• Amended Evidential Requirements under the Securities and Futures (Professional Investor) Rules
  • February 9, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction
    Amendments to the evidential requirements in the Securities and Futures (Professional Investor) Rules (Rules) came into force on 16 December 2011. It is the latest legislative development in the Hong Kong regulatory landscape, which within the past 12 months alone has included the introduction of the Securities and Futures and Companies Legislation (Structured Products Amendment) Ordinance, a new Code on Unlisted Structured Investment Products (and amendments to other retail product codes) together with changes to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code of Conduct).


    To whom do the changes apply?
    The Rules are relevant to all licensed corporations and registered institutions in Hong Kong which are doing business with, or anticipating doing business with, “professional investors” (as defined in the Rules). Additionally, the Rules will be relevant to issuers, whether on or offshore, who are looking to offer securities or structured products to professional investors in Hong Kong in reliance on an exception from requiring regulatory product authorization.


    Key aspects of the Rules
    Expansion of section 3(d) of the Rules

    The Rules now contain a broader definition of “professional investor” to include any corporation which is wholly owned by one or more trust corporations, individuals (alone or with an associate), corporations or partnerships, which fall within the scope of sections 3(a), (b) or (c) of the old rules as appropriate (section 3(d)). Sections 3(a), (b) and (c) define the following as professional investors (i) any trust corporation with total assets of not less than HK$40 million; (ii) any individual (alone or with associates) having a portfolio of not less than HK$8 million; and (iii) any corporation or partnership having a portfolio of not less than HK$8 million or total assets of not less than HK$40 million. It should be noted that these thresholds are in Hong Kong dollars or its equivalent in any foreign currency.

    The Asset Test
    Under the Rules, to qualify as a professional investor a person will have to meet the relevant assets or portfolio threshold either at the “relevant date”1 or, for the benefit of market participants who have found the previous regime satisfactory, as evidenced in audited financial statements prepared within 16 months of the relevant date or custodian statements within 12 months of the relevant date i.e. the previous methods of evidencing the asset thresholds which have been preserved by the Rules.

    Where relying on meeting the threshold at the relevant date market participants may use, as explained in the Securities and Future Commission (SFC) related consultation conclusions, methods which they deem appropriate in satisfying themselves whether a person meets the portfolio threshold to qualify as a professional investor at the relevant date.

    Although not contained in the Rules, in its consultation conclusions the SFC did not rule out the possibility of a person accepting an investors’ self-declaration as one of the ways in which to confirm a person’s professional investor status. The SFC has indicated that this method should be limited to occasions which are appropriate in the circumstances, where an intermediary has sufficient knowledge of the person based on its own appropriate due diligence, not least taking into account requirements, where relevant, of the SFC Code of Conduct.

    Record keeping
    It is worth remembering that the SFC clearly expects intermediaries to keep proper records of their assessment process so that they can demonstrate that they have exercised professional judgment and have reached a reasonable conclusion that their clients meet the relevant thresholds. The keeping of records is a fundamental practice appearing throughout he SFC’s regulatory requirements.

    Prior to the Rules, intermediaries could apply for a waiver under s.134 of the Securities and Futures Ordinance (SFO) from the requirements. Modifications and waivers may still be applied for, however market participants will not necessarily need to apply for a modification or waiver if the sources or types of information relied upon are consistent with the approach under the Rules. In addition, the SFC has noted that modifications which have been granted as of the date of implementation of the Rules may continue to be relied upon.

    1. Defined in s.2 of the Rules:

    (a) in the case of advertisement, invitation or document described in s.103(3)(k) of the SFO, means the date on which the advertisement, invitation or document is issued or processed for the purpose of issue;
    (b) in the case of a call described in s.174(2)(a) of the SFO, means the date on which the call is made;
    (c) in the case of an offer described in s.175(5)(d) of the SFO, means the date on which the offer is made;
    (d) in any other case which, by virtue of the any rules made under the SFO, requires compliance with an obligation, means the date by or on which the obligation is required to be complied with.


    With the Rules in force, it is critical to implement robust, and documented, internal policies requiring sufficient and appropriate due diligence in the context of dealing with professional investors, especially where the assessment does not entail obtaining the evidence specifically set out in the Rules.

    Whist this briefing deals solely with the Rules, where a licensed corporation or registered institution deals with clients who are professional investors under the Rules it is important that the requirements under the SFC Code of Conduct are appropriately addressed, in particular chapters 15.1-15.3 relating to investor characterization (broadly speaking, an assessment of the types of products previously traded, frequency and size of trades, dealing experience, knowledge and expertise, and awareness of risks).