Background
On 25 September 2014, the Securities and Futures Commission (“SFC”) published “Consultation Conclusions on the Proposed Amendments to the Professional Investor Regime and Further Consultation on the Client Agreement Requirements”. While amendments on the professional investor regime and the client agreement requirements under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code”) are outlined, a further consultation on a new proposal concerning the client agreement requirements is launched.

Code Requirements for Professional Investors
Currently, intermediaries must comply with all relevant Code requirements, with the application of certain exemptions, such as the requirement to ensure that the suitability of recommendations or solicitations made to clients is reasonable in all circumstances (i.e. Suitability Requirement), when they deal with professional investors (“PIs”) as stated in the Code (“Code Exemptions”).

Concerning individual PIs, the SFC has concluded that intermediaries serving them will no longer be entitled to certain Code Exemptions including the Suitability Requirement, which is considered to be the cornerstone of investor protection, and other Code Exemptions which are inherently linked with the Suitability Requirement and/or have significant bearing on investor protection. Only the Code Exemptions that are in nature more administrative can continue to be available, provided that intermediaries have explained the risks and consequences of those Code Exemptions to client and obtained their written consent.

Concerning corporate PIs, the SFC has announced that a principles-based assessment (“New CPI Assessment”) will dispense with the current “bright-line tests” in assessing whether a corporate PI is sufficiently knowledgeable and experienced in relevant products and markets. The New CPI Assessment is considered to be more reliable in indicating the financial sophistication of a corporate PI and consists of three criteria: (i) the corporate PI has the appropriate corporate structure and investment process and controls; (ii) the person responsible for making investment decisions has sufficient investment background; and (iii) the corporate PI is aware of the risks involved. Intermediaries serving those Corporate PIs that have satisfied these criteria are entitled to all Code Exemptions.

Besides, the SFC considered that the investment vehicles wholly owned by individuals PIs and by family trusts should not be carved out from corporate PIs. The intermediaries serving such investment vehicles shall be entitled to certain Code Exemptions if and only if such investment vehicles have satisfied the New CPI Assessment.

The aforesaid amendments will take effect on 25 March 2016.

Detailed Study of the Suitability Requirement
Apart from the aforesaid amendments, the SFC has undertaken to conduct a separate and detailed internal study (including the collection of industry views) of the Suitability Requirement. This study will be on issues such as the situations triggering the Suitability Requirement, the meaning of a “solicitation” or a “recommendation” and the steps that intermediaries should take to satisfy the obligations under the Suitability Requirement. The SFC has emphasised that this study was distinct from the proposal of introducing a new contractual obligation to client agreements as mentioned below and it did not set out a timetable of this study.

Private Placement Regime
The SFC has concluded that corporate PIs and individual PIs should continue to be allowed to participate in private placement activities and the minimum monetary thresholds for qualifying PIs (i.e. the $8 million minimum portfolio threshold for corporations and individuals or the $40 million minimum total assets threshold for corporations) should remain unchanged.

Client Agreement Requirements
The SFC has decided it will not require intermediaries to provide clear descriptions of their actual services to be provided to clients in the client agreements, after considering the respondents’ concerns of the practical difficulties to make such descriptions.

The SFC also considered that intermediaries should not be allowed to include any clauses inconsistent with the Code requirements or mis-describing the actual services to be provided to clients in the client agreements. As such, it has decided to amend the Code to the effect that client agreements should not contain such clauses nor any terms by which a client purports to acknowledge that no reliance is placed on any recommendation made by intermediaries.

All these amendments will only be effected after a further consultation on the following new SFC proposal concerning client agreements is concluded.

Taking into account the respondents’ concerns, the SFC, instead of incorporating the Suitability Requirement by reference, proposes to insert the following self-contained contractual clause (“New Clause”) into client agreements:

“If we [the intermediary] solicit the sale of or recommend any financial product to you [the client], the financial product must be reasonably suitable for you having regard to your financial situation, investment experience and investment objectives. No other provision of this agreement or any other document we may ask you to sign and no statement we may ask you to make derogates from this clause.”

The SFC has launched a further consultation ending on 24 December 2014 on the wordings of this New Clause.

Conclusions
The Code amendments on the professional investor regime will inevitably increase the burden of intermediaries to do more due diligence, especially when serving individual PIs. Intermediaries should take reasonable steps to get equipped for implementing the Code requirements relevant to individual PIs and the New CPI Assessment for corporate PIs, such as reviewing the internal policies and relevant documents, making necessary arrangement for conducting the increased compliance work and providing training to relevant officers and employees.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.