SEC proposes further reforms on money market funds

The SEC is proposing to tighten regulations governing money market funds. Money market funds are traditionally a safe investment vehicle holding almost exclusively shorter-term, high quality bonds. They tend to offer higher returns than bank deposits and have experienced little failure. The regulator requires money market managers to maintain their funds above 1USD per share in net asset value.

The 2008 financial crisis was a watershed moment highlighting the potential dangers of money market funds.  Reserve Primary Fund, once a major money market fund, had invested USD785 million in Lehman Brothers and was unable to maintain the formula of 1USD NAV per share. This led to widespread redemption by risk-averse investors, and the fund later required government help to get through the crisis.

The new measures which the SEC is proposing will eliminate the taken-for-granted expectation of stability in money market funds. The SEC is considering implementing a floating NAV that moves away from the pre-established 1USD mark which may reflect the risk level more realistically. The industry is opposed to the new measures saying they will eliminate the appeal of money market funds.

Reuters’ report on SEC money market reforms can be found here.

Financial Times report highlighting history and industry view of money market reforms can be found here. 

SFC reprimands Sun Hung Kai Investment Services

On 21 June 2011, the SFC reported that it had issued a reprimand to Sun Hung Kai Investment Services Ltd (SHKIS) and fined it $4.5 million for failings relating to its sale of Lehman Brothers related equity-linked notes (ELNs) to its clients between May and August of 2008.

An investigation by the SFC found that SHKIS had failed to:

• perform adequate due diligence on the ELNs before selling them to clients;
• provide adequate training and guidance for its sales staff, which would enable them to fully understand the nature of ELNs, the risks involved in ELNs, and the suitability criteria; and
• disclose material information, including the product terms and conditions and the risks associated with ELNs, to its clients       

Further details are available here.

BOC Hong Kong staff arrests in relation to Lehman Brothers

On April 12 Bloomberg reported that BOC Hong Kong had released a statement to the Hong Kong Stock Exchange, stating that two staff had been charged by the city's Commercial Crime Bureau in connection with the sale of structured products linked to Lehman Brothers Holdings Inc. They also reported that a third employee was arrested and hadn't yet been charged.

BOC Hong Kong was the biggest seller of the Lehman Brothers products, and was among a group of 16 banks that agreed a settlement arrangement for victims with the HKMA and the city's Securities and Futures Commission.

The two employees were charged April 8 under provisions of the Securities & Futures Ordinance that make it illegal to "fraudulently or recklessly induce others to invest money," according to the statement.

BOC Hong Kong has said it will make no further comment and it remains to be seen what, if any, comments the various regulators make while the investigation continues.

HKMA reports first disciplinary action in relation to Lehman Brothers related investment product

On 20 November 2009 the Hong Kong Monetary Authority (HKMA) reported that it had suspended Ms Leung Wai Yu’s registration for three months from 20 November 2009 to 19 February 2010.

HKMA’s investigation found that in March 2006, Ms Leung, who at the time was an employee of DBS Bank (Hong Kong) Limited, in the course of selling a client Constellation Credit Linked Note, had:

• failed to diligently disclose and explain to the client the product’s risk; and
• failed to complete the risk disclosure statement for the client in accordance with the bank’s internal control procedures      

The Constellation Credit Linked Note had included a reference to Lehman Brothers Holdings Inc. in respect of the occurrence of a credit event.

Mr Raymond Li, the Executive Director of the HKMA responsible for Securities Enforcement said: "This is the first time the HKMA has taken disciplinary action against a relevant individual in connection with a Lehman Brothers-related investment product.  There are other disciplinary cases which have reached an advanced stage and will be announced in due course."

Please use the following link to access the HKMA press release

FSA Announces Tough Measures for Investors in Lehman-backed Structured Products

by Karl Hindle – London UK

On 27th October, the Financial Services Authority (FSA) announced a series of wide-ranging and very tough measures in favour of investors who bought or relied upon Lehman-backed investments.

Lehman Brothers collapse signified the definite arrival of a major global financial crisis. It was not simply that a bank had failed but the far-reaching impact on global financial markets and the realisation that this was not an isolated event but systemic.

The link to the FSA announcement is here

The FSA has performed a review of marketing and distribution of structured products and not just those of Lehman Brothers, though it has paid special attention to them. This review found “significant advice failings” amongst most advisory firms recommending structured products for investors and also, “serious deficiencies” in marketing collateral used by plan managers.

Consequentially, the FSA is imposing strong measures to treat investors fairly.

These include:

• investors advised by three firms now in insolvency administration will be compensated by the Financial Services Compensation Scheme (FSCS); 
• all firms which provided advice on Lehman-backed structured products must follow an FSA complaint template and handling process to ensure fair investor treatment; 
• three further advisory firms are being subjected to enforcement action by the FSA, for providing unsuitable advice and ordering other advisers involved in providing unsuitable advice to pay financial compensation to affected investors; 
• for all other firms involved in advising and using Lehman-backed structured products, strict guidance has been issued on standards of conduct expected when using any structured product or advising on them;  and
• retroactive assessment of structured product sales is to be made by larger sellers and to assess how their standards compare to the measures which are being introduced by the FSA now.

Redress is to be made where appropriate and the FSA has stated it will be conducting follow-up assessments in 2010 to ensure compliance.

It should come as no surprise that 2010 will herald a raft of fine announcements, above and beyond the enforcement action which has already been taken. While Lehman Brothers is dead, the mess left behind is still being cleaned up but, as with any politically charged issue, someone is going to have to be seen to be "doing something" and someone is going to have to shoulder the financial blame.

As Dan Waters, the FSA's Director of Conduct Risk stated, “...we will not hesitate in taking action if firms do not take sufficient steps to respond to our concerns.”

You can find several documents of note which were published along with the announcement at the following links:

For the FSA review document - Quality of advice on structured investment products

For the complaint template and associated guidance

For the Plan Manager Review of non-Lehman-backed products

For additional information visit the Wider Implications website