SFC provides further guidance on Corporate Professional Investor Regime
As noted in my blog dated 3 October 2014 concerning the SFC's conclusions on professional investors and client agreements (link), the SFC is looking to enhance the protection afforded to professional investors who are not institutional investors.
In particular, a new paragraph 15 (on Professional Investors) of the SFC's Code of Conduct (for licensed or registered intermediaries) will come into effect on 25 March 2016.
In the meantime, the outcome of the SFC's further consultation on client agreement requirements and the adoption of a new "suitability term" is awaited. These issues are also dealt with in my previous blog.
As anticipated, the SFC has recently issued a Circular to licensed intermediaries giving guidance in the form of responses to FAQs on: (i) corporate professional investor assessment (Appendix 1 of the Circular – effective as from 25 March 2016); and (ii) description of services in client agreements (Appendix 2 of the Circular).
The Circular can be found on the SFC's website (Rule book/Circulars) -http://www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=15EC4 (Link).
As the Circular notes, compliance with the guidance given in responses to the FAQs is relevant to a licensed intermediary's fitness and properness to carry out regulated activities under the Securities and Futures Ordinance.
Corporate Professional Investor Assessment (CPI Assessment)
As from 25 March 2016, the "suitability requirement" in paragraph 5.2 of the Code of Conduct will apply to all individual investors whether regarded as "professional" or not. In effect, they will be regarded as retail investors.
Also as from 25 March 2016, corporate professional investors (including, investment vehicles wholly owned by individual professional investors or family trusts) will be subject to a new "principles-based" assessment before an intermediary can rely on exemptions from certain investor related protections set out in paragraph 15 of the Code of Conduct. The CPI Assessment will be based on three criteria: corporate structure and controls, investor background/experience and awareness of risks.
Among other things, the responses to the FAQs emphasise:
- there is no "one size fits all" approach to CPI Assessment;
- intermediaries are expected to exercise their professional judgement in carrying out assessments, taking into account different investments and markets;
- a holistic approach is required;
- criteria to take into account in assessing a corporate professional investor's corporate structure and controls;
- criteria to take into account in assessing the investment background and experience of the person(s) responsible for making investment decisions on behalf of a corporate professional investor;
- the supporting documentation from a corporate professional investor to evidence a CPI Assessment (as opposed to simply relying on the investor's written representation);
- the relevance of a shareholder's investment experience in conducting a CPI Assessment (particularly, as regards property and investment holding vehicles)
Description of services in client agreements
As confirmed in paragraph 56 of its 25 September 2014 Consultation Conclusions, rather than amend paragraph 6.2(d) of the Code of Conduct (Minimum content - description of services) the SFC has given further guidance on the existing paragraph. Intermediaries are not expected to describe all services to be provided to a client but they are expected to include descriptions of services that are regulated activities for which they are licensed or registered. The description of services should be consistent with the nature of the actual regulated services provided.
Given the preponderance of corporate professional investors in Hong Kong that are effectively owned and controlled by a small number of relatively wealthy individuals (for example, married couples), the forthcoming changes to the corporate professional investor regime will have a significant impact on licensed intermediaries. Intermediaries need to start preparing for the implementation of these changes in March 2016 where they have not already adopted them as a matter of good practice.
Furthermore, while the SFC has not amended paragraph 6.2(d) of its Code of Conduct as regards the description of regulated services, the responses to the FAQs in this regard clarify existing requirements and require intermediaries to comply.
It also appears to be only a matter of time before the Code of Conduct is amended to require that client agreements should not contain any terms which are inconsistent with the Code of Conduct or which misdescribe the actual services provided to clients. Those amendments to the Code of Conduct are pending the outcome of the SFC's further consultation on the adoption of a "suitability term" (for which please see my previous blog).
This blog is a summary of recent developments. It should not be regarded as a substitute for advice in any particular case. RPC is not responsible for the content of external websites.