On 25 September 2014, the Securities & Futures Commission (“SFC”) issued their Consultation Conclusions on the Professional Investor (“PI”) regime and Client Agreement Requirements1. These conclusions were in response to the SFC’s initial consultation with the market in May 2013.

One of the principal purposes behind the consultations was the fact that the existing PI definition under the Securities and Futures Ordinance (“SFO”), which covers Individual, Corporate and Institutional PIs, is based purely on a portfolio or asset calculation.2 As most of the selling misconduct cases handled by the SFC involve complaints by individuals, concern was expressed that this monetary calculation did not necessarily mean that an individual PI was financially sophisticated in practice. Therefore, the SFC wanted to review whether PIs were adequately protected by the existing regime.

Two of the major issues considered in this consultation were firstly whether private placements to all PIs would continue to be exempt from the prospectus and related requirements under Hong Kong law, and secondly whether certain of the existing requirements under the Intermediaries’ Code of Conduct3, which currently apply only to retail investors, should be extended to other PIs.

On these two issues:

1. In response to their question as to whether the existing PI definition is sufficient to ensure that PIs investing in private placements can truly be said to be financially sophisticated, most respondents opposed any changes and the SFC has said that it is broadly supportive of maintaining the status quo.

Three of the key issues stated by the SFC in reaching this conclusion were:

(i) the existing PI criteria are largely consistent with other comparable jurisdictions such as US, Australia and Singapore;

(ii) often private placements are made through regulated intermediaries, and the intermediaries themselves would have standards of conduct in dealing with PIs; and

(iii) private placements are typically effected through detailed documentation that outline the risk factors.

 

2. As to whether the Code of Conduct should be amended to require that intermediaries must comply with the same requirements for individual PI as for retail investors, particular focus was placed on the "Suitability Requirement".

The “Suitability Requirement” states that intermediaries must ensure that recommendations to or solicitations of investors are reasonable.

Despite a mixed response, the SFC’s conclusion is that the Code should be amended so that intermediaries will be required to comply with the Suitability Requirement - and various other parts of the Code that currently only apply to protect retail investors and provide greater transparency - in their dealings with Individual PIs. These proposed amendments would also require the intermediary to establish the individual PI’s experience and objectives; to disclose certain transaction information; to provide risk disclosure statements; and to obtain specific authority for discretionary accounts. Certain other aspects of the Code, however, would continue not to apply to individual PIs provided that client consent was obtained.

A number of related matters were also considered in the Consultations, including revisions to the assessment of a Corporate PI on a principles-based test to determine whether or not the same exemptions that should apply when intermediaries are dealing with those Corporate PIs.

The proposed amendments to the Code and client agreement requirements are now being circulated for comment. It is expected that the amendments will become effective sometime in early 2016.

Publication date: 31st October 2014

 

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