In order to better protect the interests of professional investors particularly individual professional investors, the Securities and Futures Commission (“SFC”) has recently amended the Professional Investor regime under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code”) following two consultation conclusions published in September 2014 and December 2015. These changes are summarised below.
Who is a “Professional investor”?
A professional investor is defined in Schedule 1 of the Securities and Futures Ordinance (Cap 571) and Section 3 of the Securities and Futures (Professional Investor) Rules (Cap 571D) to include :-
(a) a recognized exchange company or recognized clearing house;
(b) a person carrying on the business of the provision of investment services;
(c) a authorized financial institution;
(d) an insurer;
(e) a collective investment scheme;
(f) any government and central banks;
(g) a trust corporation with total assets of not less than HK$40 million or its equivalent in any foreign currency;
(h) an individual, either alone or with associates having a portfolio of not less than $8 million or its equivalent in any foreign currency or total assets of not less than $40 million or its equivalent in any foreign currency;
(i) any corporation or partnership having a portfolio of not less than $8 million or its equivalent in any foreign currency total assets of not less than $40 million or its equivalent in any foreign currency; and
(j) any corporation the sole business is to hold investments and is owned by any person(s) or entity in (g) to (i) above.
Three Categories of Professional Investors
With effect from 25 March 2016, the Professional Investor regime has been amended to classify professional investors into 3 categories under amended paragraph 15 of the Code :-
(a) Institutional Professional Investors, such as exchange companies or clearing houses, investment services provides, financial institutions, insurance companies, governments etc;
(b) Corporate Professional Investors, such as trust corporations, corporations or partnerships meeting the required monetary thresholds and corporate investment vehicles wholly owned by Individual Professional Investors or Corporate Professional Investors; and
(c) Individual Professional Investors, who are the private individuals meeting the required monetary thresholds.
Previously SFC licensed and registered persons (“SFC licensee(s)”) when dealing with all categories of professional investors were exempted from the requirements of paragraphs 15.4 and 15.5 of the amended Code which specify the following.
Paragraph 15.4 of the amended Code specifies :-
1. the need to establish a client’s financial situation, investment experience and investment objectives;
2. the need to ensure the suitability of a recommendation or solicitation;
3. the need to assess the client’s knowledge of derivatives and characterize the client based on his knowledge of derivatives;
4. the need to enter into a written agreement and the provision of relevant risk disclosure statements;
5. the need to disclose transaction related information; and
6. to obtain from the client an authority in a written form prior to effecting transactions for the client without his specific authority and the need to explain the authority and to confirm it on an annual basis in relation to discretionary accounts.
Paragraph 15.5 of the amended Code specifies :-
1. the need to inform the client about the licensed or registered person and the identity and status of its employees and others acting on its behalf;
2. the need to confirm promptly with the client the essential features of a transaction after effecting a transaction for a client; and
3. the need to provide the client with documentation on the Nasdaq-Amex Pilot Program.
Under the new classification above, the requirements of paragraphs 15.4 and 15.5 of the amended Code above may still be waived for Institutional Professional Investors. However, paragraph 15.4 of the amended Code can no longer be waived for Individual Professional Investors. Paragraph 15.4 of the amended Code may be waived for Corporate Professional Investors if the Corporate Professional Investor satisfies assessment criteria set out in paragraph 15.3A of the amended Code. Paragraph 15.5 of the amended Code may be waived for both Individual Professional Investors and Corporate Professional Investors if the procedural requirements in the paragraph 15.3B of the amended Code are met.
The requirements in the paragraph 15.3A of the amended Code include :-
(a) the Corporate Professional Investor who has the appropriate corporate structure and investment process and controls;
(b) the person(s) responsible for making investment decisions on behalf of the Corporate Professional Investor has(have) sufficient investment background; and
(c) the Corporate Professional Investor is aware of the risks involved for making investment decisions.
The requirements in the new paragraph 15.3B of the amended Code include :-
(a) obtaining a written and signed declaration from the client that the client has given consent;
(b) fully explaining to the client the consequences of being treated as a Professional Investor and that the client has the right to withdraw from being treated as such at any time; and
(c) specifying that the client is treated as a Professional Investor in a particular product and market and inform the client that he has a right to withdraw from being treated as a Professional Investor whether in respect of all products or markets or any part thereof.
The licensed person should carry out a confirmation exercise annually to ensure that the client continues to fulfill the requisite requirements of a Professional Investor.
New clause in client agreements
A new clause must be effected into client agreements of SFC licensees in accordance with new paragraph 6.2(i) of the Code with effect from 9 June 2017 as follows :-
“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.”
“Financial product” means any securities, futures contracts or leveraged foreign exchange contracts as defined under Schedule 1 of the Securities and Futures Ordinance. Regarding “leveraged foreign exchange contracts”, it is only applicable to those traded by persons licensed for SFC Type 3 regulated activity. The clause may not need to be added if in practice the SFC licensee does not actually solicit the sale of, or recommend, any financial products. The clause is also not required for Professional Institutional investors and Professional Corporate Investors in cases when paragraphs 15.3A and 15.3B of the amended Code are complied with.
This above is not intended to be an exhaustive summary of all recent amendments to the Professional Investor Regime in Hong Kong. If you have any queries regarding the above eNews or any other questions relating to corporate or securities matters, experienced lawyers in our Corporate Finance and Securities departments would be happy to assist you.