The Securities and Futures Commission (SFC) today released consultation conclusions on proposed amendments to the professional investor regime and launched a further consultation on client agreement requirements (Note 1).
Having reviewed all of the comments received during the consultation (Note 2), the SFC has decided to proceed with the proposal not to allow intermediaries when serving individual professional investors to be exempt from the suitability requirement and other fundamental requirements that have a significant bearing on investor protection under the Code of Conduct for Persons Licensed by or Registered with the SFC (Code) (Note 3).
"The suitability requirement is a cornerstone of investor protection. We have considered the views of respondents carefully in arriving at a balanced outcome that ensures individual investors, who are classified as professional investors, are adequately protected," said Mr Ashley Alder, the SFC’s Chief Executive Officer.
Other features of the revised professional investor regime include:
- individual professional investors and corporate professional investors will continue to be allowed to participate in private placement activities;
- the minimum monetary threshold for qualifying as individual professional investors and corporate professional investors will be maintained at the current levels (Note 4); and
- a principles-based criteria will replace the specific tests now used to assess whether exemptions to the Code requirements apply when intermediaries serve corporate professional investors (Note 5).
The amendments relating to the professional investors regime will become effective on 25 March 2016 (Note 6).
In response to market feedback, the SFC has modified its proposals on client agreement requirements and now seeks to further consult the public on the wording of a proposed new clause to be incorporated into all client agreements as a contractual term (Note 7).
The public is invited to submit their comments on or before 24 December 2014 in relation to the proposed new clause. Written comments may be sent via the SFC website (www.sfc.hk), by email to client_agreement@sfc.hk, by post or by fax to 2284 4660.
Notes:
- On 15 May 2013, the SFC issued a consultation paper on proposed amendments to the professional investor regime and the client agreement requirements.
- The SFC received 51 written submissions mainly from market participants and professional bodies and approximately 300 signed template submissions in response to the proposals contained in the consultation paper.
- The suitability requirement, which refers to the requirement to ensure the suitability of a recommendation or solicitation for a client is reasonable in all circumstances, is a key pillar of the Code. The other fundamental requirements inherently linked with the suitability requirement or that have significant bearing on investor protection under the Code include, among other things, the need to disclose certain transaction related information, the need to enter into a written agreement and the provision of relevant risk disclosure statements.
- Under the Securities and Futures (Professional Investor) Rules, the minimum portfolio threshold for individual professional investors is $8 million and the minimum total assets threshold for corporate professional investor is $40 million.
- The SFC will publish frequently-asked-questions on the assessment criteria. Investment vehicles wholly owned by individual professional investors and by family trusts will be subject to the same assessment as corporate professional investors under the Code. Accordingly, if investment vehicles can satisfy this assessment criteria, intermediaries serving them can be exempt from the suitability requirement.
- A separate internal study of the suitability requirement (including the gathering of industry views) will be carried out in due course.
- The SFC will instead provide intermediaries with further guidance on description of actual services in their client agreements. The SFC will proceed with the proposed Code amendments that provide that client agreements should not contain terms which are inconsistent with the obligations under the Code or mis-describe the actual services to be provided to the client. All proposals relating to client agreement requirements will take effect on a date specified when the further public consultation of the proposed new clause is concluded.
