In the past two months the SFC has issued a public reprimand and fined both Merrill Lynch (Asia Pacific) Limited ("Merrill Lynch") and Sun Hung Kai Investment Services Ltd ("SHKIS") for internal control failings relating to the sale of investment products.
Merrill Lynch was reprimanded and fined HK$3 million for inadequate systems in relation to the sale of two indexlinked notes to 72 clients in 2007. The SFC found that Merrill Lynch had failed to properly assess the financial situation and investment objectives of over 40 of its clients, key product information was only provided to clients after they had agreed to invest in the notes, and Merrill Lynch kept inadequate documentation to explain the rationale behind the advice given to their clients.
SHKIS was reprimanded and fined HK$4.5 million for failings relating to its sale of Lehman Brothers related equitylinked notes ("ELNs") to its clients between May and August of 2008. The SFC found SHKIS had failed to conduct adequate product due diligence, provide sufficient training and guidance on the ELNs to its sales staff, and disclose material information on the ELNs to its clients.
In determining the penalties for each firm, the SFC had considered Merrill Lynch's agreement to implement a resolution scheme to clients who bought the index-linked notes and to review its client compliant procedures; and in SHKIS' case, its serious deficiencies in its distribution system and SHKIS' disciplinary record. Both Merrill Lynch and SHKIS had also agreed to engage an independent audit firm to review their respective internal distribution systems and controls. The SFC also expressly stated that the reprimands and fines were intended to provide a strong deterrent message to the market that failures to ensure suitability of investment products and disclose material information to clients were not acceptable.