THE NEW REGIME
The Principles Based Approach
SFC's new regime is founded upon a principles based approach to the consideration of whether an investor meets the relevant assets or portfolio threshold, at the relevant date, to qualify as a professional investor. This flexible approach is designed to permit companies to employ whatever method seems most appropriate to them, in the circumstances at hand, when making this consideration.
SFC will not prescribe what these methods should be, although it does note that firms should maintain proper records of their assessment process. This will enable any firm to show that they have made a reasonable decision in declaring, after the appropriate exercise of professional judgement, that their clients satisfy the relevant thresholds.
Some issues were raised during the consultation process which merit examination:
Assessment Methods
A number of market participants requested advice from SFC on the standards and processes which should be employed when evaluating the assets and portfolio levels of potential professional investors. More detailed instruction was also appealed for, as market participants wished to know whether specified types of documents or data (such as a company search on corporate client) are acceptable evidence when investigating an investor's potential status as a professional investor. Some respondents called on SFC to release a non-exhaustive list of such acceptable documentation.
However SFC stated that although guidance on the standards to be utilized when assessing potential professional investors may increase market certainty, the concept of issuing lists of acceptable documentation for making such assessments ran contrary to the principle based approach on which the new rules are founded. SFC reiterated its intention to leave maximum flexibility to market participants in their determination of an investor’s status, so long as the means availed of are appropriate in the circumstances and records are maintained.
Self-certification
A number of respondents expressed a desire for guidance on the matter of when it would be acceptable to permit a client to self certify as a professional investor. However SFC refused to issue such specific guidance, noting that firms should have sufficient knowledge of their clients' affairs, under the know-your-client requirements in the Code of Conduct, to make such a determination for themselves. SFC also explicitly stated that it was not ruling out self-certification as an acceptable method of evaluating the assets and portfolio levels of potential professional investors, but that it must be used in appropriate situations.
Incorporation of Modifications
Over the last few years SFC has made several Modifications, under section 134 of SFO, to the requirements under the Professional Investor Rules. Some respondents requested that SFC insert those Modifications which are applicable to a wide spectrum of market participants into the Professional Investor Rules. However SFC declined to act on these propositions, calling attention to the fact that these Modifications were permitted on the basis of particular sets of facts being presented by applicants to the SFO and stating that it had no inclination to alter the manner in which such modifications are granted. Additionally, SFC declared that the need for Modifications to alleviate the rigidity of the old regime in this area had been addressed by the flexible nature of the new principles based system of assessing an investor’s status.
PRESERVATION OF EXISTING METHODS
In the Consultation Paper the SFC recommended retaining the current methods of appraising whether or not a client qualifies as a professional investor, a recommendation which received the approval of the majority of respondents. SFC confirm that market participants may choose to continue to use the existing practices or to avail of the new more flexible system presented in the Consultation Conclusions.
USE OF "RELEVANT DATE" AS THE TIME REFERENCE FOR ASCERTAINING WHETHER AN INVESTOR MEETS THE RELEVANT ASSETS OR PORTFOLIO THRESHOLD TO QUALIFY AS A PROFESSIONAL INVESTOR
The majority of respondents approved of SFC's proposal to use "relevant date" as the time reference for evaluating whether a high net worth professional investor satisfies the relevant assets or portfolio threshold. However a number contended that it is extremely difficult, from a practical standpoint, to procure evidence permitting the appraisal of an investor's assets or portfolio value on a specific date. Requests were made to SFC to ease the strictness of this rule, in recognition of these difficulties. However these were rebuffed by SFC, who reiterate in the Consultation Conclusions that although an investor must adhere to the relevant assets or portfolio threshold at the relevant date to qualify as a professional investor, the new principles-based approach imposes no process or evidence that market participants are obliged to follow or acquire on any particular date.
Furthermore, SFC note that any market participant experiencing complications when attempting to determine an investor's status on the relevant date may employ the current methods outlined in sections 3(a) to 3(c) of the Professional Investor Rules, which permit the assembling of specific documentary evidence prior to the relevant date, when making said determination.
EXTENSION OF THE SCOPE OF SECTION 3 (D) OF THE EXISTING PROFESSIONAL INVESTOR RULES
Most respondents agreed with SFC's proposal to broaden the application of section 3(d) of the existing Professional Investor Rules, with the effect that any corporation which is wholly owned by one or more individuals or corporations/partnerships, where each of those individuals or corporations/partnerships would qualify as a professional investor under section 3(b) or section 3(c) (as the case may be) of the Professional Investor Rules, will qualify as a professional investor. However some market participants felt that the scope of section 3 (d) should be extended further and include more forms of corporations as professional investors.
SFC considered the responses of the market and in the Consultation Conclusions agreed to further extend the operation of section 3 (d) of the Professional Investor Rules, so that any corporation which is wholly owned by one or more trust corporations, individuals or corporations/partnerships where each of those trust corporations, individuals or corporations/partnerships would qualify as a professional investor under section 3(a), section 3(b) or section 3(c) (as the case may be) of the Professional Investor Rules, will qualify as a professional investor.
However SFC refused to extend the application of section 3(d) any further, as to do so would be unnecessary and exceed the ambit of the current consultation. SFC also repeats the argument here that "the flexibility provided by the proposed principles-based approach has effectively addressed market participants' concerns with the practical difficulties in ascertaining their clients as professional investors under the current Professional Investor Rules."
MISCELLANEOUS MATTERS
Suggestions from market participants outside the scope of the current consultation
A number of recommendations were received by SFC from respondents with regard to aspects other than the evidential requirements of the professional investor regime. As these were not relevant to the current consultation, SFC did not consider them.
Status of existing Modifications / Future applications for Modification
One market participant queried whether Modifications granted prior to the amendment of the Professional Investor Rules will remain in force after the amendment and whether an application for a Modification or waiver of the requirements of the Professional Investor Rules, under section 134 of the SFO, will be permissible subsequent to the amendment of the Professional Investor Rules.
In response to the first query, SFC stated that the amendments would not affect any existing Modifications. SFC then noted that if a Modification application concerns sources or types of information and the remedy sought is in fact consistent with the revised Professional Investor Rules, there is no need to make such an application and to do so would be inappropriate. However, SFC will continue to consider granting modifications in relation to other requirements of the Professional Investor Rules under section 134 of the SFO.
IMPLEMENTATION
SFC will now take steps to implement the proposals discussed in this newsletter, via the making of the necessary amendments to the Professional Investor Rules. The revised rules will be gazetted in due course following review by the Department of Justice.
Jack's comment: More flexibility is at the expense of less "parental guidance".
No comments:
Post a Comment