Redemption Suspension and the Branch Head's 'Front of the Queue'
Mrs Ip, 58, holds HK$4.0 million in the 'Asia High Yield Bond Fund', an SFC-authorised fund distributed by your firm; she has held it for three years. In March she told you she would need HK$2.0 million in early June to complete the purchase of a flat, and on 2 May she submitted a redemption request for that amount, ahead of the fund's 3 June dealing cut-off.
On 20 May the fund manager announced a suspension of redemptions. About 12% of the fund's NAV is in bonds of two issuers whose trading has been suspended pending a restructuring, and the valuation committee has written one position down by 40%. The offering document permits suspension where it is not reasonably practicable to determine the value of a substantial portion of the assets. Other unitholders are calling the sales desk.
Your branch head tells you to tell Mrs Ip that 'redemptions are being processed in order of request, and as a long-standing client she will be at the front of the queue'. She also suggests offering a switch into an SFC-authorised money market fund 'to keep her calm'.
1. What can you tell Mrs Ip about the suspension, and what must you not say?
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What you can say:
- The manager has suspended redemptions under a power in the fund's constitutional documents and offering document, which permits suspension where it is not reasonably practicable to value a substantial portion of the assets. That is a factual statement.
- What triggered it: about 12% of NAV in two issuers whose bonds are suspended pending restructuring, and a 40% write-down on one position by the valuation committee.
- The suspension is temporary in principle, but nobody can say when it will lift; the manager must keep unitholders informed.
- Her request of 2 May was received before the suspension. Explain how the manager is treating requests received before the suspension under the fund's dealing rules - obtain that in writing from the manager or the fund platform; do not guess.
- Her completion deadline is a real problem. She may need bridging finance, and she should be told that plainly so she can plan.
What you must not say:
- 'You will be at the front of the queue.' There is no seniority queue. If the fund scales redemptions, it scales them pro rata across valid requests. Promising priority is a misrepresentation and a breach of fair treatment - and it will be on the recording.
- 'The fund is fine, don't worry.' You are not the valuation committee; the NAV is uncertain and a 40% write-down is material.
- Anything suggesting the suspension is a technicality, or that her loss is bound to be recovered.
Tone: accurate, consistent with what other unitholders are told, and confirmed in writing. Log the call and the follow-up.
2. How should redemption requests be handled when the fund resumes, or if it can only meet part of the requests?
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Principles:
- Treat all unitholders in the same class equally. No preferential treatment for long-standing clients, for staff, or for the clients who complain loudest.
- Follow the fund's dealing cut-off and the manager's instructions. If the manager accepts the 2 May request under the pre-suspension dealing cycle, deal with it under those terms; if it falls to be dealt with after resumption, it is handled in the same way as every other request in that cycle.
- If, on resumption, the fund can only meet part of the requests - because it must sell assets to fund them, or because liquid assets are limited - the manager will normally scale all requests in the dealing cycle pro rata. Your job is to make sure the client's request is correctly logged and timestamped, not to move it up the list.
- Do not net, offset, or 'switch' her out of the fund ahead of other holders. A switch is a redemption plus a subscription; if redemptions are suspended the switch cannot be effected, and doing it for one client would transfer value away from the others.
- If she is treated differently from another holder, there must be a documented reason that the fund's rules and the SFC's expectations support - and price or relationship length is not one.
3. What should happen internally before any switch is offered?
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- Check the mechanics. During a suspension the redemption leg cannot settle. Confirm with the manager whether switches are permitted at all; usually they are not, or are deferred.
- Test suitability. A money market fund may be a sensible destination, but it is still a sale: assess her needs (she needs HK$2.0m in three weeks), the fund's liquidity, any subscription or switching fee, and the fact that switching crystallises the loss at a written-down NAV. If the money market fund is right for the proceeds, recommend it on the merits - not 'to keep her calm'.
- Examine the motive. The branch head's instruction is driven by complaint management, not by the client's interest. A switch generates a new subscription and possibly a fee; document who recommended it and why.
- Disclose. Tell her the switch may not be executable, the likely timing, the costs, and the risk of crystallising the loss at an uncertain NAV.
- Escalate and log. Inform Compliance of the suspension communication, the branch head's instruction and the complaint. The manager notifies the SFC; the distributor must ensure its own client communications are accurate and that the complaint is handled under the firm's complaint procedures, with a written response.