Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission

Transcription

1 FAQ on the assessment of Corporate Professional Investors A new paragraph 15 of the Code 1 on Professional Investors 2 will come into effect on 25 March Paragraph 15.3A of the Code requires intermediaries to make a new assessment on Corporate Professional Investors 3 in relation to relevant products and/or markets ( CPI Assessment ) before intermediaries can be exempted from certain Code requirements when dealing with these Corporate Professional Investors in relation to such products and/or markets. In conducting the CPI Assessment, intermediaries should assess whether or not the Corporate Professional Investor satisfies all of the following three criteria (the Assessment Criteria ) (as set out in paragraph 15.3A(b) of the Code): (i) the Corporate Professional Investor has the appropriate corporate structure and investment process and controls (i.e., how investment decisions are made, including whether the corporation has a specialised treasury or other function responsible for making investment decisions); (ii) the person(s) responsible for making investment decisions on behalf of the Corporate Professional Investor has(have) sufficient investment background (including the investment experience of such person(s)); and (iii) the Corporate Professional Investor is aware of the risks involved which is considered in terms of the person(s) responsible for making investment decisions. As there is no objective one-size-fits-all criterion that can cater for differences in the profile of financially sophisticated firms, an intermediary should exercise its own judgment when assessing each Corporate Professional Investor. This FAQ sets out some practical considerations that intermediaries should take into account when they seek to comply with the new paragraph 15 of the Code in order to be exempt from the relevant Code requirements. Owing to significant differences that exist in the nature, features and risks of investment products/markets and the particular circumstances of Corporate 1 Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission 2 Professional Investor is defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance 3 Corporate Professional Investors is defined in the new paragraph 15.2 of the Code

2 Professional Investors, this FAQ is neither intended to be, nor should be construed as, an exhaustive list of all factors that intermediaries should consider. Intermediaries should note that the Commission will take into account compliance with guidance in this FAQ to determine whether an intermediary has conducted the CPI Assessment in an appropriate manner. 1. In assessing whether a Corporate Professional Investor satisfies the Assessment Criteria, should an intermediary apply a flexible and holistic approach and modify its assessment for different products or markets? Intermediaries are not expected to rigidly apply the CPI Assessment and use a tick-box approach when determining whether a Corporate Professional Investor satisfies the Assessment Criteria. For example, the Commission does not set out any specific corporate model or specific background of the decision maker(s) that the corporation must have in order to meet the CPI Assessment. The assessment has always been products and markets specific under the Code 4. Thus, an intermediary is expected to exercise its professional judgment to classify products and markets into different categories as appropriate and apply the relevant classification to the relevant Corporate Professional Investor when performing the CPI Assessment. When conducting the CPI Assessment, an intermediary should take into account the products and markets under consideration (i.e., the relevant products and markets) including the nature, features and risks of such products and markets. For example, an intermediary will be expected to apply higher thresholds when assessing Corporate Professional Investors for products that are inherently more risky and complex. Accordingly, being able to satisfy the CPI Assessment for one product or market may not necessarily mean being able to satisfy the CPI Assessment for another product or market. 2. What are the appropriate corporate structure and investment process and controls (i.e. the first criterion of the CPI Assessment) that an 4 Please see the existing paragraphs 15.3 and 15.3A and the new paragraphs 15.3A(a) and 15.3A(d) of the Code

3 intermediary should look for in assessing a Corporate Professional Investor under the CPI Assessment? An intermediary should take into account all reasonable and substantive considerations to assess how investment decisions are made by the Corporate Professional Investor. An intermediary should exercise its professional judgment as to whether the Corporate Professional Investor has an appropriate corporate structure, investment process and controls (e.g., resources, systems, etc.) in place to make investment decisions as a financially sophisticated firm. For example, a Corporate Professional Investor would be more likely to be regarded as having an appropriate corporate structure and substantive investment process and controls if it: (a) has an in-house treasury, investment or similar function comprising of competent and suitably qualified professionals responsible for its investment strategies and investment process; (b) has a designated investment committee comprising of competent and suitably qualified professionals responsible for its investment strategies and investment process; and (i) such a committee makes investment decisions on behalf of the Corporate Professional Investor or (ii) the Corporate Professional Investor makes informed investment decisions taking into account the advice or recommendation of such committee; (c) engages an external investment advisory team comprising of competent and suitably qualified professionals responsible for its investment strategies and investment process; and (i) such a team makes investment decisions on behalf of the Corporate Professional Investor or (ii) the Corporate Professional Investor makes informed investment decisions taking into account the advice or recommendation of such team, and in each case this external team is: (i) independent of the intermediary that is conducting the CPI Assessment; (ii) subject to regulatory oversight (where required); and (iii) in an investment advisory capacity in advising the Corporate Professional Investor on investment strategies, advice and recommendations; and/or

4 (d) relies on and follows the investment strategies, advice and recommendations of its related corporation provided that such related corporation: (i) has an in-house treasury, investment or similar function; (ii) has a designated investment committee; or (iii) engages an external investment advisory team that meets the conditions set out in paragraph 2(c) above, that comprises of competent and suitably qualified professionals responsible for the investment strategies and investment process of the Corporate Professional Investor. As regards the considerations that an intermediary should take into account in determining whether a person acting within the capacities mentioned in the subparagraphs above is competent and suitably qualified for investment strategies and investment process of the Corporate Professional Investor, please refer to Question 3 below. 3. How should an intermediary assess (i) the background of the person(s) responsible for making investment decisions on behalf of a Corporate Professional Investor under the second criterion of the CPI Assessment and (ii) whether a person is competent and suitably qualified for investment strategies and investment process of the Corporate Professional Investor (as referred to in Answer 2 above)? In assessing the background of the person(s) responsible for making investment decisions on behalf of a Corporate Professional Investor and whether a person is competent and suitably qualified for investment strategies and investment process of the Corporate Professional Investor, the intermediary should ensure that such person is competent and suitably qualified in relation to relevant products and/or markets. The intermediary should take a holistic approach and take into account all relevant and reasonable considerations, such as: (a) investment experience and history (including personal investments and investments for the account of others) which is directly relevant and related to the relevant products and markets, taking into account the level of responsibility, for how long and how long ago; (b) work experience in the financial sector (including investment management, investment research, recommending or selling investment

5 products), which is directly relevant and related to the relevant products and markets, taking into account the level of responsibility, for how long and how long ago; and (c) academic or professional qualifications relating to the relevant products and markets. Paragraph 5 of the Guidelines on Competence issued by the Commission also provides some useful reference points for the expected standards. 4. Can an intermediary rely on a written representation from the Corporate Professional Investor confirming that it meets the Assessment Criteria? To what extent would an intermediary be expected to obtain supporting documentation to evidence the above? It would not be acceptable for an intermediary to purely rely on a written representation from the Corporate Professional Investor confirming that it meets the Assessment Criteria (for instance via acknowledgements on the account opening documents). Instead, an intermediary should holistically review and assess the information/documents provided by its client and make its professional judgment as to whether the Assessment Criteria are satisfied. An intermediary should as far as possible obtain supporting documentation from the Corporate Professional Investor to evidence its CPI Assessment. An intermediary should maintain proper audit trail of the enquiries made and information/documents obtained in the CPI Assessment and its assessment results, including that the intermediary should prepare a written account and conclusions of the final assessment based inter alia on discussions with the Corporate Professional Investor and the review of relevant supporting documentation. 5. Can a Corporate Professional Investor be assessed to meet the Assessment Criteria on the premise that the investment decision is made by its shareholder(s) who is(are) financially experienced individual(s)? An intermediary should assess whether the Corporate Professional Investor has the appropriate corporate structure, investment process and controls of a corporation. If the necessary substantive investment processes and controls

6 are lacking in a corporation and the corporation is effectively controlled by a single individual or a small number of individuals such as married couples, it is unlikely to be able to satisfy the CPI Assessment even though they themselves are financially experienced. In general, a Corporate Professional Investor established primarily for tax planning or property or investment holding purposes with investment decisions being made by its shareholder(s) is less likely to be able to satisfy the CPI Assessment.