New Regime for Ascertaining Evidential Requirements for Professional Investor Status

The Securities and Futures (Professional Investor) (Amendment) Rules 2011 (the “ Amended Rules”), which will come into effect on 16 December 2011 , allows greater flexibility for market participants to ascertain whether an investor meets the relevant assets or portfolio threshold so as to qualify as a professional investor.

Introduction

The definition of professional investor and the relevant evidential requirements to ascertain whether an investor meets the assets or portfolio requirements are mainly set out in the Securities and Futures (Professional Investor) Rule s (Cap.571D) (the “Rules”).

On 9 September 2011, the Securities and Futures Commission (the “SFC”) gazetted the
Amended Rules to implement proposals 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 Amended Rules were tabled before the Legislative Council for negative vetting on 12 October 2011 and will come into effect on 16 Decemb er 2011. This article sets out the major amendments under the Amended Rules.

The Consultation Paper issued by the SFC and the Amended Rules

The proposals under the Amended Rules are generally based on the proposals made under
and the public comments received on the Consultatio n Paper on the Evidential Requirements under the Securities and Futures (Professional Inve stor) Rules (the “Consultation Paper ”) issued by the SFC on 4 October 2011. The Consultat ion Paper includes the following proposals:-

1. adoption of a principles-based approach;
2. preservation of existing methods set out in sect ions 3(a) to 3(c) of the Rules;
3. use of “relevant date” as the time reference for ascertaining whether an investor meets the relevant assets or portfolio threshold to quali fy as a professional investor; and
4. extension of the scope of section 3(d) of the Rules.

Principles-based approach

The purpose of the adoption of a principles-based a pproach is to allow market participants to use any methods that are appropriate in the circumstances to satisfy themselves that an investor meets the relevant assets or portfolio thr eshold at the relevant date to qualify as a professional investor. Under the Amended Rules, market participants will be allowed to use any methods to ascertain whether an investor has th e required assets or portfolio so as to qualify as a professional investor in addition to the existing methods as set out in sections 3(a) to 3(c) of the Rules as long as those methods are appropriate in the circumstances and proper records of the assessment process are kept.

In addition, the SFC will not rule out the possibility of accepting self-certification or declaration by an investor as one of the assessing methods. However, this should be restricted only to occasions that are appropriate in the circumstances.

Preservation of existing methods

The existing evidential requirements as to how the value of the assets or portfolio is ascertained under sections 3(a) to 3(c) of the Rules, which include audited financial statements, custodian statements or third party certificates depending on whether the investor in question is a trust corporation, an individual, a corporation or partnership (“Traditional Documentary Proof ”), are to be preserved.

Use of “relevant date” as the time reference

Under the Amended Rules, the SFC uses the “relevant date” as the time reference for
ascertaining whether a high net worth professional investor meets the relevant assets or portfolio threshold. “Relevant date” is defined und er section 2 of the Rules.
For market participants using the Traditional Docum entary Proof to ascertain whether an investor meets the relevant assets or portfolio thr eshold, the Traditional Documentary Proof can be issued some time before the “relevant date”. However, it should be noted that for market participants who elect to use other evidenti ary methods to ascertain whether an investor is to be qualified as a professional inves tor, they should gather documents showing that the investor has the requisite assets or portf olio as at the “relevant date”.

Such amendment is in line with the principles-based approach as it creates flexibility for market participants to take steps that are appropri ate in the circumstances to satisfy themselves that their clients have the requisite as sets or portfolio levels at the relevant date to qualify as professional investors.

Extension of the scope of section 3(d) of the Rules

The scope of section 3(d) of the Rules is extended to include any corporation which is wholly owned by any one or more of any trust corporation a s described in section 3(a); any individual as described in section 3(b); or any cor poration or partnership as described in section (c).

Conclusion

As the principles-based approach is adopted, market participants enjoy higher degree of flexibility to use any methods that are appropriate in the circumstances to satisfy themselves that an investor meets the relevant assets or portf olio threshold at the relevant date. The Amended Rules also extend the scope of investors th at can be qualified as a professional investor.