securities (induction) - 2008-update

7/28/2019 Securities (Induction) - 2008-Update

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Securities Compliance

Training - 2008

China Construction Bank

(Asia) Corporation Ltd

CCB Securities Ltd

SFC


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Objectives

To advise the relevant laws and regulationsrelating to the investment businesses.

To go through the Securities ServicesCompliance Manual (SSCM) (Jan 2007)(Intranet: Compliance/AML Documentation -> Compliance

Manual -> Chap 6 -> Chap 6.3)

To let associates and supervisors understandtheirobligations on compliance and how to

discharge the obligationstake ownership


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Outline

Securities Compliance

Private Placement of Structured Noted FX Linked Deposit Compliance

Collateralized Foreign ExchangeCompliance Highlights


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Compliance

What Does It Mean?

Compliance is acting in accordance with proper and sound

market standardsand legaland regulatoryrequirements.

Who is the Compliance Function?

They are a control and advisory function to help ensure that

the business is conducted in accordance with laws, rules and

regulations. - 2ndl ine of defense

Why?

To protect our Bank against legal/regulatory/financial(fines,

penalties) and reputationrisk.


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Compliance Duties

The Compliance Department of the Bank is charged with the

following responsibilities: (Pls. see SSCM-1)

Advisingassociates on relevant laws and regulations applicable to their

activities;

Establishingand maintainingcompliance and ethical standards;

Initiating and providing compliance training; and

Attending to all applicable regulatory issuesand relationship.


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Associate Obligation

It is the responsibility of each and every employee of the

Bank to ensure that all businesses and activities of the Bank

are conducted in full compliance with all applicable lawsand regulations. Also, the business line managers assume

the supervisory responsibility in this regard.

Further, they should read and understand Securities

Services Compliance Manual and relevant Operations

Manuals (OP-13 Investment Products and Services

(available in intranet) which will be updated from time to

time, and are in full compliance with the manuals.


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Key Authorities

Hong Kong Monetary Authority

Securities and Futures Commission

CCBC regulators e.g. HKEx, CBRC, PBOC


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Key Ordinances & Regulations

Please refer the list in the SSCM - 2 , including:

Securities and Futures Ordinance and its sub-legislationBanking Ordinance

Companies Ordinance

SFC Code of ConductCode of Banking Practice


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Affected Securities Products

Cash Equities Trading/Margin Equities

Trading/Exchange Traded products

Bond Trading (retail bond/secondary market)

Collective Investment Scheme Trading including

Mutual Funds/REITs

Structured Equity Linked Investment

(Macquarie/KBC/SG)/Structured products (public

offering/private placement)


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Licence

The Bank is a Registered Institution under the SFO to carry

on:

Type 1: Dealing in Securities

Type 4: Advising on Securities

Bankapproved as registered insti tution to carry on Type 1 & 4

regulated activities on March 7, 2005.CCB Secur ities L td. - Licensed Corporation for Type 1 regulated

activity


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Other Regulated Activities

Type 2: Dealing in Futures Contracts

Type 3: Leveraged Foreign Exchange Trading

Type 5: Advising on Futures ContractsType 6: Advising on Corporate Finance

Type 7: Providing Automated Trading Services

Type 8: Securities Margin Financing

Type 9: Asset Management

The Bank is exempted from obtaining registration for Type 3

and Type 8 regulated activities


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Registration

Please see SSCM-1 and SSCM-14

HKMA Register - Relevant Individuals (i.e.Securities Dealing Staff)

Appointment ofExecutive Officers,

Complaints Officer and Emergency ContactOfficer

Events need to be reported to the HKMA within

7 business days (internal 2 business days)


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Notification of certain events to the

HKMAS20(4) BOnotify HKMA changes of

information related to relevant individuals e.g.de-registration

Self-declaration (bankruptcy, criminal offence,mental disorder)

Changes re information provided with respect

to the HKMA Register:-- Name, ID, Nationality, capacity etc.

Non-compliance incidents (whistle-blower)


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Unregistered Dealing (s.114)

Non-SDS is prohibited from carrying on or holding out as

carrying on a regulated activity:

Penalty: Criminal Conviction and Disciplinary Action

(CheckInformation Card, our banks internal register

maintained by Personnel and the HKMAs on-lineRegister and ask Compliance whenever you have doubt)


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RegistrationHKMA Circular

HKMA Circular

Controls to ensure compliance with S114(3) of theSFO and S20(4) of the Banking Ordinance (June 13,2007)

- MC 07-85 (Sep 7, 2007)- prohibition of unregistered dealing e.g. not take partin receiving orders

- no engaged in regulated activity before proper

registration- notify changes of information of SDS within 7

business day


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Fit & Proper, Competence &

Continuous Professional TrainingSDS must be fit and proper at all times

Procedures to ensure the fitness and proprietyCompetence requirements (initial competency,

compliance with Code of Conduct)

Continuous Professional Training (6 hours)

See SSCM - 15


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Rules of Conduct SSCM - 4

Capabilities(SDS and on-going obligation)

Information About Customers(KYC Due Dil igence Assessment-Form1024)

(Client I nvestment Profi le

Questionnaire) Information For Customers (Offering

documents, r isk disclosureClause 24

of T&C)


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Retail Wealth Management Business

HKMA Circulars:-

Retail Wealth Management Business (M arch 3, 2006)customer profiling, product suitability assessment, riskdisclosure, management oversight

Q & A on Sui tabi l i ty Obligations (May 8, 2007)- know yourclients, know the investment products, provide suitableadvice, sound business practices (include document

rationale of investment advice)


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HKMA Circular

SFCs Report onFindings of 2nd Round of ThematicInspection of Licensed Investment Advisers (Jun 1, 2007)

Know Your Clients

-Not obtain sufficient information

- conflicting range of investment objectives

-Not follow up on inconsistency with clients investment objective

- policy for decline to provide key information

Product Due Diligence-Timely review using relevant market and financial information

- spot serious inconsistencies between offering documents and marketing materials of

non-SFC authorized CIS

- Review of investment product before launch


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HKMA Circular

SFCs Report onFindings of 2nd Round of ThematicInspection of Licensed Investment Advisers (Jun 1, 2007)

Lack of justification to illustrate suitability of advice

-match product against clients profile

- explain key risks and restrictions of relevant products

- remunerated by commission rebate from product providersconflict ofinterests

-Disclosure to clients quantum of remuneration from product providers

Poor Documentation

-Reason for recommendation

- product due diligence process

Management Supervision

-Sign off exception without query


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HKMA on-site examination on

structured products (August 2006)

per iodic updateof customer information inquestionnaire (1 year)

Product suitabi l i ty assessment- classification of customers' risk levelinvestment profile/client appropriateness

checklist

- Designation of products' risk level- Matching customer risk with product risk

self assessment checkl ist (half -yearly)

elder ly customers policy (MC06-061)


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Investment Profile


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Coverage

Securities-related products

- Securities Cash/Margin Trading Account (sharesaccount)

- Structured Products- Bonds

- Mutual Funds

- Structured ELI Products

Investment Linked Insurance Products

Apply to Personal Customers at initial stage


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Risk ProfilingCustomer Risk Profiling New customers are required to complete anInvestment Profile Questionnaire

(IPQ) before openingan account for all securities-related products orapplying forinvestment linked insurance products.

IPQ is designed to help customers to consider their attitude toward investment risk.

(check WMP or ICBS any IPQ completed or over 1 year)

Client Appropriateness Checklistis also required to be completed before openingan account for all securities-related products

Customers are classified into six risk profiling categories

1Capital Preservation (15-32)2Current Income (33-40)3Conservative Growth & Income (41-48)

4Growth & Income (4956)5Growth (57-64)6Aggressive Growth (65-83)


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Risk Profiling

Product Risk Categories

Same 6 categories of classification as Customer Risk Profiling

Each product is scored and categorized. The Product RiskCategory is reviewed by Product Risk Group and update in theintranetand investment systems

- Shares Cash AccountLevel 3- Shares Margin Trading AccountLevel 5- Structured ProductsLevel 1 to 5- BondsLevel 1 to 4

- Mutual FundsLevel 1 to 6- Structured ELI ProductsLevel 3 to 6- Investment Linked Insurance ProductsLevel 1 to 6


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Risk Profiling

Matching of Customer Risk Profiling with Product Risk Category forclient suitability

Account Opening for all securities-related products or applying forinvestment linked insurance products (applies to new customerseffectivefrom Oct 31, 2007)

Customer Risk should equal to or greater than the lowest level of ProductRisk Category

e.g. Customer opening shares cash account should have Level 3 or aboveotherwise exception approval mechanismCustomer opening mutual funds account has no risk matching requirement

since the lowest product risk category of mutual fund is Level 1.

Transactions (applies to existing customers)

- conduct subscription/purchase/placement/switching for securities-relatedproducts (except shares account) and investment linked insurance products


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Guideline for Completion of IPQ

Modeled on previous mutual fund questionnaire

Section I No more than 3 unanswered questions Lowest score is assigned for unanswered questions Conflicting answer in Question 9 & 11 (e.g. choose highest option in

one and lowest in the other) Table selection in Question 8 (investment experience) should agree

with the answermanual check Section II

All questions must be completed

Time horizonweightingmanual check if product has tenor No investment account is opened if customer refuse to

complete the Questionnaire/ more than 3 questions areunanswered


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Guideline for Completion of IPQ

Completing IP

Any unanswered

questions?

Do the customers

select conflicting

answer in Question 9

and 11?

Is Section II

uncompleted?

In question 8, do

the answer

unmatch with the

the years of

experience in the

table

Ask the customer

to consider any

changes to the

answer required /

complete the IP

Yes

Are there more than

3 questions

unanswered in

Section I?

Calculate the IP

with the lowest

score for

unanswered

questions

Reject the

customer

instruction

Yes


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Elderly Customers & Other Vulnerable

Customers

Account Opening & HK$100,000 transaction

2nd officer witness requirements continue.

Exception Approval required for higher risk

transactions:-

a) (i) Investment tenor > 2 years and (2) age + tenor >

70and (3) transaction amount > or = HK$100,000

b) transaction amount > or = HK$1,000,000c) Product Risk is 6 and amount > or = HK$100,000


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Exception Approval

For Mismatch of Risk, please check customerwhether update of IPQ is required

Customer Risk Profiling < Product Risk Level

Product tenor does not meet his/her expected time

horizon Customers net worth < the requirement set out in the

Policy and Procedures (e.g. HK$400,000 forStructured ELI account)

No prior investment experience (e.g. StructuredProducts account)

Lack of understanding on the product feature


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Exception Approval (contd)

For elderly customerage over 65 a product with (i) investment tenor over 2 years; (ii) age +

tenor > 70; and (iii) transaction amount of HK$100,000 orabove.

a product with investment amount of HK$1,000,000 orabove per transaction. a product with (i) product risk level 6; and (ii) transaction

amount of HK$100,000 or above.

Exceptions in Client Appropriateness Checklist(F1006B)

Complete Justification Factors


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Exceptions Approval authority

more than 3 exceptions Division manager

For Product Risk Level 6but Customer Risk

Profiling is 2 or below

Division manager

3 or less exceptions Unit/ Branch manager

Exception Approval Form (F1376)

attached to account opening form/instruction form,

forward a copy to Compliance


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Age < 65 Age > 65

Proceed thetransaction

Customer Type

Any Exception?

No

Yes (i) complete theException Approval Form

(ii) confirm customer suitability(iii) document the Rationales

of Investment Advice

Are there morethan 3

exceptionsnoted?

Approved byDivision Manager

Approved byBranch/Unit

Manager

Yes (i) complete theException Approval Form

(ii) confirm customer suitability

(iii) document the Rationalesof Investment Advice

Proceed thetransaction

Any Exception?

Is Product Risk= 6 and IP < 2

Product Risk=6 and amount> HK$100,000

Amount >HK$1,000,000

(1) investment tenor>2 years and (2) age

+ tenor > 70 andamount >

HK$100,000

Are there morethan 3

exceptionsnoted?

Yes

No

Is Product Risk= 6 and IP < 2

No

Yes

No

Others

Document theRationales of

Investment Advice

No

Document theRationales of

Investment Advice

Yes

Yes


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Rationales of Investment Advice

Investment Subscription/ Switching

RISmatch customers risk profile TIMmatch customers expected time horizon EXPcustomer has prior investment experience KNOcustomers has relevant product knowledge DIVportfolio diversification LOWSmall investment amount NWOHigh net worth customer AGEmatch customers age Others

Phone Ordermark Phone Order only


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Suitability Confirmation

Account Opening/Transaction

The product may be considered to be inappropriatefor the customer

Product Risk Score > Customer Risk Profiling Score Product tenor not match with customer expected timehorizon (as stated in section II)

I/we fully understand the associated risks and return of the

Account(s), which I/we intend to apply for. I/We confirm that I/wewish to proceed with my/our application for the Account(s) despitethe risk level of the product(s) under the Account(s) may be higherthan my/our risk profile suggests. (Please if applicable)


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Phone Order by BBPC

Referred by Branch

- IPQ must be completed already

- any exception(if yessuitability confirmation byBBPC and Exception Approval by Branch to BBPC):-

- any risk mismatch

- Product Level 6 and customer Risk Level 2 years or notany elderly restrictionsRationale of investment by Branch to BBPC


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Shares Transactions

IPQ only completed upon account opening or

re-assessment

Every 6 months, top 30 transaction volume

customers are required to complete IPQ if not

yet done so (report sent by Compliance)

Other products by account basis e.g. CFX,

FXLD, gold trading,


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Re-assessment

Customer with IPQ completed for more than 1 year

Customer with securities account only has transaction

in past 6 months and with IPQ completed more than 1

year . Letter will be sent and no reply will signify nochange and letter date will be the last IPQ update

date.

Phone Orderverbal confirmation if no change forProduct Risk Score is 5 or below, update the last IPQ

update date.


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Updates on Investment Profile (IP)at Branch

Without IP

With IP Date of last IP

completed

More than 1 year

Less than 1 year

Conduct IP

yes

Proceed the

transaction

Conduct IP

Branch

No Reject thetransaction


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Others

Company customeradopt Form 1045 Joint Account

- new account openingeach required to completethe IPQ

- transactionrisk profile of account holder givinginstruction is considered

Online Banking

- mutual fundrequire completion of IPQ andconfirmation of Level 6 products.

Update IPQ where necessary, paper form availableinput into WMP


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Others

Transaction

Any IPQ or over 1 year

Product risk category vs customer risk profile and

any mismatchcustomer suitability confirmationand exception form Any elderly restrictionsexception form Any product tenor issuecustomer suitability

confirmation and exception form Rationale of investment

OP 13-12/MC-07-103


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Customer Assets(Segregation of Client Securities

Securities and Futures (Client Securities)

Rules)

Customer Priority

(First Come First Servenot handle own/connected person trade)

Honesty, Integrity and Due DiligenceFor ed documents no un air re erence


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Conflict of Interest(higher commission rate)

Responsibilities of Senior Management

Misuse of Information(Need to Know

Information Security SSCM - 12)

Prevention of Money Laundering

(SSCM

7/Compliance Manual Chap 1)


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Dealing by Employees of Other RegisteredPersons

(Written Consent Required

registered institution/licensed

corporation/insurance companies

Form 18)

Handling of Customer Complaints (SSCM - 9)OP1-11


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SDS Securities Dealing Policy

Code for Transactions in Securities of CCBC byRelevant Employees of CCB (Asia)

SDS - Please read SSCM- 8 for the Dealing PolicySign the following:

Acknowledgement Form

Existing Securities Account Report Form

New Securities Account Application Form


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SDS Securities Dealing Policy

Arrange with service provider to send duplicate

confirmation and monthly statement to Compliance

directly

Discourage short-term, speculative orexcessive trading

Violation - Disciplinary action including termination


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Account Opening

SSCM - 5

Customer Identification Rules

Customer Identification Documents

Account Opening Documentation

Account Opening Policies (Investment Profile

Questionnaire, Client Appropriateness Checklist,

Exception Approval (where applicable))

Hold Mail Policymax 6 months, risk disclosure

Restrictionson providing securities services into the

U.S.A. (SSCM3)


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Dealing

Fair Dealing

No Short Selling (criminal offence)

Information for clients e.g. selling Collective

Investment Schemes

Prior approval from Compliance is needed for thedistribution ofunauthorized Collective Investment

Schemes and unseasoned Securities, like New Issues

of bonds (i.e. less than 6 months from the date of new

issue)offering documents requirements.


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Dealing

Mutual Fund Trading Policy

Market Timingpurchased & sold repeatedly toexploit short term differentials in prices of fund &

underlying assets

Late tradingnot accept order after trading dates

closing price


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Prohibited Activities

See SSCM - 4

No discretionary arrangement is allowedwithout prior approval from Compliance.

G l P hibiti f


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General Prohibition of

Unsolicited Call (s. 174)

No associates of the Bank is allowed to engage in making any

unsolicited call to non existing Securities Clients (i.e. only can call

those with Share Trading, Bond Trading or Mutual Fund Accounts), so as

to attempt to induce/make/offer or induce/offer to make with another

person to enter to any securities related service agreements with theBank or to buy/sell any securities.

Penalty: Criminal Conviction and Disciplinary Action. Also,

possibility of rescission of contract

Securities and Futures (Unsolicited CallExclusion) Rules:-- existing client/professional investors

Calling Procedures/Calling Register

See SSCM - 4 for the major prohibited activities


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Question

Which of the following is an existing client

under S174 of SFO (re unsolicited call)?a. saving account holder

b. securities account holder

c. ex-securities account holder

d. CFX account holder


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Question

Which of the following is an unsolicited call toinduce someone to invest in securities?

a. Visit a person using information obtained from publicdirectories

b. Call a person who has left a name card after attending aseminar

c. Distribute promotional materials on securities to aperson visiting the banking center and take the initiativeto explain the contents of materials before the personasks

d. Send direct mailing promotional materials on securities

to general public

Off f F d l tl


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Offence of Fraudulently or

Recklessly Inducement for

Investment (s.107)Fraudulent misrepresentation:

Making a statement to the knowledge of maker that it isfalse, misleading or deceptive

Making a promise without intention of fulfilling orincapable of being fulfilled

Issuing forecast or statementnot justified on the factsknown to the maker or with an intentional omission of amaterial fact

Penalty:Criminal Conviction and Disciplinary Action


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Offence of Fraudulently or

Recklessly Inducement for

Investment (s.107)

Reckless Misrepresentation:

Making a false, misleading or deceptive statementrecklessly

Making recklessly a promise which is not capable of beingfulfilled

Issuing/making recklessly a forecast or statement notjustified on the facts known to the maker

Penalty:Criminal Conviction and Disciplinary Action

Ci il Li biliti f i d i


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Civil Liabilities for inducing

others to invest under (s.108)

Where a person makes any fraudulent,

reckless or negligent misrepresentation (i.enegligent = without reasonable care) to induce

other to invest, such person may be liable to

pay compensation for any pecuniary loss

Ci il Li biliti f i d i


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Civil Liabilities for inducing

others to invest under (s.108)

If the above person is a body corporate, any

person who was a directorof the entity at the

time when the misrepresentation was madeshall be presumed also to have made the

misrepresentation, unless it is proved that he

did not authorize the making of the

misrepresentation.


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Avoidance of Misrepresentation

All representation must be true, fair and correct and based

on facts.

Sufficient due diligence should be done to ascertain the

correctness of the information supplied by third parties.

Appropriate disclaimers must be included.

All advertisement, written recommendation and research

paper must be vettedby Compliance SSCM - 11.

In doubt, please seek Compliance advice.


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Market Malpractice

It may be a Market Misconduct and a criminal offence

under Part XIII and Part XIV of the SFO for performing

or facilitating market manipulation, false trading,

price rigging and insider dealing.

Penalty:Criminal Conviction and Disciplinary Action.

Avoidance of contravention:

Know your clients

Report any suspicious trading to Compliance


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Misconduct

Meaning of misconduct

contravention of applicable SFO provisions

contravention ofconditions attached to theHKMAs consent

act or omission relating to RIs carrying on of a

regulated activity which is likely to beprejudicial to the interests of the investing

public.


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Disciplinary Action

Revocation

Suspension

Private reprimand

Public reprimand

Fines


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Enforcement Actions

Joint SFC/HKMA Enforcement Action

Ban a Hang Seng Staff from re-enter industry for 5 months

- mishandling of investment orders forms that were signed byclients which were blank.

- engaged in joint securities dealing activities withoutdisclosing trading to employer.

Ban for Life

- misappropriate client assets

- sold client securities without clients instructions orauthorization, conceal trades were entry errors

- operate secret accounts


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Enforcement Actions

Suspended Jail Term for Market Manipulation

- sentenced to 4 months imprisonment, suspended for 18months and fined HK$200,000

- create a false or misleading appearance of active trading

- sold and bought the same or a similar number of shares backat the same or a higher price, serving no true economic

purpose.

Specific Internal Control and


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Specific Internal Control and

Monitoring SSCM- 6

Exception Reports

Segregation of Duties

Tape listening

MIS Report e.g. significant transactions/elderly

customers for appropriateness check

Inspection by Internal Control and Compliance

Please also see SSCM - 12 for Information Security


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Requirements for selling ELI

Please read SSCM - 17

Only SDS who have undergone appropriate trainingcan participating in market/selling ELI

Min net worth requirement i.e.HK$400,000

Client Appropriateness (checklist) (Form 1006A)

Risk disclosure and confirmation (Form 1005A)

Requirements for selling


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Requirements for selling

Structured Products/Bonds

Please read SSCM - 18

Structured Products

Public Offer

Min net worth requirement - HK$400,000

Private Placement

Min net worth requirement - US$500,000


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CASE STUDIES


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Case Study

Selling Practices

Barber Asia Limited v. Susan Field (July 2005) Facts inexper ienced investor, Loan and Guarantee Scheme,

reliance on Barbers advice in Aug 1998, gearing ratio of 2.5 timesoriginal investment by assigning it to a lender as security for a loan,

borrowing in Yen for investment in Pounds Sterling, substantialappreciation of Yen and required to make extra collateral to secure thegearing loan, close the position in Dec 1999, less than a quarter of thevalue of original investment (i.e. US300,000 to GBP44,000)

Insufficiently diligent in explaining the down risks of investment(include gearing, cur rency mismatch, interest r isk, pre-encashmentpenal ties of collateral investments) and failed to properly assess thesuitability of client

Express warnings on the documentation do not absolve dutyto explainthe risk


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Case Study

Selling Practices

Barber Asia Limited v. Susan Field (July 2005)

Code of Conductassure that client understands

the nature and risksof the product and sufficientnet worthto assume the risks and bear potential

losses

requirements ofdil igence and suitabi l i tyapply

even execution only client

Suspended from 6 months to 1 monthafter SFAT


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Case Study Due Diligence

Towry Law (Asia) HK Limited (Aug 2005) Conducted insuf f icient due dil igence into 2 hedge fundsbeforerecommending them to clients. These funds were subsequentlyliquidated

Sold the 2 funds to clients whose investment objectives and risktolerance did not matchwith the risk profiles of the 2 funds

Failed to conduct properenquiriesinto circumstances surrounding the2 funds which indicated problemswith the funds; and

Failed to advise cli entswhen it became clear that the funds hadproblems

Without admission of liability, Towry law agreed to make ex-gratiapaymentsof approximately US37.7 million to 1,216 affected clients.

Settle disciplinary proceedings by severely reprimandingTowry Law


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Case Study

Forged Signature of Documentsdisciplinary action and criminaloffence

Unlicensed dealing and aiding abetting

Bank executive in DBS (SFC Enforcement Report - September2006)

accepted clients telephone orders to trade in securities and relayedthose orders to the banks dealing room for execution.

Fined HK$1,000

Wing Lung Futures Limited(Joint SFC/HKMA EnforcementAction - Apr 27, 2006)

Securities Department of Wing Lung Bank accept instructions fromsome clients to trade in Hang Seng Index Futures and relayed theinstructions to Wing Lung Futures dealing room for execution andconfirmed the execution of trades with clients.

Fined HK$900,000/prohibited from acting as EO or RI for 6/8months/reprimand


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Case studies

1. Market Manipulation

2. Insider dealing

3. Inducement

4. AML KYC, hold-mail, contract notes rules

5. Customer suitability, sufficient net worth to assume

risks and bear potential losses


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Private Placement ofStructured Notes


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Structured Notes

e.g. Equity-linked/Index-linked/currency-linked

Debenture - Companies Ordinance

Securities - Securities and Futures Ordinance

Offering documents authorized by SFC (IPO

approved by HKEX) and filed with Companies

Registry -> permissible for public distribution

Unauthorized ones -> Criminal Offence/Disciplinary

Action by Regulators and Civil Liabilities for public

distribution unless exempted


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Private Placement

Internal guidelines for Private Placement:

1. approachingnot more than qualified 50 persons/potential

investors (i.e. NOT successful buyers) by qualified Notes

Salespersons. (i.e. internally approved Securities Dealing Staff ofthe Bank).

2. Non U.S. residents

3. No cross border transactions, including inducement, without

prior Compliance approval.

Exemption under Companies


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Exemption under Companies

OrdinanceCompanies (Amendment) Ordinance 2004:

Exemption of Prospectus (17th Schedule)

1. To not more than 50 persons

2. Professional investors (in line with definition under SFO)

3. Offers not exceeding HK$5million

4. Minimum denomination/consideration: HK$500,000

Exemption under Securities and


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Exemption under Securities and

Futures OrdinanceS.103prospectus with respect to shares or debenturesexempt from compliance with Companies Ordinance

But

S.175requirements for offers contained in a writtendocument with specified descriptions

Major exemptions

-Professional investors

-3 securities transactions within 3 years from date of the

offer


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Existing Securities Clients

Individual Clients Corporate Clients

Professional Investors

USD 500,000(minimum net worth stated in theClient Investment Profile Questionnaire)

Non-US Resident

Qualified Clients


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Transaction history enquiry printout

Evidence

With at least 3 securities transactions

executed within 3 years

Existing Securities Clients

Qualified Clients

lifi d li


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A latest custodian statement,latest monthlystatement or valid Certificate of Deposit,auditor certificate (within 12 monthfrom date of communicating the offer)

Evidence

With Investment Portfolio

over HKD 8,000,000

Professional Investors - Individual Clients

Qualified Clients

Q lifi d Cli


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A latest custodian statement, latest monthly

statement or valid Certificate of Deposit,auditor certificate (within 12 month from dateof communicating the offer)

The most recent audited financial statement of

corporation or partnership customers (notearlier than 16 months from the date ofcommunicating the offer)

Evidence

With Investment Portfolioover HKD 8,000,000

Audited Financial Statement showsa Total Asset Value >= HKD 40,000,000

Professional Investors - Corporate Clients

Qualified Clients

P f li


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Portfolio

Portfolio means:

Securities;

Certificate of Deposit issued by a bank in HKor an overseas bank regulated by foreign laws;

Money held by a custodian.

Clients Suitability


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Clients Suitability

The clients must have sufficient net worth to

bear the risks;

The investment is fit for their investment

objectives; and

The clients should have relevant investmentexperience.

Clients Suitability


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Clients Suitability

Maintaining Balanced Portfolio (i.e. no over-concentration) and liquidity.

Consideration:

Any investment exceeding 10% of clients networth deserves a careful consideration. A strong

justification should be made for anythingexceeding 25%. A prior approval from SVP or

above is required for investment in excess of 50%

of a clients declared net worth.

Distribution Flow


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Distribution Flow

Principal Guaranteed Payoff Scenarios

Evidence to substantiate eligibility of

Qualified Clients Limited copies of offering documents

controlled by IS

- Control List maintained by IS- Do not make any copy without prior

approval of IS

Internal use copies: For Internal Use Only

Distribution Flow


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Distribution Flow

The Bank is acting as Principalin general /advising clients the

Banks capacityNeither Investment advice nor recommendation can be given.

buying the Notes from the Bank and no contractual relationship

arise between the customer and the Issuer etc.at the time of

application; (settlement risk)

understand and accept that neither the Issuer etc. accepts any

responsibility for the provision of bank services and custody

services by the Bank; the Bank will not charge commissionfrom the customer but

may receive rebate from Issuer etc. on the subscription price;

After the subscription, the Bank is the nominee for the customer

in holding the Notes.


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87

FX Linked Deposit -

Compliance

R l t L & G id li


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Relevant Laws & Guidelines

Securities and Futures Ordinance(SFO)- not securities- Leveraged Foreign Exchange Trading

(LFET) - probably

Section SB-2 of the HKMA SPM on

Leveraged Foreign Exchange Trading -Conduct of Unsolicited Calls

R l t L & G id li


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Relevant Laws & Guidelines

Code of Banking Practicesection 18.7 -risk disclosure statement

warning of risks of dealing in investment products

linkedto deposit accounts Whether principal, interest or both may be subject to

possible lossarising from the linked investmentproducts; and

A fair comparisonof the possible returns on theinvestment with conventional time depositsof thesame maturity.

P d t


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Product

Minimum deposit amount of USD50,000 and a

maximum tenor not exceeding one year.

Special approval from responsible Division

Manager for a single deposit amounting to

USD5 million or above.

Cli t A i t


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Client Appropriateness

Potential Risk: High -Net worth over USD 100,000

Pre-clearance from Compliance if customer located

outside Hong Kong Client Appropriateness Questionnaire (Form 47)

Sufficient net worth to bear the risks

Fit for clients investment objectives

Prior relevant investment experience

Cli t A i t


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Client Appropriateness Checklist (Form 47A)

Net worth below HK$780,000 (USD100,000)

Proportion of intended amount to clients total annualincome, net worth or assets.

Sufficient net worth

Fit for clients investment objectivesExhibit reasonable understanding

Other factorsUS$5 million

Branch Manager/responsible Division Manager Approval

A i t A i t


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Associates Appropriateness

Associates attended the appropriate producttraining

Compliance with the Compliance Manual for

FX Linked Deposit

P hibit d A ti iti


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Prohibited Activities

Role of the Bank: Principal

No Investment Advisory or Recommendation isallowed

Avoid Conflict of InterestNo Discretionary Account Arrangement

Acco nt Opening


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Account Opening

Language of the Agreement

Explain the Agreement in detail & advise the

client to seek independent legal / professional

advice if deemed necessary

Provide the client with a copy ofexecuted

Customer Agreement and relevant account

opening documentation.

Account Opening


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Account Opening

Brochure on FX-Linked Deposit

Account Opening Forms

Client Appropriateness Checklist (Form 47)

Client Appropriateness Questionnaire (Form 47A)Client Agreement for FX Linked Deposit (Form

48)

Emphasis on the Risk Disclosure Statement (Form52)

Account Opening Forms must be completedbefore

enter into transaction

Risk Disclosure Statement


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(Form 52)

Return limited to nominal interest payable and depend onmovement of specified currency exchange rate. Fluctuation ofcurrency exchange rate may lead to loss

Risk of currency exchange rates

Exchange controls Principal Protected Deposit

High Yield Deposit

Early withdrawal

Term sheet Deposit Protection Scheme

Statement not provided again including phone order

Dealing


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Dealing

Term Sheet (Form 49)

Placement Order Form (From 49A)confirmdetails of the transactions

Placement Order Confirmation (Form 49B)sent by back office

Unsolicited Calls


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Unsolicited Calls

Existing Customers (with written agreement)With deposit in excess of HK$ 750,000 with

the bank Only associates who posses sufficient product

knowledge about FX Linked Deposit and the policies/ procedures of making unsolicited marketing callsare allowed to perform the calls

Call Register

Opt-out clause Incoming callscollection of personal data

FX Linked Deposit


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FX Linked Deposit

Complaints HandlingCustomer Complaint Control Log

Marketing Materials

Accurate and no misleadingAppropriate Risk Disclosure

Market Research

Avoid conflict of interest

Reasonable ground and in good faith Record Retention

Collateralized Foreign


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Collateralized Foreign

Exchange (CFX)Compliance Highlights

Eligibility to Carry On CFX Business


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Eligibility to Carry On CFX Business

Only those associates who have attended theBanks CFX Internal Training are eligible tocarry on CFX business at the front line.

Associates Responsibility


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Associates Responsibility

Full compliance with all applicable laws andregulations

Read, understand and comply with the

Compliance Guidel ines for CollateralizedForeign Exchangeand OP13-11which will

be updated from time to time

Introduction


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Introduction

Securities and Futures OrdinanceSB-2 of the HKMA Supervisory Policy

Manual: the Leveraged Foreign Exchange

TradingConduct of Unsolicited CallsCode of Banking Practice

Other relevant Rules and Guidelines issued bythe regulatory authorities

e.g. Schedule 6 - SFC Code of Conduct,HKMA letters

Associate Investment Policy for CFX


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Trading

CFX associates

Prohibited from maintaining CFX accounts with

outside institutions

Appendix 1 - Associate Acknowledgement Form Appendix 2 - Existing Investment Account

Reporting Form

Appendix 3 - New Investment Account Opening

Form

Appendix 4 - Investment Account Closure Form

Account Opening


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Account Opening

Inform the client that a Client Agreement either inEnglish or in Chinese must be entered into.

Explain in detail to the client the contents of the

Agreement. Advise the client to seek independent

legal/professional advice if deemed necessary.

Account Opening


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Account Opening

Complete the account opening procedures asdescribed in OP13-11 of the Operations Manual

including completion of Client Appropriateness

Checkl ist (Form 019).

Provide the client with a copy of Client Agreement

and relevant account opening documentation.

The Bank is Principal to Client. Thus, no advice or

recommendation should be given.



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Sufficient net worth to bear the risk (minimumdeclared net worth of HK$1,000,000)

Fit for the clients investment objectives

Relevant investment experience

Risk Disclosure


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Risk Disclosure

Master Agreement

Application Form

Marketing Materials

- FX Risk, Stop Loss Orders

Client Identification

Ultimate Beneficial Owner

Unsolicited Call


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Unsolicited Call

Section 174 of the Securities and Futures Ordinance Criminal Liabilities, Civil Liabilities, Disciplinary Action

Selection of Clients for Making Unsolicited Call Existing customer

Assets over HK$750,000

Specific corporationtreasurer or authorized person

Associate suitability

Standards of Conduct for Making Unsolicited Calls 8:am to 9:00 pmNot disguise the purpose of the call

Orders Handling


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Orders Handling

Recording

First in First Serve

Time

Order Sequence


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Orders Monitoring

Contract Notes and Statements of Account

Complaints Handling

Marketing Materials

Proper Approval

Risk Disclosure


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Research Due Diligence

Good Faith

Fair and Objective Advice

Conflict of Interest

Record Retention Policy

Documents - 7 years

Tapes - 3 months


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Q &A

Question 1


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Question 1

When buying US securities at the instruction of

customer who is non-US persons and not residing

in the US, which of the following U.S. InlandRevenue Dept form should be filled in?

a. Form W-9b.Form W-8BEN

c.Form W-8IMY

Question 4

Question 2


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Question 4

Keep adequate records ofclients transaction

Dispatch contact noteswithin 2 days

Know your clients reidentity, financial situation,investment experience andinvestment objective

Employee dealings and

employers consent

a) SFC Code of Conduct

b) Keeping of Records

Rules

c) Contract Notes Rules

Question 4

Question 3


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Question 4

Risk disclosure statement Know your customer re

identity/AML

Know your customer reidentity, financial situation,investment experience andinvestment objective

Employee dealings andemployers consent

Mismatch of customer risk& Product risk

a) Form 18

b) Form 1043

c) Investment ProfileQuestionnaire

d) Form 1024

e) Form 1376ExceptionApproval

Question 4


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Question 4

Which of the following are the exceptions for

section 175 of the SFO?

a. 3 banking transactions executed within one year

b. Individuals who have CD of not less than US$4

millionc. 6 mutual fund transactions executed within 3

years

Question 5


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Question 5

When there is a suspicious breach on the SFO and

its subsidiary legislation e.g. contract

Notes,Statements of Account and Receipts Rules,report should be made to Securities Compliance

Department and Operations Manager within

a.2 business days

b.1 business day

c.4 hours

Question 6


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Question 6

Which of the followings are requirements under the

Associate Investment Policy for SDS:

a. Obtain prior approval on new investment accountopened by spouse of SDS

b. Provide duplicate daily confirmations and monthly SDS

account statements on mutual fund transaction

c. Prohibited from executing trades forown securities a./c

d. Obtainprior approval for shares trading

Question 7


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Question 7

Which of the followings are exemptions for

acceptance of gifts/benefits:

a. Lavish meal from existing customer

b. Gift of value HK$1,000 given on festive occasion under

customary practice by prospective customer

c. Lai-See of HK$100 from existing customer

d. Personal benefit of HK$3,000 received from a close

personal friend and such friendship is entirely unrelated

to the business of the Bank.

Question 4

Question 8


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Question 4

Structured ELI account Private placement on

structured notes

CFX account FX-linked deposit

a) US$500,000b) HK$1,000,000

c) HK$400,000

d) USD100,000

Question 8

Question 9


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Question 9

If a SDS committed dangerous driving in Canada, is

it required to notify such events to Personnel and

Compliance under the Securities and Futures(Licensing and RegistrationInformation) Rules?

Question 10


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Question 10

Which of the followings are exemptions or internal

requirements for private placement:

a. Minimum net worth of HKD500,000

b. Not more than 50 persons

c. Professional investors

d. Existing customers with 1 securities transaction within 3

years

e. Minimum subscription of HK$500,000


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Thank You