FAQs on how to implement the SFC’s new guidance on assessing Corporate Professional Investors
On 22 January 2015, the SFC issued a circular regarding the new Professional Investor Regime, which will come into effect on 25 March 2016. Under the new Paragraph 15 of the Code of Conduct, Paragraph 15.3A requires intermediaries to make a new assessment on Corporate Professional Investors (“CPI”) in relation to relevant products and/or markets before intermediaries can be exempted from certain Code requirements (“CPI Assessment”). Paragraph 15.3A(b) of the Code has set out three Assessment Criteria in conducting the CPI Assessment.
Licensed corporations who can only deal with Professional Investors in particular, should take note of the clarification of the new rules when addressing their suitability obligations.
Given that the CPI Assessment is principle-based, the SFC has provided further guidance in response to five FAQs:
1. Should a flexible and holistic approach be applied when assessing whether a CPI satisfies the Assessment Criteria?
Intermediaries are expected to exercise professional judgment to classify products and markets into different categories as appropriate, and apply the relevant classification to the relevant CPI when performing the CPI Assessment. When conducting the Assessment, intermediaries should take into account the products and markets under consideration including the nature, features and risks of such products and markets.
Accordingly, being able to satisfy the CPI Assessment for one product or market may not necessarily mean being able to satisfy the CPI Assessment for another product or market.
2. What are the “appropriate corporate structure” and “investment process and controls” intermediaries should look for under the CPI Assessment?
A CPI is more likely be regarded as having an appropriate corporate structure and substantive investment process and controls if it:
(a) has an in-house treasury, investment or similar function responsible for its investment strategies and investment process
(b) has a designated investment committee
(c) engages an external investment advisory team, or
(d) has a related corporation providing investment advisory services which meets the conditions set out above
3. How should an intermediary assess whether a person is competent and suitably qualified for investment strategies, investment process and making investment decisions?
Intermediaries should ensure that such a person is competent and suitably qualified in relation to relevant products and/or markets, taking into account their:
(a) investment experience and history
(b) work experience in the financial sector, and
(c) academic or professional qualifications relating to the relevant products and markets
Paragraph 5 of the Guidelines on Competence also provides useful reference points for the expected standards.
4. To what extent should intermediaries obtain supporting documentation to evidence that the CPI meets the Assessment Criteria?
It would not be acceptable to purely rely on a written representation from the CPI confirming that it meets the Assessment Criteria. Intermediaries should holistically review and assess the information/documents provided by clients and make professional judgments as to whether the Assessment Criteria are satisfied. Intermediaries should, as far as possible, obtain supporting documentation from the CPI to evidence the CPI Assessments, and maintain a proper audit trail of the enquiries made and information/documents obtained in the CPI Assessments and assessment results.
5. Can a CPI be assessed to meet the Assessment Criteria on the premise that the investment decision is made by its shareholder(s) who is(are) financially experienced individual(s)?
If the necessary substantive investment processes and controls are lacking in a corporation and the corporation is effectively controlled by a single individual or a small number of individuals such as married couples, it is unlikely to be able to satisfy the CPI Assessment even though they themselves are financially experienced.
In general, a CPI established primarily for tax planning or property or investment holding purposes with investment decisions being made by its shareholder(s) is less likely to be able to satisfy the CPI Assessment.
Licensed corporations who serve Professional Investors should be aware of the guidance provided by the SFC, determine whether the existing clients consist of CPIs, and implement sufficient policies and procedures in conducting the CPI Assessment when the new Professional Investor Regime comes into effect next year.