The Securities and Futures (Professional Investor) Rules (the “PI Rules”) are the framework which set out the hurdles which must be met in order to permit firms to classify their clients as “professional investors” thereby opening the door, subject to certain regulatory requirements, to a reduced compliance burden in the dealings firms have with such clients.
The Securities and Futures Commission (the “SFC”) has historically permitted some limited waivers or modifications to certain firms pursuant to section 134 of the Securities and Futures Ordinance (Cap 571). The SFC is seeking firms’ feedback on proposals to effectively codify certain standard section 134 modifications in the revised PI Rules. Should the revised PI Rules be adopted, overlapping section 134 modifications are expected to be cancelled.
On 1 March 2017, the SFC launched the consultation on the proposed amendments to the PI Rules (the “Consultation”). The deadline for firms to respond is 3 April 2017. The Consultation can be found here. Broadly, the proposals would appear to be a positive step for firms, in expanding the kinds of persons or entities who may qualify as professional investors, and also the steps which may be taken by firms in order to demonstrate appropriate assessment of clients.
The three principal heads of change which are proposed are as follows:
it is proposed to allow the share of portfolios or investment vehicles attributable to a client which are held in joint accounts with persons other than the spouse or child of the client to be counted in the assessment of whether an individual client meets the financial asset threshold to qualify as individual professional investors;
it is proposed to expand the definition of corporations as professional investors, notably to include corporations with the principal business activity of holding investments, where that corporation is wholly owned by one or more persons who are themselves professional investors. The SFC also proposes to permit corporations which are the holding company of corporate professional investors to be classified themselves as professional investors; and
it is proposed to permit firms to accept alternative forms of evidence demonstrating a client’s qualification as a professional investor.
Eversheds expects that firms will react positively to the SFC’s proposals, given that they are clearly designed to reflect common business practices and structures and implement the SFC’s investor protection mandate in a manner which is sensitive to the issues that firms face in classifying clients. The SFC expects that, were the revised PI Rules to be adopted, firms should find that an increased number of clients meet the relevant professional investor tests, and it should be more practical for firms to obtain and maintain appropriate evidence of this classification. The SFC have also indicated that they expect the amendments will facilitate and encourage the participation of corporations in private placement activities.
Generally, therefore, the proposals appear to make it easier for firms to be confident and effective in their assessments of professional investor status.