Recent changes to the Rules, which are to go into effect on December 16, 2011 (subject to a "negative vetting" by the Legislative Council), aim to refine the evidential requirements for ascertaining whether a person meets the relevant assets or portfolio threshold so as to qualify as a Professional Investor. The proposed changes purport to align Hong Kong with other leading markets and extend greater flexibility to individuals who fall within the exemption of a Professional Investor.
Professional Investors, also known in the market as "high net worth professional investors", are defined as:
- a trust corporation with total assets worth no less than HK$40M;
- an individual, alone or joint account, with a portfolio worth no less than HK$8M;
- a corporation or partnership with either a portfolio worth no less than HK$8M or total assets worth no less than HK$40M; or
- a corporate investment vehicle owned by an individual, alone or jointly, with a portfolio worth no less than HK$8M.
Those within the definition of Professional Investors are able to participate in investment opportunities that are not authorized by the Securities and Futures Commission ("SFC"); therefore, market participants may utilize the Professional Investor exemption and treat these Professional Investors similarly to "institutional professional investors such as banks / regulated dealers."
Where a client of a licensed or registered person is a Professional Investor, the licensed or registered person will not be required to fulfill the requirements set out in paragraph 15.5 of SFC Code of Conduct, particularly:
- establishing the client's financial situation, investment experience, and investment objectives;
- entering into a written agreement and the provision of relevant risk disclosure statements;
- to obtain from the client an authority in a written form prior to effecting transactions for the client without his specific authority; or
- the need to explain the authority and/or the need to confirm the authority on an annual basis.
However, Professional Investors are subject to more onerous accreditation standards—including demonstrating relevant knowledge and experience—than institutional Professional Investors under the SFC Code of Conduct.
The Rules set out specific methods, known as evidential requirements, to ascertain the relevant assets or portfolio thresholds for the first three types of high net worth professional investors. These evidential requirements are:
- For a trust corporation: (i) the most recent audited financial statement prepared in respect of the trust corporation and within 16 months before the relevant date; (ii) one or more audited financial statements, each being the most recent audited financial statement, prepared in respect of the trust or any of the trusts and within 16 months before the relevant date; or (iii) one or more custodian statements issued to the trust corporation in respect of the trust or any of the trusts and within 12 months before the relevant date.
- For an individual: (i) a certificate issued by an auditor or a certified public accountant within 12 months before the relevant date; or (ii) one or more custodian statements issued to the individual (either alone or with his/her spouse or children) within 12 months before the relevant date.
- For a corporation or partnership: (i) the most recent audited financial statement prepared in respect of the corporation or partnership and within 16 months before the relevant date; or (ii) one or more custodian statements issued to the corporation or partnership within 12 months before the relevant date.
The proposed changes to the Rules were proposed by the SFC and are to be implemented by December 16, 2011. The two key changes are:
- No requirement for traditional evidential requirements (as set out in section 2 above) allowing financial institutions to use "any methods that are appropriate" to satisfy themselves that an investor meets the requisite asset or portfolio threshold. However, it should be noted that if a financial institution adopts the "any methods that are appropriate" approach to ascertain a Professional Investor, they must show that the investor has the requisite assets or portfolio at the date of the "relevant date" (as compared to the traditional evidential requirements that can be issued some time before the "relevant date").
- More investment vehicles can qualify as high net worth professional investors. Currently, they must be individuals who, alone or jointly, have a portfolio of at least HK$8M. The proposed changes will also allow corporate investment vehicles lso to be owned by other types of high net worth professional investors.
Comparative Table of the Key Changes to the Rules
Click here to view the table.
The goals of the changes are to achieve greater flexibility and to align Hong Kong with other leading markets, however, the changes create possible grey areas and gaps that require particular attention.
As the Rules will not prescribe fixed set of requirements for ascertaining whether a person meets the Professional Investor threshold, it appears that the new changes would be protective to the financial institutions as they only need to satisfy themselves that the investor is a Professional Investor with the self-declaration provided. This could mean that when there is dispute as to the professionalism of the investor, the financial institution may use the self-declaration to rebut what the investor has demonstrated to them as Professional Investor. Otherwise, the protection enjoyed by the investor would be loosened if the financial institution, through their internal check, finds out that the investor falls into the definition of a Professional Investor. With this hidden loophole, a floodgate of complaints may arise, which would have a negative impact on the market as a whole.
Furthermore, even though the SFC will rely on the financial institution's professional judgment and will expect them to keep proper records of their assessment process so as to demonstrate that they have exercised professional judgment and have reached a reasonable conclusion, the standard of professional judgment or reasonable conclusion is vague and arguable due to the lack of prescriptive standard. The SFC will need time to set out examples to benchmark the standard, which they can then make reference to when a complaint is filed with the SFC.