BACKGROUND
This post will provide pertinent details from the Monetary Authority of Singapore's investigation report on the sales and marketing of structured notes linked to Lehman Brothers. The aim of this post is to highlight the importance of complying with regulations and guidelines on product's sale and marketing materials especially during the planning stages which no doubt has a rippling effect.
FALL OF LEHMANN
BROTHERS
On 15 September 2008 and 3 October 2008, Lehman Brothers
Holdings Inc. (“LBHI”) and Lehman Brothers Special Financing, Inc. (“LBSF”)
respectively filed for Chapter 11 bankruptcy protection in the United States of
America (the “US”). This resulted in the default or early redemption of a set
of credit-linked structured note (the “Notes”).
Key features of the Notes as follows:
i. The Notes were linked to the credit risks of a basket of
entities (each termed a “Reference Entity” and collectively termed as
“Reference Entities”) on a first-to-default basis. These Reference Entities
included financial institutions, multi-national companies and sovereign states;
ii. The portfolio would suffer losses if the credit risk of
a portfolio of about 100 to 150 reference entities experienced credit events.
If these losses exceeded a certain amount, the Notes would be redeemed early;
iii. In the event the Notes had to be redeemed early,
investors would receive a redemption amount which would likely be less, and
could be significantly less, than the principal amount.
AFFECTED NOTES FROM LEHMAN’S
i. Minibond Notes
Series 1, 2, 3, 5, 6, 7, 8, 9 and 10 of notes issued by
Minibond Limited and arranged by Lehman Brothers Inc (in respect of series 1,
2, 3, 5 and 6) and Lehman Brothers Singapore Pte Ltd (in respect of series 7,
8, 9 and 10) offered from 3 April 2006 to 25 July 2008. Event of defaults
occurred under the respective series of the Minibond Notes as the interest
payments fell due.
ii. High Notes 5 (HN5)
High Notes 5 (“HN5”) issued and arranged by DBS Bank Ltd
(“DBS”) offered from 30 March to 30 April 2007. As a result of LBHI filing for
Chapter 11, the notes were redeemed early, DBS has determined the early
redemption amount payable to investors of HN5 to be zero.
iii. Series 3 LinkEarner Notes (Jubilee Notes)
Series 3 LinkEarner Notes issued by Jubilee Global Finance
Limited and arranged by Merrill Lynch (Singapore) Pte Ltd (the “Jubilee Notes”)
offered from 16 April to 18 May 2007. As a result of LBHI filing for Chapter
11, the notes were redeemed early, Merrill Lynch has determined the early
redemption amount on the Jubilee Notes to be zero.
iv. Pinnacle Notes
Series 9 and 10 of notes issued by
Pinnacle Performance Limited and arranged by Morgan Stanley Asia (Singapore)
Pte (the “Pinnacle Notes”) offered from 29 October to 30 November 2007. credit
events occurred to five (One of the five was LBHI) of the 100 Synthetic CDO
Reference Entities securing the Pinnacle Notes. Morgan Stanley has determined
the early redemption amount on the Pinnacle Notes to be zero.
COMPLAINTS &
MAS INVESTIGATION
There were news report that investor has lost their money and they were misrepresented. As of 31 May 2009, the Distributors of the Notes had
received 6,503 complaints from investors of the Notes.
An investigation was launched by the Monetary Authority of
Singapore on FIs’ due diligence on the Notes, the procedures in place at the
point of sale, including how the FI ensured that the Notes were sold to clients
whose investment objectives and risk tolerance matched the risk profile of the
Notes, and the training and supervision of representatives and LFAs in relation
to the Notes.
The investigation covered 10 financial institutions (“FIs”)
that distributed the Notes. As part of the investigations into two of the
Distributors, the Authority also investigated 10 licensed financial advisers
(“LFAs”) that were appointed by these two Distributors to refer clients to
them.
Financial Institutions (FIs)
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FIs recruiting LFAs
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Financial Advisers
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- ABN AMRO Bank N.V Singapore Branch (ABN)
- DBS Bank Ltd (DBS)
- Malayan Banking Berhad Singapore Branch (MBB)
- Hong Leong Finance Ltd (HLF)
- CIMB-GK Securities Pte Ltd (CIMB)
- DMG & Partners Securities Pte Ltd (DMG)
- Kim Eng Securities Pte Ltd (KESPL)
- OCBC Securities Pte Ltd (OSPL)
-Phillip Securities Pte Ltd (PSPL)
- UOB Kay Hian Pte Ltd (UOBKH)
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-OSPL
-PSPL
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-Alpha Financial Advisers Pte Ltd
-Cornerstone Planners Pte Ltd
-Elpis Financial Pte Ltd
-Financial Alliance Pte Ltd
-Fin-exis Advisory Pte Ltd
-GYC Financial Advisory Pte Ltd
-IPP Financial Advisers Pte Ltd
-Metropolitan Broking Services Pte Ltd
-Optimus Financial Pte Ltd
-Ray Alliance Financial Advisers Pte Ltd
|
WHATS NEXT
The sales and marketing practice, financial advice practice, non-compliances of FIs and distributors will be provided in subsequent posts. After looking at the data and findings by MAS, we will explore the root causes and corporate cultures that created the lapses in risks and controls.
