Hong Kong Fines Bank of America Arm

By YVONNE LEE

HONG KONG—Hong Kong's securities regulator said Thursday it has issued a reprimand to an arm of Bank of America-Merrill Lynch and fined it 3 million Hong Kong dollars (about US$386,000) for inadequate systems in relation to the sale of two index-linked notes in 2007.

The move follows broader criticism of city regulators by some local investors over their handling of other financial instruments that ended up nearly worthless as a result of the 2008 financial crisis.

The Securities and Futures Commission said in a statement the decision follows an investigation that found Merrill Lynch (Asia Pacific) Ltd. had failed to properly assess the financial situation and investment objectives of more than 40 of the 72 customers who invested in the index-linked notes during 2007. The SFC didn't say how much money was invested in the notes or to what indexes they were linked.

A spokesman for the company, a unit of Bank of America Corp., declined to comment.

The commission also found that key product information was provided to clients only after they had agreed to invest in the index-linked notes, and Merrill Lynch kept inadequate documentation to explain the rationale behind the advice they had given to their customers.

"Merrill Lynch will implement enhanced complaint-handling procedures to review client complaints regarding its distribution, sale, and provision of investment advice in relation to unlisted structured products other than the two index-lined notes," the statement said.

In its statement, the commission said Merrill Lynch has agreed to repurchase from customers holding the outstanding index-linked notes. The value of the repurchase offers is expected to be around US$3.67 million, or the amount they had invested.

In addition, Merrill Lynch agreed to offer top up payments to customers who bought the index-linked notes through Merrill Lynch and redeemed them for less than their principal invested, the statement said.

The notes are separate from other investment instruments known as minibonds, which were linked to the now-defunct U.S. investment bank Lehman Brothers. Hong Kong lenders sold millions of dollars worth of minibonds before Lehman Brothers collapsed in 2008. The bankruptcy triggered a slump in the value of the products and sparked protests by investors, who complained they had been misled by banks' staff when buying the products. The banks have argued that they disclosed risks, but some have reached settlements.