Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission
Is it permissible for intermediaries to use gifts to promote a product category, e.g. unit trusts across all funds categories by various fund houses?
The underlying purpose of this requirement is to avoid the use of gifts to distract investors from the features and risks of a particular product. In this regard, if gifts are offered in such a way that they are linked to a particular type of investment product such as certain types of funds or funds offered by certain fund houses, then such gifts will be bound by this requirement as investors may be distracted from the unique features and risks of such particular funds.
Section reference: 3.11
Does this requirement apply to individual customers only but not corporate customers?
This requirement is applicable to both individual and corporate customers unless the customers are professional investors for the purpose of the Code of Conduct.
Section reference: 5.1A
For listed derivative products, e.g. derivative warrants (“DW”) and callable bull/bear contracts (“CBBC”), is it sufficient to explain the risks relating to the commonly known types of DW or CBBC?
Generally speaking, yes. This is because a “type” of derivative products is regarded as constituting those that are of a similar nature and have some commonality of risks. Intermediaries are required to explain the relevant risks associated with the different types of exchange-traded derivative products to clients.
Section reference: 5.1A(b)(i)
The term “acting in the best interests of the client” is open to interpretation. Would performance of steps including reminding the client of the risk mismatch of the product, documenting the reasons of any product recommendation as well as the reasons of the client’s choice of the product, and obtaining the client’s acknowledgement and confirmation of the risk mismatch be considered as acting in the best interests of the client?
The Commission does not consider that taking certain pre-set steps in the selling process would amount to acting in the best interests of the client. Instead, intermediaries should assess whether the transaction is suitable for the client. In that regard, reference may be made to the circular issued by the Commission on 28 May 2010 titled “Guidance to Licensed Corporations and Registered Institutions in relation to Investor Characterization and Professional Investors Requirements” (the “Circular”). Paragraph 12 of the Circular stated that “For the purpose of complying with paragraph 5.1A(b)(ii) of the Code of Conduct, where an intermediary is required to provide appropriate advice to a client as to whether or not a transaction is suitable for the client in all the circumstances, the intermediary should have regard to the factors set out in the Suitability FAQs issued by the Commission in May 2007.”
If an intermediary is of the view that the transaction is not suitable for a client but then proceeds to effect the transaction for the client, the intermediary should be prepared to justify why, despite the unsuitability, the intermediary still considered it to be in the best interests of the client to do so.
Section reference: 5.1A(b)(ii)
According to paragraph 6 of the Circular, a client will be considered as having knowledge of derivatives if he has executed five or more transactions in any derivative product (whether traded on an exchange or not) within the past three years. Is this intended as reference rather than rules?
The numbers are indicative and for reference only. However, the Commission regards these as minimum requirements. Intermediaries should take into account the individual circumstances of each client when determining whether he or she has knowledge of derivatives.
Section reference: 5.1A
Last update: 30 Sep 2010