails to resume making the premium payments). Where the ILAS product allows policyholders to take out policy loans, Banks should disclose and explain how the policy loans operate (e.g. whether the loans will be automatically given when the policyholder does not pay a premium payment that is due), the interest and charges on the loans, and the possible termination of the ILAS when the account value is insufficient to cover the outstanding loans and accumulated loan interest.
• Lock-in periods – Banks should disclose and explain that ILAS products are designed to be held for a medium/long-term period and that early surrender of the product may be subject to a heavy financial penalty, and disclose the level of penalty. Banks should also explain to customers the restrictions on cash withdrawal, if any.
• Fees and charges – Banks should disclose and explain the fees and charges at both the scheme level and the underlying investment asset level, and that due to the fees and charges, the return on the ILAS product as a whole may be lower than the return of the underlying investment assets. Banks should also explain that part of the fees and charges paid will be used to cover the charges for the life insurance coverage. The insurance charges will reduce the amount that may be applied towards investment in the underlying assets selected. The insurance charges may increase significantly during the term of the ILAS product due to factors such as age and investment losses. This may result in a significant or even total loss of the premiums paid.
• Cooling-off period – Banks should draw to the attention of the customer his or her right to cancel the policy, how he or she may exercise the right and how the refund will be calculated.

Banks should provide to customers the ILAS offering documents and Product Key Fact Statements (if issued). When explaining or recommending ILAS products to customers,
banks should give balanced views. Where direct investment in the underlying investment assets (e.g. unit trusts and mutual funds) can be the alternative of indirect investment through ILAS products, banks should explain to customers the pros and cons of ILAS products compared with direct investment in the underlying investment assets and taking out a life insurance policy separately.

Banks must distribute HKFI's education pamphlet entitled "Questions you need to ask before taking out an ILAS product" to potential policyholders of ILAS products at the point-of-sale. Where appropriate, banks may also refer their potential customers to other ILAS-related public education materials, e.g. those issued by SFC or HKFI.

Ensuring customer suitability

• Banks should take all reasonable steps to ensure that the recommended ILAS product is suitable for a customer having regard to the customer’s circumstances, such as investment objectives and horizon, investment experience, risk tolerance level, affordability and asset concentration, etc. In general, customer risk profiling and needs analysis should be performed prior to making any solicitation or recommendation in respect of any ILAS products. In this respect, banks should ensure compliance with HKFI's "Updated Requirements Relating to the Sale of ILAS Products following the Introduction of the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products".
• Banks should avoid exerting any undue influence on or the manipulation of the risk profiling result. Banks should guard against any acts, before, during or after the profiling process, that may defeat the purpose of these measures.
• While ILAS products can take various forms, those currently available in Hong Kong mostly offer a wide range of investment options with varying risk levels which a customer can choose from. It is also a common feature of ILAS products that subsequent switching between investment options and a top-up investment are allowed. At the point-of-sale of ILAS products, banks should explain to the customer the possible risks of switching to or top-up investment in investment options that are inconsistent with his or her risk profile. Banks should remind the customer to discuss with relevant staff before making a subsequent switching or top-up investment.
• Where a customer indicates that he or she does not need/want insurance/investment products, banks should not recommend ILAS products. Further, in view of the long lock-in period of ILAS products, banks should ensure that due regard is paid to a customer's risk tolerance, financial situation, liquidity needs, investment horizon and retirement plan (if any) in considering whether ILAS products are suitable for him or her. In particular, when dealing with elderly customers or customers in need of liquidity, banks should alert them of the lock-in period and ensure that the product is suitable for the customer. Banks should allow sufficient time for these customers to consider the product or seek advice from their relatives or friends where necessary.
• Banks should exercise extra care in selling investment products to vulnerable customers. Among other things, there should be more than one front-line staff member handling the sale to such a customer, unless the customer opts out of this arrangement and proper audit trail is maintained on this opt-out decision.
• More stringent control measures should be adopted for transactions involving a risk mismatch. Whenever any of the investment options selected by a customer in an ILAS transaction has a risk rating higher than the customer’s risk tolerance level, before accepting this transaction, the bank staff should (i) remind the customer of the risk mismatch and that the investment option(s) may not be suitable for him or her; (ii) document the reasons of any product recommendations as well as the reasons for the customer’s choice of investment option(s); (iii) ensure the customer's acknowledgement of the risk mismatch; and (iv) appropriately audio-record the relevant conversation in respect of these arrangements. In the event of inconsistent answers given by the customer, the bank staff should seek clarification and document the reasons given by the customer. Endorsement should be sought from supervisory staff.
• Banks should have proper audit trail, including audio-recording, of every switching transaction or top-up investment processed by the bank to capture either (i) the customer's acknowledgement that the switching or top-up investment did not involve solicitation / recommendation by the bank or its staff; or alternatively (ii) the rationale for any solicitation/recommendation by the AI or its staff. If the switching transaction or top-up investment processed by the AI involves the customer choosing risk-mismatched investment option(s), the control measures set out in the previous paragraph should also be adopted. Similarly, there should be appropriate warnings, alert messages and audit trail for transactions conducted through channels other than bank branches such as phone banking or Internet banking.

Records maintenance and audio-recording

• Banks should ensure that adequate records and an audit trail (including audio records) are in place to show that the proper selling process has been followed. Banks should ensure the salient parts of the sales process and ancillary arrangements relevant to the ILAS application are properly audio-recorded. This should cover the salient parts of the customer risk profiling, relevant information for suitability assessment obtained from financial needs analysis5, provision of alternatives and rationales of the recommendation (e.g. covering why the ILAS product was recommended instead of direct investment in funds and separate life insurance policy), disclosure of product features and risks, Applicant’s Declarations, and Customer Protection Declaration.

Management oversight

• Banks should have adequate management oversight of the sale of ILAS products. Banks should establish proper management information system reports for management to assess its business and identify risks or non-compliance. High risk areas and exceptions (such as transactions with vulnerable customers, tenor and/or risk mismatch transactions, affordability issues or high asset concentration) related to the sale of the ILAS products should be monitored. There should also be regular independent reviews of the selling process of ILAS products, covering test-checks of ILAS transactions including those identified as high risk areas and exceptions. The "mystery shopper" programme of banks should include a test of the ILAS product selling process. Appropriate follow-up actions should be taken if any irregularity is identified.

Complaints handling

• Banks should ensure that complaints relating to ILAS are handled in a proper and timely manner. Banks should report to the relevant principal insurers all complaint cases and keep the insurers informed during the complaint handling process, as appropriate. Given the principal-agent relationship, the complaints may also be handled by the principal insurers and reviewed by OCI or HKFI.

Notifications to regulators

• Banks should promptly report to the HKMA and other relevant regulator(s) any material breach, infringement of or non-compliance with any applicable law, regulations and codes.

Disciplinary proceedings

• Disciplinary proceedings under the Banking Ordinance may be taken against a relevant individual (ReI) if his or her conduct in the sale of ILAS products raises concerns about his or her fitness and properness to be an ReI. Banks should clearly communicate to all ReIs involved in the sale of ILAS products the potential risk of disciplinary proceedings being taken against them for any acts or omissions that raise concerns about their fitness and properness to be an ReI.
• Similarly, disciplinary proceedings may also be taken by IARB against technical representatives for non-compliance or misconduct under the Code of Practice for the Administration of Insurance Agents issued by HKFI. Banks are advised to report, via their principal insurers, to IARB any disciplinary proceedings taken on an ReI for any acts or omissions that raise concern about his or her fitness and properness to remain as an ReI.

Jack's comment: Such "parental guidance" note should also be provided by SFC or OCI to those insurance agents who are not working for banks.

Evidential Requirements for Professional Investors

SFC recently published the Consultation Conclusions regarding proposals to refine the requirements for evidencing whether a person qualifies as a high-net-worth professional investor under the Securities and Futures (Professional Investor) Rules.



THE NEW REGIME


The Principles Based Approach


SFC's new regime is founded upon a principles based approach to the consideration of whether an investor meets the relevant assets or portfolio threshold, at the relevant date, to qualify as a professional investor. This flexible approach is designed to permit companies to employ whatever method seems most appropriate to them, in the circumstances at hand, when making this consideration.


SFC will not prescribe what these methods should be, although it does note that firms should maintain proper records of their assessment process. This will enable any firm to show that they have made a reasonable decision in declaring, after the appropriate exercise of professional judgement, that their clients satisfy the relevant thresholds.


Some issues were raised during the consultation process which merit examination:


Assessment Methods


A number of market participants requested advice from SFC on the standards and processes which should be employed when evaluating the assets and portfolio levels of potential professional investors. More detailed instruction was also appealed for, as market participants wished to know whether specified types of documents or data (such as a company search on corporate client) are acceptable evidence when investigating an investor's potential status as a professional investor. Some respondents called on SFC to release a non-exhaustive list of such acceptable documentation.


However SFC stated that although guidance on the standards to be utilized when assessing potential professional investors may increase market certainty, the concept of issuing lists of acceptable documentation for making such assessments ran contrary to the principle based approach on which the new rules are founded. SFC reiterated its intention to leave maximum flexibility to market participants in their determination of an investor’s status, so long as the means availed of are appropriate in the circumstances and records are maintained.


Self-certification


A number of respondents expressed a desire for guidance on the matter of when it would be acceptable to permit a client to self certify as a professional investor. However SFC refused to issue such specific guidance, noting that firms should have sufficient knowledge of their clients' affairs, under the know-your-client requirements in the Code of Conduct, to make such a determination for themselves. SFC also explicitly stated that it was not ruling out self-certification as an acceptable method of evaluating the assets and portfolio levels of potential professional investors, but that it must be used in appropriate situations.


Incorporation of Modifications


Over the last few years SFC has made several Modifications, under section 134 of SFO, to the requirements under the Professional Investor Rules. Some respondents requested that SFC insert those Modifications which are applicable to a wide spectrum of market participants into the Professional Investor Rules. However SFC declined to act on these propositions, calling attention to the fact that these Modifications were permitted on the basis of particular sets of facts being presented by applicants to the SFO and stating that it had no inclination to alter the manner in which such modifications are granted. Additionally, SFC declared that the need for Modifications to alleviate the rigidity of the old regime in this area had been addressed by the flexible nature of the new principles based system of assessing an investor’s status.


PRESERVATION OF EXISTING METHODS


In the Consultation Paper the SFC recommended retaining the current methods of appraising whether or not a client qualifies as a professional investor, a recommendation which received the approval of the majority of respondents. SFC confirm that market participants may choose to continue to use the existing practices or to avail of the new more flexible system presented in the Consultation Conclusions.


USE OF "RELEVANT DATE" AS THE TIME REFERENCE FOR ASCERTAINING WHETHER AN INVESTOR MEETS THE RELEVANT ASSETS OR PORTFOLIO THRESHOLD TO QUALIFY AS A PROFESSIONAL INVESTOR


The majority of respondents approved of SFC's proposal to use "relevant date" as the time reference for evaluating whether a high net worth professional investor satisfies the relevant assets or portfolio threshold. However a number contended that it is extremely difficult, from a practical standpoint, to procure evidence permitting the appraisal of an investor's assets or portfolio value on a specific date. Requests were made to SFC to ease the strictness of this rule, in recognition of these difficulties. However these were rebuffed by SFC, who reiterate in the Consultation Conclusions that although an investor must adhere to the relevant assets or portfolio threshold at the relevant date to qualify as a professional investor, the new principles-based approach imposes no process or evidence that market participants are obliged to follow or acquire on any particular date.
Furthermore, SFC note that any market participant experiencing complications when attempting to determine an investor's status on the relevant date may employ the current methods outlined in sections 3(a) to 3(c) of the Professional Investor Rules, which permit the assembling of specific documentary evidence prior to the relevant date, when making said determination.


EXTENSION OF THE SCOPE OF SECTION 3 (D) OF THE EXISTING PROFESSIONAL INVESTOR RULES


Most respondents agreed with SFC's proposal to broaden the application of section 3(d) of the existing Professional Investor Rules, with the effect that any corporation which is wholly owned by one or more individuals or corporations/partnerships, where each of those individuals or corporations/partnerships would qualify as a professional investor under section 3(b) or section 3(c) (as the case may be) of the Professional Investor Rules, will qualify as a professional investor. However some market participants felt that the scope of section 3 (d) should be extended further and include more forms of corporations as professional investors.


SFC considered the responses of the market and in the Consultation Conclusions agreed to further extend the operation of section 3 (d) of the Professional Investor Rules, so that any corporation which is wholly owned by one or more trust corporations, individuals or corporations/partnerships where each of those trust corporations, individuals or corporations/partnerships would qualify as a professional investor under section 3(a), section 3(b) or section 3(c) (as the case may be) of the Professional Investor Rules, will qualify as a professional investor.


However SFC refused to extend the application of section 3(d) any further, as to do so would be unnecessary and exceed the ambit of the current consultation. SFC also repeats the argument here that "the flexibility provided by the proposed principles-based approach has effectively addressed market participants' concerns with the practical difficulties in ascertaining their clients as professional investors under the current Professional Investor Rules."


MISCELLANEOUS MATTERS


Suggestions from market participants outside the scope of the current consultation


A number of recommendations were received by SFC from respondents with regard to aspects other than the evidential requirements of the professional investor regime. As these were not relevant to the current consultation, SFC did not consider them.


Status of existing Modifications / Future applications for Modification


One market participant queried whether Modifications granted prior to the amendment of the Professional Investor Rules will remain in force after the amendment and whether an application for a Modification or waiver of the requirements of the Professional Investor Rules, under section 134 of the SFO, will be permissible subsequent to the amendment of the Professional Investor Rules.


In response to the first query, SFC stated that the amendments would not affect any existing Modifications. SFC then noted that if a Modification application concerns sources or types of information and the remedy sought is in fact consistent with the revised Professional Investor Rules, there is no need to make such an application and to do so would be inappropriate. However, SFC will continue to consider granting modifications in relation to other requirements of the Professional Investor Rules under section 134 of the SFO.


IMPLEMENTATION


SFC will now take steps to implement the proposals discussed in this newsletter, via the making of the necessary amendments to the Professional Investor Rules. The revised rules will be gazetted in due course following review by the Department of Justice.




Jack's comment: More flexibility is at the expense of less "parental guidance".

Guideline on "Over-concentration"?

Yesterday SFC and HKMA announced that an agreement has been reached with Standard Chartered Bank (Hong Kong) Limited in relation to the bank's distribution of equity linked structured notes issued and guaranteed by Lehman Brothers (LB ELNs). Standard Chartered sold over HK$5 billion worth of LB ELNs between August 2006 and June 2008 of which HK$2.19 billion worth remains outstanding. The 2,515 outstanding LB ELNs are held by 2,234 individual customers.


Without admitting liability, Standard Chartered has agreed to make a repurchase offer to eligible customers holding an outstanding LB ELN distributed by Standard Chartered. The total value of the repurchase offer is estimated to be approximately HK$1.48 billion and will cover over 95% of the outstanding transactions in LB ELNs by Standard Chartered customers.


The repurchase offer is available to all retail customers holding outstanding LB ELNs who invested more than 5% of their Available Assets in not principal protected LB ELNs or 10% of their Available Assets in principal protected LB ELNs at the time of the purchase of the LB ELNs. The offer will exclude corporations (other than a corporation where the suitability assessment was based on an individual's circumstances rather than the corporation's, charities and not for profit organisations), professional investors, customers of the private banking division of Standard Chartered and those who did not purchase the LB ELNs from Standard Chartered.


Following an investigation by SFC and HKMA, both regulators were concerned that Standard Chartered may have exposed LB ELN customers to higher levels of risk than were suitable for them by not adequately considering concentration risk when assessing the suitability of LB ELNs for customers.


Under the repurchase scheme, Standard Chartered has agreed to make the repurchase offer at a price equal to the total value of each eligible customer's investment in outstanding not principal protected LB ELNs less 5% (or less 10% in the case of customers holding principal protected LB ELNs) of each customer's total assets held at or with Standard Chartered at the end of the month immediately preceding the date of the purchase of the outstanding LB ELNs or, the amount invested in LB ELNs (whichever is higher) (Available Assets).


The repurchase offer price will exclude the amount of coupons already paid to the customer but include an additional amount representing the interest that would have been earned if the amount invested in LB ELNs that is over 5% or 10% of the customer’s Available Assets (as the case may be) had been invested with Standard Chartered on a fixed term deposit instead of being invested in LB ELNs.


Under the repurchase scheme, Standard Chartered will also pay top-up payments to those customers with whom Standard Chartered has already entered into settlement agreements but would otherwise have been eligible to receive a repurchase offer to the extent that such payments are needed to ensure those customers are treated in the same way as other customers participating in the repurchase scheme.
In entering into this agreement under section 201 of the Securities and Futures Ordinance, SFC took into account that:

• the total value of the repurchase offers under the repurchase scheme that will be made available to eligible customers who invested in LB ELNs at levels in excess of 5% or 10% of their Available Assets;

• although LB ELNs were high risk products, they were less complex than Minibonds and likely to have been suitable products for most customers as part of a diversified portfolio;

• unlike Minibonds, there is no distributable collateral for the LB ELNs;

• as unsecured creditors there is little chance LB ELN holders will receive a substantial payment or dividend in the Lehman Brothers bankruptcy so the payments from Standard Chartered may be the only possible return for eligible customers.

• the repurchase offer will enable the vast majority of Standard Chartered's LB ELN customers to obtain a reasonable recovery without the costs and associated risks of separate litigation;

• the agreement will bring the LB ELN matter to an appropriate end for the benefit of Standard Chartered and its customers who participate in the repurchase scheme;

• a result on these terms could not have been achieved through disciplinary action by SFC against Standard Chartered and/or its officers and employees; and

• Standard Chartered has undertaken to engage an independent reviewer, to be approved by SFC and HKMA, to review its systems and processes relating to the sale of unlisted structured investment products, to report to SFC and the HKMA and will commit to the implementation of all recommendations of the independent reviewer.

In view of the repurchase scheme, SFC will not take disciplinary action against Standard Chartered and its current or former officers or employees in relation to the distribution of LB ELNs, save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature. HKMA has also informed Standard Chartered that it does not intend to take any enforcement action against their executive officers and relevant individuals in connection with the sale of LB ELNs to customers who have accepted the repurchase offers or the top-up payments under the repurchase scheme, except for any acts of dishonesty, fraud, deception or conduct that is criminal in nature.



Jack's comment: This case highlights the importance of concentration risk in the suitability process, which seems to be a hindsight after the Lehman Minibond incident. This case implicitly delivers a regulatory message that "over-concentration" means above 5% (of Available Assets) for non-principal protected products and over 10% for principal-protected products. Are such percentages too restrictive? Also, the so-called "Available Assets" count only assets maintained by the customers with the bank, then over-concentration is almost inevitable. Seriously speaking, if SFC does not intend to take this case as a benchmark to define over-concentration, it should issue a guideline in this respect as soon as possible.