Hong Kong's Securities and Futures Commission (SFC) has published a Consultation Paper on proposed amendments to the Securities and Futures (Professional Investor) Rules (PI Rules)(Consultation). The Consultation includes proposals to expand the categories of persons who may qualify as a professional investor, permit aggregation of certain assets and introduce alternative forms of evidence to satisfy the asset or portfolio thresholds under the PI Rules.
Implications for intermediaries
The proposals are intended to enhance market consistency in the application of the PI Rules and provide greater flexibility to meet the business needs of intermediaries. The proposals relate only to the professional investor assessment under the PI Rules and do not seek to further review the professional investor regime under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. We expect that intermediaries will welcome the clarity and guidance offered by the proposals, which, if adopted, are likely to facilitate more efficient and accurate professional investor classification.
In the past, the SFC has granted a number of modifications to the PI Rules, in response to applications from intermediaries for greater flexibility in carrying out a professional investor assessment under the PI Rules. The proposals reflect the SFC's aim to consolidate the most commonly sought modifications and make them generally available to all industry participants by incorporating them in the PI Rules.
The proposals address the following key areas:
- Expansion of Corporate Professional Investors: To allow the following types of corporations to qualify as professional investors: (i) a corporation whose principal business is to hold investments and which is wholly owned by one or more persons who are each qualified as a professional investor; and (ii) a corporation which wholly owns another corporation that meets the asset or portfolio thresholds under the PI Rules. The SFC's view is that in addition to reflecting the practical reality that such investment holding arrangements are commonly adopted, the changes may also encourage greater participation of corporations in private placement activities.
- Expansion of Individual Professional Investors: To allow the following to be taken into account in satisfying the asset or portfolio thresholds: (i) an individual's share of a portfolio that is held in a joint account with someone other than a spouse or a child and (ii) an individual’s portfolio or share of a portfolio held by a corporation, the principal business of which is to hold investments and which is wholly or partially owned by that individual.
- Alternative forms of evidence: To extend the evidential requirements for demonstrating a person’s qualification as a professional investor in the PI Rules to include public filings and certificates issued by auditors, certified public accountants or custodians. The SFC is seeking views on whether the type or categories of "public filings" and the content of "certificates" should be prescribed and whether the PI Rules should impose conditions for the use of these alternative forms of evidence.
Actions to consider
Pending the release of the Conclusions by the SFC, you may want to consider:
- Whether the expansion of professional investors sufficiently addresses the common issues faced by your business team when serving high net worth individuals and corporations (eg, family office structures)
- Whether the expansion of the evidential requirements captures what your business team will commonly use for ascertaining the professional investor threshold under the principles-based approach for verification of professional investor status as at the relevant date, and if you would like to see any alternative forms of evidence being formally codified
- Providing a response to the Consultation to express your views and feedback on any of these issues
In our view, the proposals offer a balanced approach to standardising the market practice and acknowledging the practical business needs of intermediaries when serving and assessing professional investors. The Consultation will close on 3 April 2017.