Linked Notes that are linked to Lehman Brothers have caused big losses to investors in Hong Kong, Singapore and other more financially advanced countries.
Caveat Emptor (buyer bewares) is often the rule. However, information asymmetry often disadvantaged the investors, especially when the investors are of lower educational level, not knowing English and under excessive sales gimmicks..
Sellers had the advantages. Sales pamphlet’s facts may be selectively presented; prospectus may be available only after the sales; high risk product (like LNs) be recommended to low risk investors etc..
I just wonder whether these Linked Notes are marketed in Malaysia to the general public and what the regulator’s standpoint on Linked Notes.
Found this
"Guidelines on the offering of structured products" (2007) from
Securities Commission of Malaysia:
PDF fileThe above guidelines are applicable to :
Equity LN, Bond LN, Index LN, Currencies LN, Interest Rate Linked Notes, Commodity LN, Credit LN etc..
In my opinion, the requirement that makes a difference and gives investors’ extra protection are the "
suitability and fair dealing requirements".
Excerpts of some of the notable points inside (refer to the PDF file for details):
(bracketed text below is my comment)
1. ....primary seller shall adopt fair dealing best practices when dealing, marketing and selling structured products to investors…. (this puts the responsibility to the seller)
2. ....different standards of fair dealing in relation to institutional investors and investor individuals…
(this sets a more stringent requirement to sales to investor individuals)
3. ...giving an investor individual who invests in structured products during an offer period, the option to obtain a full refund of his principal investment sum within three working days of such investment or the remaining offer period
(a cooling off period; good for investors who are bombarded with sales gimmicks)
4. A primary seller should endeavour to make an investor understand the risks in relation to investing in structured products before marketing and selling structured products to that investor.
(this again puts the responsibility to the seller)
i.
know your client: ……primary seller should take all reasonable steps beforehand to assess the client’s financial position, investment experience and investment objectives.
(not only puts responsibility to the seller, it also sets the proper sequence of the sales process)
ii.
duty of care: …..financial risks and potential losses that may arise from investing in structured products are fully explained to clients before the client makes his investment decision
iii.
sales personnel: …. specifically identified personnel who have a financial background and possess adequate knowledge and understanding of structured products, particularly when dealing with investor individuals….. (only peoples with adequate product knowledge can sell)
iv.
provided risk disclosure statement: …..risk disclosure statement is to be provided separately from the application form or other document constituting a contract between an Eligible Issuer and the investor, and is to be furnished to the potential investor together with other promotional and sales documents, before any binding contract is entered into by the investor….
v.
confirmation of disclosure by client: …..primary seller should invite the client to read the risk disclosure statement, ask questions and take independent advice if the client so wishes….client should be requested to sign a confirmation..
vi.
investors individual: …primary seller should ensure that a higher standard of diligence is exercised when dealing with investor individuals… (this sets a higher standard for sales to investor individuals)
I hope these guidelines have helped reducing/eliminating misrepresentation in LN sales in Malaysia and Malaysian investors are not affected by these LNs.
If that is the case, special thanks should be given to the Securities Commission. It has safeguarded the investors’ interest.
