On 1 March 2017, the Securities and Futures Commission (SFC) published a consultation paper on proposals to standardise the rules for prescribing professional investors.
The Proposals
The SFC proposes to:
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allow a portfolio held in joint account(s) with persons other than associates and investment vehicle(s) owned by an individual to be counted in determining whether the individual meets the monetary threshold to qualify as a professional investor;
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expand the definition of corporations as professional investors – from sole business to principal business as an investment holding company owned by a broader range of individuals and entities; and
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allow alternative forms of evidence to be used to demonstrate that a person qualifies as a professional investor - it is to be welcomed to streamline the evidential burden on treatment of professional investors.
The proposals are principally aimed at amending the Securities and Futures (Professional Investor) Rules (PI Rules) to formalise and codify modifications that the SFC has previously individually granted under section 134 of the Securities and Futures Ordinance. Those modifications have led to a variation in who might qualify as a professional investor for different intermediaries, and the evidence on which different intermediaries may rely when assessing whether a person is a professional investor. The changes are intended to enhance transparency and promote market consistency.
What’s Not Changing?
Importantly, the consultation, following on from a soft consultation with industry participants, is not intended to:
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overhaul the professional investor regime in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code of Conduct);
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change any other elements of the professional investor regime, such as the asset/portfolio thresholds prescribed under the PI Rules or other provisions in the SFC Code of Conduct; or
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remove the existing principles-based approach for determining whether a person meets the asset/portfolio thresholds.
Practical Considerations
Overall:
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The proposals are designed to regularise the position in relation to the categorisation of professional investors and level the playing field for all intermediaries, and will increase certainty in the market by codifying existing practice by some market participants.
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The proposals should be welcomed by asset managers and private banks, since there will be more flexibility and scope for treating individuals as professional investors, either directly or through corporate holdings.
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Intermediaries will need to check their client on-boarding arrangements, where relevant, to assess whether any clients need to be re-categorised as the result of the proposed changes to the PI Rules – the changes should make no difference to licensing requirements or the treatment of professional investors under the SFC Code of Conduct.
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Intermediaries will need to check their marketing procedures to identify any target clients who may, following implementation of the proposed changes, be treated as professional investors for the purposes of the Hong Kong public offer restrictions.
Responses to the consultation paper and comments on the indicative draft of the proposed amendments to the PI Rules contained in the paper should be made in writing to the SFC no later than 3 April 2017.
