Circular on distributors providing additional returns and other services or arrangements when marketing SFC-authorised funds

The Securities and Futures Commission (SFC) has issued a circular to address concerns about the practices of licensed corporations and intermediaries in offering SFC-authorized funds. The circular follows a recent review of such practices and startling observations in this context. For example, some distributors have been enticing clients with guaranteed returns and incentives that divert attention from understanding the risks of these funds. Some distributors have also imposed additional features or restrictions not outlined in the fund’s offering documents. Others used highly aggressive marketing strategies to make people invest in their funds.
Therefore, the SFC has summarized the key requirements pertaining to the distribution of SFC-authorized funds, particularly with respect to the promotion of guaranteed returns, the imposition of redemption and dealing frequency restrictions, and other related issues.
(1) Promotion of guaranteed returns: Guaranteed returns offered by distributors may include the actual return of the invested funds and an extra return to meet a specified guaranteed rate. Distributors need to be aware that such guaranteed return arrangements may be considered „structured products“ under the Securities and Futures Ordinance (SFO) and issuing advertisements for them without SFC authorization can be an offense. This is the case where the guaranteed return is linked on any change in the value of the fund.
Furthermore, any features of investment funds must be included in the marketing material. This includes additional returns or guaranteed returns as described above. Therefore, distributors should refrain from providing additional returns or incentives that are not part of the product’s documented features, as this could breach SFO section 103 or paragraph 3.11 of the Code of Conduct.
Finally, distributors are reminded to consider same paragraph 3.11, which also prohibits offering gifts (apart from fee discounts) when promoting specific investment products to clients
(2) Redemption or trading restrictions: In its above noted review, the Commission had observed that some distributors of SFC-authorized funds have imposed trading or redemption restrictions on their clients, even though the funds themselves did not have such restrictions and allow(ed) for daily dealings. This practice goes against the principles of fairness and honesty outlined in the Code of Conduct. Distributors are expected not to limit a client’s ability to redeem their investments and to stick with a fund’s stated dealing and redemption frequency. After all, clients need to be able to make timely investment decisions in response to changing market conditions.
(3) Other issues: The Commission found that some distributors promote services that do not guarantee returns but emphasize regular interest payments or distribution features, which are actually derived from the returns of underlying SFC-authorized funds. In such cases, intermediaries must ensure their advertisements are not misleading or deceptive and comply with the Code of Conduct.
Furthermore, when highlighting financial returns in advertisements, distributors should follow the SFC’s Advertising Guidelines for Collective Investment Schemes. Any such marketing campaign should not create a false impression of guaranteed returns without risk, make comparisons to bank deposits, or suggest that the services are equivalent to bank deposits or savings.
—
To conclude, the SFC notes that it will closely monitor the conduct of distributors in this context and will not refrain from taking enforcement action, if so needed.