On 25 September 2014, the Securities and Futures Commission (SFC) published Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements (the Conclusions).  The Conclusions follow a three-month consultation in 2013 on changes to professional investor and client agreement provisions of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code).  The Conclusions are available here.

Summary of key developments

Professional investors - from 25 March 2016:

  1. Intermediaries will no longer be able to waive certain investor protection provisions of the Code, including the requirement to ensure the suitability of a recommendation or solicitation, when dealing with professional investors who are individuals; and  
  2. For investment vehicles, family trusts and corporate professional investors that are not institutional investors, the intermediary may only dis-apply certain investor protection provisions if the entity is willing to do so and passes a “CPI Assessment”.

For further details, see below: Professional investors – new paragraph 15

Client agreements - on a date to be determined:

  1. The SFC seeks to amend paragraph 6.2 of the Code to require the insertion of a new clause into client agreements.  The new clause (the subject of a fresh consultation) covers suitability and non-derogation; and  
  2. The SFC will add a new paragraph 6.5 to the Code to require that the client agreement does not include anything inconsistent with the Code or anything inaccurate or misleading in the description of services.

For further details, see below: Client agreements – revised paragraph 6

Professional investors – new paragraph 15

The Code’s paragraph 15, which covers professional investors, will be replaced in full.  The new paragraph 15 sets out the terms of exemptions from Code requirements which may apply to intermediaries’ dealings with different categories of investors.

For professional investors who are individuals, the Conclusions stipulate “all individuals shall be treated in the same manner as retail investors under the Code”.   Therefore only minor exemptions, relating to administrative matters, are available for dealings with individual professional investors.

For investment vehicles, family trusts and corporate professional investors that are not institutional investors (each referred to as a CPI), the SFC is introducing a principles-based corporate professional investor assessment (the CPI Assessment).  The CPI Assessment has three criteria: (i) the CPI has the appropriate corporate structure and investment process and controls; (ii) those responsible for making investment decisions have sufficient investment experience; and (iii) the CPI is aware of the risks involved.  If an intermediary is reasonably satisfied that a CPI meets all these criteria, the intermediary may treat the CPI as a “professional investor” so long as the intermediary has provided a full explanation of the consequences and the CPI has signed a consent.

Institutional investors (essentially investors which are themselves regulated entities) will continue to be exempt from the suitability and other investor protection requirements of the Code.

The effective date of these changes is 25 March 2016.

Client agreements – revised paragraph 6

In the 2013 consultation paper, the SFC had proposed that the suitability requirement of the Code be incorporated by reference into client agreements as a contractual term.  Having considered respondents’ views, the SFC now proposes that a new clause on suitability and non-derogation be inserted into client agreements:

“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives.  No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.”

The SFC is seeking comments on the new clause by 24 December 2014.

A further change to the client agreement requirements, to be contained a new paragraph 6.5 of the Code, prohibits the inclusion of clauses which are inconsistent with the Code or which misdescribe the actual services provided to clients.  A note to the new paragraph elaborates that it precludes the incorporation of non-reliance clauses.

Suitability FAQs

The SFC plans to conduct “a separate and detailed internal study (including the gathering of industry views)” of the suitability requirement, with a view to issuing further guidance.  The main issues are (i) when is the suitability requirement triggered and what amounts to a “solicitation” or a “recommendation”, and (ii) once triggered, what steps should an intermediary take to satisfy the suitability requirement.

Private placement regime

In the 2013 consultation, the SFC sought views on whether individual professional investors should be allowed to participate in private placement activities and whether the portfolio thresholds for professional investor status should be increased.  The SFC has concluded that these aspects of the private placement regime should remain unchanged. 

Moving forward

The changes to the professional investor regime will come into effect on 25 March 2016.  To be ready for compliance, intermediaries should plan to implement changes to policies and documentation for individual professional investors and CPIs, including the new CPI Assessment, and to introduce training for relevant personnel. 

Whilst the final outcome and effective date of changes to the client agreement is pending, intermediaries should be aware that further changes to client agreements will be required. It would be prudent for intermediaries to review their current agreements for compliance with the new paragraph 6.5 of the Code even though those provisions may not become effective for some time.