Hong Kong Consults On Professional Investor Rules

by Mary Swire, LawAndTax-News.com, Hong Kong

07 October 2010

Hong Kong’s Securities and Futures Commission (SFC) has started a public consultation on refining the requirements for determining whether a person qualifies as a high-net-worth professional investor.

Under the Professional Investor Rules (PIR), there are four types of high-net-worth professional investors - a trust corporation with total assets of not less than HKD40m (USD5m), or its equivalent; an individual with a portfolio of not less than HKD8m; a corporation or partnership with either a portfolio of not less than HKD8m or total assets of not less than HKD40m; or a corporation the sole business of which is to hold investments and which is wholly owned by an individual who has a portfolio of not less than HKD8m.

The PIR set out specific methods (or evidential requirements) to ascertain the relevant assets or portfolio thresholds, including audited financial or custodian statements. However, in October 2009, when the SFC published a previous consultation paper, some market participants disclosed that, because of those specific evidential requirements, they have found it difficult in practice to ascertain and treat clients as professional investors.

In response, the SFC is proposing that, while the minimum value of the relevant assets or portfolio will remain unchanged, firms will, in the future, be able to use any method to satisfy themselves that an investor meets the required asset or portfolio threshold at the relevant date.

The SFC takes the view that it would not be desirable to seek to prescribe all the possible ways that an investor could demonstrate that they have the relevant assets so as to qualify as a professional investor under the PIR. The SFC will rely on the firms’ professional judgement to decide the methods by which they can satisfy themselves that their clients have the required assets or portfolio levels at the relevant date.

The SFC expects firms to keep proper records of their assessment process so as to demonstrate that they have exercised professional judgement and have reached a reasonable conclusion that their clients meet the relevant thresholds, for example, keeping copies of the documents they have relied on to assess clients’ means.

However, to enable firms that wish to continue with existing practices, the current methods of establishing different types of high-net-worth professional investors under the PIR will also be preserved.

The SFC stresses that this review of the evidential requirements relates only to the method in which the assets or portfolio thresholds in the PIR may be established so as to classify a person as a professional investor for the purposes of those rules. The consultation does not review any of the other elements of the professional investor regime including the assets/portfolio thresholds themselves or the provisions in the Code of Conduct, which were the subject of a separate consultation exercise which concluded in May 2010.

Comments on the consultation should reach the SFC by November 5.

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