Download Changes to Hong Kong`s Professional Investor

www.BlankRome.com
November 2011 No. 4
Changes to Hong Kong’s Professional Investor Rules
Recent changes to the Rules which are to be effected on
16 December 2011 (subject to negative vetting by the
Legislative Council), aim to refine the evidential requirements
for ascertaining whether a person meets the relevant assets or
portfolio threshold so as to qualify as a professional investor.
The proposed changes purport to align Hong Kong with other
leading markets and extend greater flexibility to persons who
fall within the exemption of a professional investor.
Professional Investors
Professional Investors (also known in market as “high net
worth professional investors”), are defined as:
• a trust corporation with not less than HK$40M worth of
total assets;
• an individual, (alone or joint account), with not less than
HK$8M portfolio;
• a corporation or partnership with either a portfolio of not
less than HK$8M or HK$40M worth of total assets; or
• a corporate investment vehicle owned by individual
(alone or jointly) with not less than HK$8M portfolio.
Those within the definition of Professional Investors (high
net worth professional investors) are able to participate in
investment opportunities that are not authorised by the
Securities and Futures Commission (SFC), therefore market
participants may utilize the Professional Investor exemption
and treat these Professional Investors similarly to “institutional
professional investors such as banks / regulated dealers”.
Where a client of a licensed or registered person is a
Professional Investor, the licensed or registered person will not
be required to fulfil the requirements set out in paragraph15.5
of SFC Code of Conduct, particularly:
• establishing client’s financial situation, investment experience and investment objectives;
• entering into a written agreement and the provision of
relevant risk disclosure statements;
• to obtain from the client an authority in a written form
prior to effecting transactions for the client without his
specific authority; or
• the need to explain the authority and/or the need to
confirm the authority on an annual basis.
However, Professional Investors are subject to more onerous accreditation standards (including demonstrating relevant
knowledge and experience) than institutional professional
investors under the SFC Code of Conduct.
Evidential Requirements
The Rules set out specific methods (evidential requirements) to ascertain the relevant assets or portfolio thresholds
for the first three types of high net worth investors. These evidential requirements are:
• For a trust corporation – (i) the most recent audited
financial statement prepared in respect of the trust corporation and within 16 months before the relevant
date; (ii) one or more audited financial statements,
each being the most recent audited financial statement,
prepared in respect of the trust or any of the trusts and
within 16 months before the relevant date; or (iii) one
or more custodian statements issued to the trust corporation in respect of the trust or any of the trusts and
within 12 months before the relevant date.
© 2011, Blank Rome Solicitors. Notice: The purpose of this Asia Update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources,
the accuracy and completeness of which cannot be assured. The Update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. Additional information on Blank Rome may be found
on our website, www.blankrome.com.
5605-07 The Center • 99 Queen's Road Central • Hong Kong • +852 3528-8300
Blank Rome comprises multiple affiliated partnerships: a limited liability partnership with the full name Blank Rome LLP, qualified in Pennsylvania and maintaining offices throughout the U.S.; Blank Rome Government Relations
LLC in Washington, DC; and a Hong Kong general partnership, Blank Rome Solicitors & Notaries, which practices in Hong Kong. Blank Rome maintains appropriate registrations in the jurisdictions in which its offices are located. A
list of the partners in each entity is available for inspection at any Blank Rome office.
ASIA UPDATE
• For an individual – (i) a certificate issued by an auditor
or a certified public accountant within 12 months
before the relevant date; or (ii) one or more custodian
statements issued to the individual (either alone or with
his/her spouse or children) within 12 months before
the relevant date.
• For a corporation or partnership – (i) the most recent
audited financial statement prepared in respect of the
corporation or partnership and within 16 months before
the relevant date; or (ii) one or more custodian statements issued to the corporation or partnership within
12 months before the relevant date.
Key Changes
The proposed changes to the Rules were proposed by the
SFC and are to be implemented by 16 December 2011. The
two key changes are:
• no requirement for traditional evidential requirements
(as set out in section 2 above), allowing financial institutions to use “any methods that are appropriate” to
satisfy themselves that an investor meets the requisite
asset or portfolio threshold. However, it should be
noted that if a financial institution adopts the “any
method that are appropriate” approach to ascertain a
Professional Investors, they must show that the investor
has the requisite assets or portfolio as at the date of the
“relevant date” (as compared to the traditional evidential requirements which can be issued some time
before the “relevant date”).
• more investment vehicles can qualify as high net worth
professional investors. Currently, they must be individuals who (alone or jointly) have a portfolio of at least
HK$8 million. The proposed changes will allow corporate investment vehicles also to be owned by other
types of high net worth professional investors.
Comparative Table of the Key Changes to the Rules
Prior to 16 December 2011
To be effected on 16 December 2011
(subject to “negative vetting” by Legislative Council
E V I D E N T I A L R EQ U I R E M E N T S
To meet the requisite asset or portfolio:
• Custodian Statement
• Audited Financial Statements
• 3rd Party Certificate
To meet the requisite asset or portfolio:
Principles-based approach: “any methods that are
appropriate”
• Unaudited Financial Statements
• Self-declarations
• Internal Checks
The above statements can be issued 12 months before the
relevant date (the offer date)
The above documents/information must be shown as at the
relevant date
Downsides:
Can be used by a limited number of financial institutions if:
• Information about the relevant investor’s assets /
portfolio can be quickly assessed
• The institutions are willing to rely on a
self-declaration, which carries risks and can
be difficult to obtain immediately pre-trade
Recommendations:
• Using a self-declaration coupled with slightly
older evidence to offset the risks of relying on
that self-declaration alone
• Devise very practical mechanisms for obtaining this
declaration quickly, i.e. electronic confirmations
BLANK ROME SOLICITORS
2
ASIA UPDATE
Comparative Table of the Key Changes to the Rules (continued)
Prior to 16 December 2011
To be effected on 16 December 2011
(subject to “negative vetting” by Legislative Council
M O R E I N V E ST M E N T V E H I C L E S C A N Q UA L I F Y
Investment vehicle must be wholly owned by an individual
who (alone or jointly) has a portfolio of at least HK$8 million
Investment vehicle can be owned by other types:
• Trust corporation with at least HK$40 million assets
• Corporation with either a portfolio of at least HK$8
million or HK$40 million total assets
• Partnership with a portfolio of at least HK$8 million
or HK$40 million total assets
Conclusion
The aims of the changes are to achieve greater flexibility
and to align Hong Kong with other leading markets, however,
the changes create possible grey areas and gaps require particular attention.
As the Rules will not prescribe fixed set of requirements
for ascertaining whether a person meets the Professional
Investor threshold, it appears that the new changes would be
protective to the financial institutions as they only needs to
satisfies themselves that the investor is a Professional Investor
with the self-declaration provided. This could mean that when
there is dispute as to the professionalism of the investor, the
financial institution may use the self-declaration to rebut what
the investor has demonstrated to them as Professional
Investor. Otherwise, the protection enjoyed by the investors
would be loosened if the financial institution through their
internal check finds out that the investors fall into the definition of Professional Investor. With this hidden loophole, a
floodgate of complaints may arise which would have negative
impact on market as a whole.
Furthermore, even though the SFC will rely on the financial institution’s professional judgment to decide and expects
them to keep proper records of their assessment process so
as to demonstrate that they have exercised professional judgment and have reached a reasonable conclusion, the standard of professional judgment or reasonable conclusion is
vague and arguable due to the lack of prescriptive standard.
The SFC will need time to set out examples so as to benchmark the standard which they can then make reference to
when complaint is filed with the SFC.
Blank Rome’s Asia Practice provides experienced legal representation for Asia-based clients doing business
in the United States and for U.S. clients doing business in Asian countries. This includes counseling our U.S.-based clients on
the legal issues involved with entering and developing new markets for their goods and services in Asia.
Many attorneys in our Asia Practice group are fluent in Cantonese, Mandarin, and Shanghainese and have extensive
knowledge of the cultural and legal systems that affect business and investment in Asia. We understand the unique
needs of Asia-based clients and have a team of attorneys with strong, cooperative relationships with knowledgeable
local law firms to provide a platform for efficient and comprehensive service.
Blank Rome Asia Practice Members
HONG KONG
UNITED STATES
Nigel J. Binnersley, Partner
+852.3528.8388
Kristi Lynn Swartz, Partner
+852.3528.8335
Ronald Sum, Partner
+852.3528.8372
Conor T. Warde, Registered Foreign Lawyer +852.3528.8493
Grace Hou, Registered Foreign Lawyer
+852.3528.8382
Vivian Ma, Trainee Solicitor
+852.3528.8492
Daniel Lee, Associate Solicitor
+852.3528.8385
Elaine Wong, Paralegal
+852.3528.8404
Gilbert Pun, Paralegal
+852.3528.8306
Psyche Chong, Paralegal
+852.3528.8300
•
•
•
•
•
•
•
•
•
•
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
SHANGHAI
Henry M. Kuller, Partner
Jeffrey A. Rinde, Partner
William Zheng, Partner
Scott C. Kline, Partner
Fang Felton, Senior Legal Consultant
Justine Wang, Legal Consultant
+86.21.2089.3208
+86.21.2089.3205
+86.21.2089.3210
+86.21.2089.3203
+86.21.2089.3202
+86.21.2089.3205
•
•
•
•
•
•
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Barry H. Genkin, Asia Practice Chair
Dawn M. Bernd-Schulz, Partner
Alfred W. Zaher, Partner
Ernest W. Chung, Partner
Brad L. Shiffman, Partner
Jeanne M. Grasso, Partner
Richard DiStephano, Partner
David A. Dorey, Partner
Steven L. Caponi, Partner
Christin R. Cerullo, Associate
Timothy A. French, Associate
Shawn Shiqing Li, Associate
Eric C. Mendelson, Associate
James J. Quinlan, Associate
Kristina L. Trauger, Associate
Huan Xiong, Associate
BLANK ROME SOLICITORS
3
215.569.5514
202.772.5946
215.569.5364
212.885.5447
212.885.5442
202.772.5927
212.885.5372
302.425.6418
302.425.6408
215.569.5744
215.569.5394
215.988.6993
212.885.5159
215.569.5430
212.885.5339
212.885.5130
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]