SFC standardises the rules for prescribing professional investors Introduction In March 2017, the SFC published the Consultation Paper on the Proposed Amendments to the Securities and Futures (Professional Investor) Rules ( Consultation Paper ). The proposed amendments to the Securities and Futures (Professional Investor) Rules (Cap 571D) (the Professional Investor Rules ) include expanding the categories of persons who will qualify as professional investors and allowing the aggregation of certain assets and alternative forms of evidence for determining and ascertaining whether a person meets the relevant asset or portfolio thresholds to qualify as a professional investor under the Professional Investor Rules. The SFC has now concluded the consultation and published the Consultation Conclusions on Proposed Amendments to the Securities and Futures (Professional Investor) Rules ( Consultation Conclusions ). Background Categories of Professional Investors The Securities and Futures Ordinance (Cap 571) ( SFO ) provides for two types of professional investors, namely: 1. entities specified in paragraphs (a) to (i) of the definition of professional investor in Part 1 of Schedule 1 to the SFO (e.g. banks and insurance companies). These are Institutional Professional Investors under the Code of Conduct for Persons Licensed
by or Registered with the SFC; and 2. high net worth professional investors as set out in the Professional Investor Rules. The Consultation Paper is concerned with high net worth professional investors under the Professional Investor Rules. There are four types of high net worth professional investors, namely:- 1. 2. 3. 4. a trust corporation entrusted with total assets of not less than HK$40 million (or the equivalent in foreign currency); an individual who (either alone or with his/her spouse or children in a joint account) has a portfolio of not less than HK$8 million (or the equivalent in foreign currency); a corporation or partnership with either a portfolio of not less than HK$8 million (or the equivalent in foreign currency) or total assets of not less than HK$40 million (or the equivalent in foreign currency); and a corporation the sole business of which is to hold investments and which is wholly owned by any of the persons falling within paragraphs (a), (b) or (c) above. Evidential Requirements Under the Professional Investor Rules, licensed and registered intermediaries can adopt a principles-based approach or a prescriptive approach to determine whether high net worth professional investors satisfy the applicable assets or portfolio thresholds. The principles-based approach allows intermediaries to adopt methods they consider appropriate to satisfy themselves that an investor meets the applicable assets or portfolio threshold at the relevant date. On the other hand, the prescriptive approach requires the intermediaries to obtain specified evidential documents before the relevant date. For example,
for an individual professional investor, the intermediary can rely on (1) a certificate issued by an auditor or a certified public accountant within 12 months before the relevant date; or (2) one or more custodian statements issued to the individual (either alone or with his/her spouse or children in a joint account) within 12 months before the relevant date as evidence to satisfy the applicable assets or portfolio thresholds. Intermediaries have sought modifications to the Professional Investor Rules to gain greater practical flexibility for themselves and their clients. As a result, the SFC has granted modifications under section 134 of the SFO which the SFC considers to facilitate efficiency without compromising investor protection. There are now about 40 subsisting modifications. The SFC proposes in the Consultation Paper to amend the Professional Investor Rules by formalizing the modifications that it has granted to expand the categories of persons who qualify as professional investors and the evidence that can be relied upon in determining whether the threshold criteria are met. Key amendments to the Professional Investor Rules After taking into account the public feedback, the SFC published its Consultation Conclusions last month and recommended the following key amendments to the Professional Investor Rules. Allowing aggregation of certain assets The SFC proposed to allow an individual to aggregate the following assets when determining whether he or she meets the relevant portfolio threshold to qualify as a professional investor: 1. The share of a portfolio held in an account jointly
owned by an individual with non-associates, including individuals, corporations and partnerships. An associate is defined as a spouse or child. The existing Professional Investor Rules allow an individual to take into account the whole portfolio (as opposed to a share of it) held in a joint account with associates when determining whether he/she meets the threshold to qualify as a professional investor. In determining the share of an individual s portfolio held in a joint account with a non-associate for the purpose of meeting the prescribed threshold, the individual s share is to be based on either the share specified in the written agreement between the account holders or an equal share of the portfolio in the absence of a written agreement. 2. The portfolio or share of the portfolio of any corporation the principal business of which is to hold investments and which is wholly owned by the individual at the relevant date. After considering the responses to the consultation, the SFC concludes that it will not take forward the proposal to allow an individual to count the portfolio held by a corporation if he/she partially owns the corporation. Intermediaries are expected take reasonable steps, which may include obtaining necessary evidence from the individual, to substantiate his or her sole ownership of the corporation. Expanding the definition of corporations to qualify as professional investors Categories of corporations which qualify as Professional Investors will be expanded to include the following:- 1. A corporation the principal business of which is to hold investments and is wholly owned by one or more persons where each of them qualifies as professional investors. 2. A corporation which wholly-owns another corporation which is a qualified professional investor.
The SFC observed that in practice, the holding company may be an offshore investment holding company which is not necessarily required to prepare consolidated annual audited financial statements. In this regard, intermediaries may have difficulties ascertaining whether the holding company meets the monetary threshold under Rule 6(a) of the Professional Investors Rules. The SFC considered that this is a sensible extension to allow the holding company to qualify as a professional investor if it wholly owns another corporation which fulfils the monetary requirements (regardless of whether the consolidated annual audited financial statements are in place for the holding company), and this will provide intermediaries with operational flexibility. Allowing alternative forms of evidence Alternative forms of evidence will be allowed in ascertaining whether a person meets the relevant assets or portfolio threshold to qualify as a professional investor, such as: 1. 2. 3. public filings made under legal or regulatory requirements in Hong Kong or in a place outside Hong Kong; certificates issued by custodians in Hong Kong or in a place outside Hong Kong; certificates issued by auditors or certified public accountants. Conclusion and way forward In conclusion, the SFC is of the view that implementation of the revised Professional Investor Rules is in the best interest of the industry to ensure a level-playing field. After considering all the comments and suggestions, the SFC will not take forward the proposal to allow an individual to count the portfolio held by a corporation if he or she partially owns the corporation. Other proposals as set out in the consultation paper will be adopted.
The SFC has gazetted the proposed amendments to the Professional Investor Rules and will submit the amendments to the Legislative Council for negative vetting. Subject to the legislative process, the SFC expects the amended rules to come into effect on 13 July 2018. The SFC will revoke all the modifications previously granted under section 134 of the SFO when the rules become effective. For enquiries, please contact our Corporate & Commercial Department: E: cc@onc.hk T: (852) 2810 1212 W: www.onc.hk F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. Published by ONC Lawyers 2018