06 Jun 2018 by Janice Chew

Amendments to Securities and Futures (Professional Investor) Rules Expected to Take Effect on 13 July 2018

The Securities and Futures (Professional Investor) Rules (PI Rules) will be amended to incorporate modifications previously granted by the Securities and Futures Commission (SFC) under section 134 of the Securities and Futures Ordinance (SFO). The amended PI Rules are expected to come into effect on 13 July 2018, subject to the legislative process. The amended PI Rules will have covered the modifications granted previously, and subsisting modifications will be revoked when the amended PI Rules become effective.

The following provides a summary of the changes to the PI Rules as outlined in the conclusions of a consultation exercise, published by the SFC on 18 May 2018.

Aggregation of Certain Assets for Individuals

The amendments allow portfolios held in joint accounts with non-associates and in investment corporations wholly-owned by an individual to count towards meeting the threshold to qualify as an individual professional investor.

According to the PI Rules, a “portfolio” is defined as a portfolio comprising securities, certificates of deposit issued by banks or money held by custodians for a person, whereas an “associate” is defined as the spouse or any child of an individual.

Share of a portfolio held in a joint account with a non-associate

The PI Rule amendments will allow an individual’s share of a portfolio held in an account jointly owned by the individual with non-associates – individuals, corporations and partnerships – to be aggregated for the purposes of meeting the professional investor threshold.

Whereas a joint account with associates permits the portfolio to be considered in full for the purpose of meeting the threshold, a joint account with non-associates will mean the individual is considered as holding a share in the portfolio, but not the whole portfolio. The SFC will not expand the definition of “associate”.

Intermediaries will be expected to make reasonable enquiries about the existence of a written agreement before considering the equal share of a portfolio in a joint account, in order to avoid miscounting the actual share of the portfolio. No conditions will be imposed by the SFC on the content of the written agreement.

Portfolio held by a corporation owned by an individual

The consultation paper originally proposed allowing an individual’s portfolio or share of a portfolio held by an investment corporation which is wholly or partially owned by the individual to be counted towards meeting the prescribed threshold to qualify as a professional investor.

On this proposal, the industry raised legal concerns that if an individual does not wholly own a corporation, he or she may not have control over it, and such portfolio may not be his or her legitimate property. In response, the SFC decided not to allow the portfolio of a partially-owned corporation to be counted, and only the portfolio of a wholly-owned corporation can be aggregated.

Expanded definition of corporations which qualify as professional investors

The criteria of professional investors will be expanded to include:

  • Corporations whose principal business is investment holding and which are wholly-owned by one or more persons all of whom are professional investors (under the PI Rules or Schedule 1 to the SFO); and
  • Corporations that wholly own another corporation which is a professional investor by virtue of meeting the asset or portfolio threshold.
    This would allow an offshore investment holding company to qualify as a professional investor if it wholly owns another corporation which fulfils the monetary requirements. This amendment is intended to provide operational flexibility for intermediaries to ascertain whether the holding company meets the monetary threshold under Rule 6(a) as it is not necessary for an offshore investment holding company to prepare consolidated annual audited financial statements.

The SFC also reminds directors or shareholders of corporations to review their corporate governance structure to ensure their shareholders are properly informed of the consequences and the impacts on them when the corporation they own is being qualified as a professional investor under the amended PI Rules.

Alternative forms of evidence

The evidential requirements set out in sections 3(a) to (c) of the PI Rules ascertaining whether a person meets the monetary threshold to qualify as a professional investor will be extended to include public filings submitted with 12 months before the relevant date, as well as certificates issued by auditors, certified public accountants or custodians.

Published in Asia Law Network

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