David Webb, an activist investor in Hong Kong, has proposed three regulatory reforms in the wake of the Lehman Minibond fiasco, in which Hong KongÆs regulators have been swamped by thousands of retail investor complaints that the structured products backed by Lehman have been mis-sold and lost most of their value.

Webb says it is in the interest of distributors and issues of structured products to support these or similar measures, lest regulators in Hong Kong, Singapore or other jurisdictions simply opt to ban or strictly curb the sale of structured notes to retail investors.

When Lehman Brothers Holdings filed for bankruptcy on September 15, several of its special-purpose vehicles were no longer able to guarantee unlisted structured financial products marketed as ôMinibondsö, ôProFund Notesö or ôPyxis Notesö. Many commercial banks sold series of these products in Hong Kong and Singapore. The SPVs invested proceeds in various forms of collateral, including swaps with a Lehman entity guaranteed by LBH, including collateralised debt obligations and credit default swaps. These products were not sold as principal protected, but retail complaints allege they were told these were conservative investments akin to bonds.

Without commenting on how the issue of the Minibonds should be resolved (Hong Kong authorities have pressured banks into agreeing to compensate investors for Minibonds based on current market prices), Webb outlines three steps to put regulation of structured products on a proper footing.

First, echoing complaints common in the mutual funds industry, he says regulation needs to be consistent. Webb calls for a unified regulator that would provide consistent, even rules, in place of the sometimes-contradictory ones promulgated separately by the Securities and Futures Commission, the Hong Kong Monetary Authority, the Mandatory Provident Fund Schemes Authority and the Office of the Commissioner of Insurance.

Fund executives routinely voice dissatisfaction at the uneven playing field, with funds required to issue prospectuses and win SFC approval, while structured notes are considered bank products and therefore have lax regulation.

Second, Webb proposes a mandatory cooling-off period, to ensure that when a bank salesperson pitches an investment product, investors must be given time to leave the pressure of a sales environment and be allowed to change their mind within, say, 14 business days. Hong Kong already has a cooling-off period for long-term insurance policies. Other jurisdictions have cooling-off periods for long-term investment products, including Australia (for unit-linked insurance, retirement savings accounts and other managed investments), and Singapore (for unit trusts).

Third, Webb calls for mandatory disclosure of commissions. He notes that while Minibond prospectuses acknowledge they pay a distributor a commission based on the amount of notes sold, the disclosure doesnÆt say how much. And this statement appears to contradict another claim in the same prospectus, which says Lehman ôalways use all of the proceeds of issue of our notes to buy the assets on which those notes are securedö; Webb says this isnÆt true, because some of those proceeds go to commissions.

Webb says, ôA light bulb would go on in even the dimmest customer head if they were told, in every marketing document of a financial product, in clearly readable typeface, that the bank would be receiving 5% commission on each sale of the product.ö