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US Hedge Fund Industry Supports Hong Kong SFC Proposed Changes to Professional Investor Rules

By Jim Hamilton

The US hedge fund industry supports a proposal by the Hong Kong Securities and Futures Commission to replace the SFC?s current professional investor requirements with a principles-based approach that would permit firms to use any method to satisfy themselves that an investor meets the relevant threshold at the date of a firm?s communication or offer. In a letter to the Commission, the Managed Funds Association said that this new approach would provide firms with greater flexibility in determining which investors qualify as high net worth professional investors. The MFA believes that the increased flexibility is appropriately balanced by the requirement that firms have records to demonstrate the basis for their conclusions that a high net worth professional investor has met the required asset or portfolio thresholds.

The SFC is not requesting comment on the asset or portfolio thresholds under the Professional Investor Rules, but rather is seeking views only on the method by which firms may verify that an investor qualifies under the thresholds.

There are four types of high net worth professional investors under the Securities and Futures Ordinance: 1) a trust corporation with total assets of not less than HK$40 million; 2) an individual who either alone or in a joint family account has a portfolio of not less than HK$8 million; 3) a corporation or partnership with either a portfolio of not less than HK$8 million or total assets of not less than HK$40 million; and 4) a corporation the sole business of which is to hold investments and which is wholly owned by an individual who either alone or with a joint family account, has a portfolio of not less than HK$8 million. The asset thresholds can be satisfied by the equivalent in foreign currency.

Certain restrictions on communications and offers under the Securities and Futures Ordinance do not apply to professional investors, which include investors that qualify as high net worth professional investors. Currently, the SFC?s Professional Investor Rules prescribe specific methods by which a firm must verify that an investor meets the asset or portfolio thresholds to qualify as a high net worth professional investor. The rules set out detailed evidentiary requirements for investors that are trust corporations, individuals, and corporations or partnerships.

The SFC proposes to replace these requirements with a principles-based approach that would permit firms to use any method to satisfy themselves that an investor meets the relevant threshold at the date of a firm?s communication or offer. Under this approach, the SFC would rely on firms? professional judgment to decide the methods by which they can determine that a client has the required assets or portfolio levels. Firms would be required to keep appropriate records demonstrating that they have exercised professional judgment and reached a reasonable conclusion that their clients meet the relevant thresholds. Firms that wish to continue using the existing verification methods would be permitted to do so.

The MFA noted that a similar principles-based approach for the verification of investors in private funds has functioned effectively in the U.S. for many years under Regulation D, which provides that an accredited investor includes a person that an issuer reasonably believes meets the asset thresholds under the Regulation. In addition, under Rule 2a51-1(h) under the Investment Company Act, a qualified purchase includes a person that a fund reasonably believes meets the asset thresholds in Section 2(a)(51) of the Act.

Full post as published by Jim Hamilton's World of Securities Regulation on November 09, 2010 (boomark / email).