The SFC has released a Consultation Paper on proposed amendments to the Securities and Futures (Professional Investor) Rules (Cap. 571D) (“PI Rules”).

This article summarises what you need to know about the proposals, including potential new client opportunities. We also provide a synopsis of how these proposals fit within the broader professional investor regulatory regime.

Pragmatic and important expansions

The amendments proposed do not radically change the PI Rules or the categories of professional investors under them. However, the proposals provide some pragmatic and important expansions to the PI Rules, largely in response to industry developments and requests over the years.

The key changes proposed under the Consultation Paper include the following:

Please click here to view the table. 

Some of these have been the subject of bespoke modifications granted by the SFC to particular institutions in the past. This development will therefore help level the playing field.

Embedding existing industry approach

The Consultation Paper stresses that the intention is not to radically change the PI Rules. Rather, the changes are intended to embed in the PI Rules modifications that the SFC would commonly grant to intermediaries on application.

…but a few things are staying the same

  • No changes to monetary thresholds - There are no proposed changes to the monetary thresholds which currently apply under the PI Rules.
  • No change to the scope of the “portfolio” –The SFC has not agreed to change the types of assets that can count to the client’s portfolio. For example, precious metals such as gold bullion remain irrelevant for the purposes of the PI Rules. Only securities, deposits and certificates of deposit count.

Why is this relevant? And where does it fit in?

Classification as a professional investor under the PI Rules is relevant to the following:

  • the prospectus regime under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”);
  • the offer approval requirements under the Securities and Futures Ordinance (Cap. 571) (“SFO”); and
  • conduct and suitability requirements applying under the Code of Conduct for Persons Licensed by or Registered with the SFC (“SFC Code of Conduct”).

While the SFC Code of Conduct was updated in March 2016 in respect of the obligations affecting professional investors, these changes did not vary the PI Rules themselves. For example, see our December 2015 alert for further details about the suitability clause that is now required.

It is also worth noting that the changes proposed to the PI Rules do not affect the definition of professional investors under paragraphs (a) to (i) in Part 1 of Schedule 1 of the SFO, known as “institutional professional investors”.

This means that licensing exemptions that may be available where services are provided to institutional professional investors, are not affected under the changes proposed in the Consultation Paper.

The following chart brings this together:

Please click here to view the chart. 

Who benefits?

We expect the SFC’s proposals will be of most interest to private banks and wealth managers. They also undoubtedly impact others who work in the zone between pure “retail” and “institutional”, such as corporate banks and many securities houses, for which an expansion of the pool of investors who can access exempt products would be significant. The proposals will also inevitably influence product design.

What is clear though is that individuals – no matter how rich either alone or when their wealth is held with others – remain subject to the most stringent protections because of the standards imposed under the SFC Code of Conduct. That is, even though more products may become available to them, requirements such as suitability and pre-sale disclosures still apply.

Timetable – how soon?

Comments may be made in writing to the SFC on the proposed changes to the PI Rules on or before 3 April 2017. We are currently working on the banking industry’s response.

The timetable for actual implementation remains to be seen, but the process will involve:

  • the SFC issuing its consultation conclusions paper at some point after the consultation closes – usually a few months;
  • final adjustments to the new PI Rules, if any;
  • the amended PI Rules being subject to negative vetting by the Legislative Council, before becoming effective.

The indicative draft signals an intent to have the amended PI Rules come into operation in 2017. Our best guess is that this would likely be around late Q3 / Q4.

Next steps

We recommend considering:

  1. whether you wish to put forward other changes to the PI Rules, or adjustments to the changes proposed;
  2. what this means for your business, including the new opportunities that are likely to become available; and
  3. how your compliance protocols need to change to support those opportunities.