China Construction Bank (Asia) Corporation Ltd

CCB Securities Ltd

Securities Compliance Training - 2008

SFC

Objectives
To advise the relevant laws and regulations relating to the investment businesses. To go through the Securities Services Compliance Manual (SSCM) (Jan 2007)
(Intranet: Compliance/AML Documentation -> Compliance Manual -> Chap 6 -> Chap 6.3)

To let associates and supervisors understand their obligations on compliance and how to discharge the obligations take ownership

Outline
Securities Compliance Private Placement of Structured Noted

FX Linked Deposit Compliance

Collateralized Foreign Exchange Compliance Highlights

Compliance
What Does It Mean? Compliance is acting in accordance with proper and sound market standards and legal and regulatory requirements. 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. - 2nd line of defense
Why? To protect our Bank against legal/regulatory/financial (fines, penalties) and reputation risk.
4

Compliance Duties
The Compliance Department of the Bank is charged with the following responsibilities: (Pls. see SSCM-1) Advising associates on relevant laws and regulations applicable to their activities; Establishing and maintaining compliance and ethical standards; Initiating and providing compliance training; and Attending to all applicable regulatory issues and relationship.
5

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 laws and 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.
6

Key Authorities
Hong Kong Monetary Authority
Securities and Futures Commission

CCBC regulators e.g. HKEx, CBRC, PBOC

Key Ordinances & Regulations

Please refer the list in the SSCM - 2 , including:
Securities and Futures Ordinance and its sub-legislation Banking Ordinance Companies Ordinance SFC Code of Conduct

Code of Banking Practice

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)
9

Licence
The Bank is a Registered Institution under the SFO to carry on: Type 1: Dealing in Securities Type 4: Advising on Securities
Bank approved as registered institution to carry on Type 1 & 4 regulated activities on March 7, 2005.

CCB Securities Ltd. - 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 Contracts Type 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
11

Registration
Please see SSCM-1 and SSCM-14 HKMA Register - Relevant Individuals (i.e. Securities Dealing Staff) Appointment of Executive Officers, Complaints Officer and Emergency Contact Officer Events need to be reported to the HKMA within 7 business days (internal 2 business days)

12

Notification of certain events to the HKMA

BO notify 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)
S20(4)
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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 (Check Information Card, our banks internal register maintained by Personnel and the HKMAs on-line Register and ask Compliance whenever you have doubt)

14

Registration HKMA Circular

HKMA Circular Controls to ensure compliance with S114(3) of the SFO and S20(4) of the Banking Ordinance (June 13, 2007) - MC 07-85 (Sep 7, 2007) - prohibition of unregistered dealing e.g. not take part in 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 Training

SDS must be fit and proper at all times Procedures to ensure the fitness and propriety

Competence 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 Diligence Assessment Form1024) (Client Investment Profile Questionnaire)

Information For Customers (Offering documents, risk disclosure Clause 24 of T&C)

17

Retail Wealth Management Business

HKMA Circulars: Retail Wealth Management Business (March 3, 2006) customer profiling, product suitability assessment, risk disclosure, management oversight Q & A on Suitability Obligations (May 8, 2007) - know your clients, know the investment products, provide suitable advice, sound business practices (include document rationale of investment advice)
18

HKMA Circular
SFCs Report on Findings of 2nd Round of Thematic Inspection 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
19

HKMA Circular
SFCs Report on Findings of 2nd Round of Thematic Inspection 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 providers conflict of interests -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
20

HKMA on-site examination on structured products (August 2006)

periodic update of customer information in questionnaire (1 year) Product suitability assessment - classification of customers' risk level investment profile/client appropriateness checklist - Designation of products' risk level - Matching customer risk with product risk self assessment checklist (half-yearly) elderly customers policy (MC06-061)

21

Investment Profile

22

Coverage
Securities-related products - Securities Cash/Margin Trading Account (shares account) - Structured Products - Bonds - Mutual Funds - Structured ELI Products Investment Linked Insurance Products Apply to Personal Customers at initial stage

23

Risk Profiling
Customer Risk Profiling

New customers are required to complete an Investment Profile Questionnaire (IPQ) before opening an account for all securities-related products or applying for investment 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 Checklist is also required to be completed before opening an account for all securities-related products Customers are classified into six risk profiling categories 1 Capital Preservation (15-32) 2 Current Income (33-40) 3 Conservative Growth & Income (41-48) 4 Growth & Income (49 56) 5 Growth (57-64) 6 Aggressive Growth (65-83)

24

Risk Profiling
Product Risk Categories Same 6 categories of classification as Customer Risk Profiling Each product is scored and categorized. The Product Risk Category is reviewed by Product Risk Group and update in the intranet and investment systems - Shares Cash Account Level 3 - Shares Margin Trading Account Level 5 - Structured Products Level 1 to 5 - Bonds Level 1 to 4 - Mutual Funds Level 1 to 6 - Structured ELI Products Level 3 to 6 - Investment Linked Insurance Products Level 1 to 6
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Risk Profiling
Matching of Customer Risk Profiling with Product Risk Category for client suitability

Account Opening for all securities-related products or applying for investment linked insurance products (applies to new customers effective from Oct 31, 2007) Customer Risk should equal to or greater than the lowest level of Product Risk Category e.g. Customer opening shares cash account should have Level 3 or above otherwise exception approval mechanism Customer 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-related products (except shares account) and investment linked insurance products
26

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 answer manual check

Section II
All questions must be completed Time horizon weighting manual check if product has tenor

No investment account is opened if customer refuse to complete the Questionnaire/ more than 3 questions are unanswered
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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

Yes

Ask the customer to consider any changes to the answer required / complete the IP

Calculate the IP with the lowest score for unanswered questions

Are there more than 3 questions unanswered in Section I?

Yes

Reject the customer instruction

28

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

29

Exception Approval
For Mismatch of Risk, please check customer whether 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 for Structured ELI account) No prior investment experience (e.g. Structured Products account) Lack of understanding on the product feature

30

Exception Approval (contd)

For elderly customer age over 65

a product with (i) investment tenor over 2 years; (ii) age + tenor > 70; and (iii) transaction amount of HK$100,000 or above. a product with investment amount of HK$1,000,000 or above 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

31

Exception Approval (contd)

Exceptions more than 3 exceptions For Product Risk Level 6 but Customer Risk Profiling is 2 or below 3 or less exceptions Approval authority Division manager Division manager

Unit/ Branch manager

Exception Approval Form (F1376) attached to account opening form/instruction form, forward a copy to Compliance
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Exception Approval (contd)

Customer Type Proceed the transaction Age < 65 Age > 65 No Any Exception? Yes (i) complete the Exception Approval Form (ii) confirm customer suitability (iii) document the Rationales of Investment Advice Any Exception? Document the Rationales of Investment Advice

No

Yes (i) complete the Exception Approval Form (ii) confirm customer suitability (iii) document the Rationales of Investment Advice

Proceed the transaction Are there more than 3 exceptions noted?

Document the Rationales of Investment Advice

Is Product Risk = 6 and IP < 2

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 and amount > HK$100,000

Others

Yes

No

Yes No Yes Approved by Division Manager Approved by Branch/Unit Manager Are there more than 3 exceptions noted?

No

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Yes

Rationales of Investment Advice

Investment Subscription/ Switching RIS match customers risk profile TIM match customers expected time horizon EXP customer has prior investment experience KNO customers has relevant product knowledge DIV portfolio diversification LOW Small investment amount NWO High net worth customer AGE match customers age Others Phone Order mark Phone Order only
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Suitability Confirmation

Account Opening/Transaction The product may be considered to be inappropriate for the customer
Product Risk Score > Customer Risk Profiling Score Product tenor not match with customer expected time horizon (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/we wish to proceed with my/our application for the Account(s) despite the risk level of the product(s) under the Account(s) may be higher than my/our risk profile suggests. (Please if applicable)
35

Phone Order by BBPC

Referred by Branch - IPQ must be completed already - any exception (if yes suitability confirmation by BBPC and Exception Approval by Branch to BBPC) :- any risk mismatch - Product Level 6 and customer Risk Level <= 2 refer to branch - Tenor > 2 years or not any elderly restrictions Rationale 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 no change and letter date will be the last IPQ update date. Phone Order verbal confirmation if no change for Product Risk Score is 5 or below, update the last IPQ update date.

38

Updates on Investment Profile (IP) at Branch

Without IP Branch More than 1 year With IP Date of last IP completed yes Conduct IP No Reject the transaction Conduct IP

Less than 1 year

Proceed the transaction

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Others
Company customer adopt Form 1045 Joint Account - new account opening each required to complete the IPQ - transaction risk profile of account holder giving instruction is considered Online Banking - mutual fund require completion of IPQ and confirmation of Level 6 products. Update IPQ where necessary, paper form available input into WMP

40

Others
Transaction Any IPQ or over 1 year Product risk category vs customer risk profile and any mismatch customer suitability confirmation and exception form Any elderly restrictions exception form Any product tenor issue customer suitability confirmation and exception form Rationale of investment OP 13-12/MC-07-103
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Rules of Conduct SSCM - 4

Customer Assets (Segregation of Client Securities Securities and Futures (Client Securities) Rules)
Customer Priority (First Come First Serve not handle own/connected person trade) Honesty, Integrity and Due Diligence (Forged documents, no unfair preference)
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Rules of Conduct SSCM - 4

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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Rules of Conduct SSCM - 4

Dealing by Employees of Other Registered Persons (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 by Relevant Employees of CCB (Asia)
SDS - Please read SSCM- 8 for the Dealing Policy

Sign 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 or excessive trading Violation - Disciplinary action including termination

46

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 Policy max 6 months, risk disclosure Restrictions on providing securities services into the U.S.A. (SSCM 3)
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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 the distribution of unauthorized 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. 48

Dealing
Mutual Fund Trading Policy Market Timing purchased & sold repeatedly to exploit short term differentials in prices of fund & underlying assets Late trading not accept order after trading dates closing price

49

Prohibited Activities
See SSCM - 4 No discretionary arrangement is allowed without prior approval from Compliance.

50

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 the Bank or to buy/sell any securities. Penalty: Criminal Conviction and Disciplinary Action. Also, possibility of rescission of contract Securities and Futures (Unsolicited Call Exclusion) Rules:-

- existing client/professional investors

Calling Procedures/Calling Register See SSCM - 4 for the major prohibited activities
51

Question
Which of the following is an existing client under S174 of SFO (re unsolicited call)?
a. b. c. d. saving account holder securities account holder ex-securities account holder CFX account holder

52

Question
Which of the following is an unsolicited call to induce someone to invest in securities?
a. Visit a person using information obtained from public directories b. Call a person who has left a name card after attending a seminar c. Distribute promotional materials on securities to a person visiting the banking center and take the initiative to explain the contents of materials before the person asks d. Send direct mailing promotional materials on securities 53 to general public

Offence of Fraudulently or Recklessly Inducement for Investment (s.107)

Fraudulent misrepresentation: Making a statement to the knowledge of maker that it is false, misleading or deceptive Making a promise without intention of fulfilling or incapable of being fulfilled Issuing forecast or statement not justified on the facts known to the maker or with an intentional omission of a material fact Penalty: Criminal Conviction and Disciplinary Action
54

Offence of Fraudulently or Recklessly Inducement for Investment (s.107)

Reckless Misrepresentation: Making a false, misleading or deceptive statement recklessly

Making recklessly a promise which is not capable of being fulfilled

Issuing/making recklessly a forecast or statement not justified on the facts known to the maker Penalty: Criminal Conviction and Disciplinary Action
55

Civil Liabilities for inducing others to invest under (s.108)

Where a person makes any fraudulent, reckless or negligent misrepresentation (i.e negligent = without reasonable care) to induce other to invest, such person may be liable to pay compensation for any pecuniary loss

56

Civil Liabilities for inducing others to invest under (s.108)

If the above person is a body corporate, any person who was a director of the entity at the time when the misrepresentation was made shall be presumed also to have made the misrepresentation, unless it is proved that he did not authorize the making of the misrepresentation.

57

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 vetted by Compliance SSCM - 11.

In doubt, please seek Compliance advice.

58

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
59

Misconduct
Meaning of misconduct contravention of applicable SFO provisions contravention of conditions attached to the HKMAs consent act or omission relating to RIs carrying on of a regulated activity which is likely to be prejudicial to the interests of the investing public.
60

Disciplinary Action
Revocation Suspension

Private reprimand
Public reprimand

Fines
61

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 by clients which were blank. - engaged in joint securities dealing activities without disclosing trading to employer. Ban for Life - misappropriate client assets - sold client securities without clients instructions or authorization, conceal trades were entry errors - operate secret accounts
62

Enforcement Actions

Suspended Jail Term for Market Manipulation - sentenced to 4 months imprisonment, suspended for 18 months 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 back at the same or a higher price, serving no true economic purpose.

63

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
64

Requirements for selling ELI

Please read SSCM - 17 Only SDS who have undergone appropriate training can 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)
65

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
66

CASE STUDIES

67

Case Study

Selling Practices Barber Asia Limited v. Susan Field (July 2005)

Facts inexperienced investor, Loan and Guarantee Scheme, reliance on Barbers advice in Aug 1998, gearing ratio of 2.5 times original investment by assigning it to a lender as security for a loan, borrowing in Yen for investment in Pounds Sterling, substantial appreciation of Yen and required to make extra collateral to secure the gearing loan, close the position in Dec 1999, less than a quarter of the value of original investment (i.e. US300,000 to GBP44,000) Insufficiently diligent in explaining the down risks of investment (include gearing, currency mismatch, interest risk, pre-encashment penalties of collateral investments) and failed to properly assess the suitability of client Express warnings on the documentation do not absolve duty to explain 68 the risk

Case Study
Selling

Practices

Barber Asia Limited v. Susan Field (July 2005) Code of Conduct assure that client understands the nature and risks of the product and sufficient net worth to assume the risks and bear potential losses requirements of diligence and suitability apply even execution only client Suspended from 6 months to 1 month after SFAT
69

Due Diligence Towry Law (Asia) HK Limited (Aug 2005)

Conducted insufficient due diligence into 2 hedge funds before recommending them to clients. These funds were subsequently liquidated Sold the 2 funds to clients whose investment objectives and risk tolerance did not match with the risk profiles of the 2 funds Failed to conduct proper enquiries into circumstances surrounding the 2 funds which indicated problems with the funds; and

Case Study

Failed to advise clients when it became clear that the funds had problems
Without admission of liability, Towry law agreed to make ex-gratia payments of approximately US37.7 million to 1,216 affected clients. Settle disciplinary proceedings by severely reprimanding Towry Law70

Case Study

Forged Signature of Documents disciplinary action and criminal offence Unlicensed dealing and aiding abetting Bank executive in DBS (SFC Enforcement Report - September 2006) accepted clients telephone orders to trade in securities and relayed those orders to the banks dealing room for execution. Fined HK$1,000 Wing Lung Futures Limited (Joint SFC/HKMA Enforcement Action - Apr 27, 2006) Securities Department of Wing Lung Bank accept instructions from some clients to trade in Hang Seng Index Futures and relayed the instructions to Wing Lung Futures dealing room for execution and confirmed the execution of trades with clients. Fined HK$900,000/prohibited from acting as EO or RI for 6/8 months/reprimand
71

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
72

Private Placement of Structured Notes

73

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 74

Private Placement
Internal guidelines for Private Placement:
1. approaching not more than qualified 50 persons/potential investors (i.e. NOT successful buyers) by qualified Notes Salespersons. (i.e. internally approved Securities Dealing Staff of the Bank).
2. Non U.S. residents

3. No cross border transactions, including inducement, without prior Compliance approval.

75

Exemption under Companies Ordinance

Companies (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

76

Exemption under Securities and Futures Ordinance

S.103 prospectus with respect to shares or debentures exempt from compliance with Companies Ordinance But S.175 requirements for offers contained in a written document with specified descriptions Major exemptions

-Professional investors
-3 securities transactions within 3 years from date of the offer 77

Qualified Clients
Non-US Resident USD 500,000 (minimum net worth stated in the Client Investment Profile Questionnaire) Existing Securities Clients Professional Investors Corporate Clients
78

Individual Clients

Qualified Clients
Existing Securities Clients With at least 3 securities transactions executed within 3 years

Evidence Transaction history enquiry printout

79

Qualified Clients
Professional Investors - Individual Clients With Investment Portfolio over HKD 8,000,000
Evidence

A latest custodian statement,latest monthly statement or valid Certificate of Deposit, auditor certificate (within 12 month from date of communicating the offer)
80

Qualified Clients
Professional Investors - Corporate Clients With Investment Portfolio over HKD 8,000,000 Evidence Audited Financial Statement shows a Total Asset Value >= HKD 40,000,000

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

The most recent audited financial statement of corporation or partnership customers (not earlier than 16 months from the date of communicating the offer)

81

Portfolio
Portfolio means:
Securities; Certificate of Deposit issued by a bank in HK or an overseas bank regulated by foreign laws; Money held by a custodian.

82

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 investment experience.
83

Clients Suitability
Maintaining Balanced Portfolio (i.e. no overconcentration) and liquidity. Consideration:

Any investment exceeding 10% of clients net worth deserves a careful consideration. A strong justification should be made for anything exceeding 25%. A prior approval from SVP or above is required for investment in excess of 50% of a clients declared net worth.

84

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

85

Distribution Flow
The Bank is acting as Principal in general /advising clients the Banks capacity Neither 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 commission from 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. 86

FX Linked Deposit Compliance

87

Relevant Laws & Guidelines

Securities

and Futures Ordinance (SFO) - not securities - Leveraged Foreign Exchange Trading (LFET) - probably SB-2 of the HKMA SPM on Leveraged Foreign Exchange Trading Conduct of Unsolicited Calls
88

Section

Relevant Laws & Guidelines

Code

of Banking Practice section 18.7 risk disclosure statement

warning of risks of dealing in investment products linked to deposit accounts Whether principal, interest or both may be subject to possible loss arising from the linked investment products; and A fair comparison of the possible returns on the investment with conventional time deposits of the same maturity.
89

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.

90

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

91

Client Appropriateness

Client Appropriateness Checklist (Form 47A)

Net worth below HK$780,000 (USD100,000) Proportion of intended amount to clients total annual income, net worth or assets. Sufficient net worth Fit for clients investment objectives Exhibit reasonable understanding Other factors US$5 million Branch Manager/responsible Division Manager Approval
92

Associates Appropriateness
Associates

attended the appropriate product

training Compliance with the Compliance Manual for FX Linked Deposit

93

Prohibited Activities
Role

of the Bank: Principal

No Investment Advisory or Recommendation is allowed Avoid Conflict of Interest

No

Discretionary Account Arrangement

94

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 of executed Customer Agreement and relevant account opening documentation.

95

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 (Form 52) Account Opening Forms must be completed before enter into transaction

96

Risk Disclosure Statement

(Form 52)

Return limited to nominal interest payable and depend on movement of specified currency exchange rate. Fluctuation of currency 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
97

Dealing
Term

Sheet (Form 49) Placement Order Form (From 49A) confirm details of the transactions Placement Order Confirmation (Form 49B) sent by back office

98

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 calls are allowed to perform the calls Call Register Opt-out clause Incoming calls collection of personal data

99

FX Linked Deposit

Complaints Handling
Customer Complaint Control Log

Marketing Materials
Accurate and no misleading Appropriate Risk Disclosure

Market Research
Avoid conflict of interest Reasonable ground and in good faith

Record Retention
100

Collateralized Foreign Exchange (CFX) Compliance Highlights

101

Eligibility to Carry On CFX Business

Only

those associates who have attended the Banks CFX Internal Training are eligible to carry on CFX business at the front line.

102

Associates Responsibility
Full

compliance with all applicable laws and regulations Read, understand and comply with the Compliance Guidelines for Collateralized Foreign Exchange and OP13-11 which will be updated from time to time

103

Introduction
Securities

and Futures Ordinance SB-2 of the HKMA Supervisory Policy Manual: the Leveraged Foreign Exchange Trading Conduct of Unsolicited Calls Code of Banking Practice Other relevant Rules and Guidelines issued by the regulatory authorities e.g. Schedule 6 - SFC Code of Conduct, HKMA letters
104

Associate Investment Policy for CFX 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

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Account Opening

Inform the client that a Client Agreement either in English 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.

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Account Opening

Complete the account opening procedures as described in OP13-11 of the Operations Manual including completion of Client Appropriateness Checklist (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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Client Appropriateness

Sufficient net worth to bear the risk (minimum declared net worth of HK$1,000,000) Fit for the clients investment objectives Relevant investment experience

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Risk Disclosure
Master

Agreement Application Form Marketing Materials - FX Risk, Stop Loss Orders

Client Identification
Ultimate

Beneficial Owner

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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 corporation treasurer or authorized person

Associate suitability Standards of Conduct for Making Unsolicited Calls

8:am to 9:00 pm Not disguise the purpose of the call

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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

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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. Inland Revenue Dept form should be filled in? a. Form W-9 b.Form W-8BEN c.Form W-8IMY
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Question 2 Question 4

Keep adequate records of clients transaction Dispatch contact notes within 2 days Know your clients re identity, financial situation, investment experience and investment objective Employee dealings and employers consent

a)

SFC Code of Conduct

b) Keeping of Records Rules c) Contract Notes Rules

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Question 3 Question 4

Risk disclosure statement Know your customer re identity/AML Know your customer re identity, financial situation, investment experience and investment objective Employee dealings and employers consent Mismatch of customer risk & Product risk

a) Form 18 b) Form 1043

c)

Investment Profile Questionnaire Form 1024

d)

e) Form 1376 Exception Approval

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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 million c. 6 mutual fund transactions executed within 3 years
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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
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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 account opened by spouse of SDS b. Provide duplicate daily confirmations and monthly SDS account statements on mutual fund transaction c. Prohibited from executing trades for own securities a./c d. Obtain prior approval for shares trading
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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.
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Question 4 Question 8
Structured ELI account Private placement on structured notes CFX account FX-linked deposit

a) b) c) d)

US$500,000 HK$1,000,000 HK$400,000 USD100,000

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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 Registration Information) Rules?

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Question 10
Which of the followings are exemptions or internal requirements for private placement:
a. b. c. d. Minimum net worth of HKD500,000 Not more than 50 persons Professional investors Existing customers with 1 securities transaction within 3 years e. Minimum subscription of HK$500,000
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Thank You

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