The Securities and Futures Commission (SFC) has reprimanded and fined Phillip Securities (Hong Kong) Limited (Phillip Securities) $1 million for failings over its sale of a fund to four clients (Note 1).
Phillip Securities has also agreed to repurchase the fund from the clients at the principal amount less dividends plus interest if the amount had been invested in a 12-month fixed term deposit over the same period of time (Note 2).
An SFC investigation revealed that Phillip Securities sold the American Pegasus Fixed Income Fund – Series II Segregated Portfolio to the four clients around August 2004, involving transaction amount of approximately $819,000. The fund was liquidated in July 2011 and the clients have not been able to recover their investment (Note 3).
The SFC found that Phillip Securities failed to:
- conduct adequate due diligence on the fund before selling it to clients;
- provide adequate training and/or sufficient product information to its sales staff to ensure they fully understand the nature of the fund, the risks involved, and for which types of investors the fund would have been suitable; and
- implement sufficient measures to ensure that its sales staff had assessed the suitability of the fund to clients, and to monitor and review the selling process.
In deciding the sanction, the SFC took into account that Phillip Securities has co-operated with the SFC in resolving the disciplinary proceedings.
Notes:
- Phillip Securities is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 4 (advising on securities), Type 7 (providing automated trading services) and Type 9 (asset management) regulated activities.
- The repurchase agreement is made under section 201 of the Securities and Futures Ordinance.
- The American Pegasus Fixed Income Fund – Series II Segregated Portfolio is a viatical settlement which invested in senior life settlement insurance policies issued by investment grade insurance companies in the United States. It is not a product authorized by the SFC. In June 2010, investors were notified that the fund would be wound up as it did not have sufficient value to continue to pay life insurance policy premiums until the expected maturity of the life settlement policies held by it. The fund was placed into official liquidation under Cayman Islands law in July 2011.
A copy of the Statement of Disciplinary Action is available on the SFC website