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03 Jul 2018

Recent updates on the PI Rules, the Code of Conduct and the Fund Manager Code of Conduct


There have been three regulatory updates following the consultations by the Securities and Futures Commission (SFC) on various topics. There will be amendments to:

  1. the Securities and Futures (Professional Investors) Rules (PI Rules), which will take effect on 13 July 2018;
  2. the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct), which will take effect on 17 August 2018; and
  3. the Fund Manager Code of Conduct (FMCC), which will take effect on 17 November 2018.

All licensed corporations and registered institutions should start considering what implications the above amendments will have on them. It may require changes to their internal policies and procedures as well as client agreements. In particular, discretionary account managers will be affected most since minimum content requirements on discretionary client agreements will be introduced under the FMCC.

So what are the amendments about? The key messages are as follows:

PI Rules

Currently, when determining the status of an individual, we can only look into the portfolio which he owns or jointly owns with his associate(s) (i.e. a spouse or a child). The amendments allow us to take into account portfolios held by an individual through (1) his joint accounts with non-associate(s) and (2) his wholly owned companies. Please bear in mind that a joint account with non-associates will only mean that the individual can be treated as holding a share in the portfolio but not the whole portfolio.

The definition of “professional investors” will be expanded to include corporations which have investment holding as their principal business and are wholly owned by one or more professional investors. Corporations that own another corporation which satisfies the asset or portfolio test for professional investors will also be professional investors.

One can also rely on public filings made pursuant to legal or regulatory requirements in Hong Kong or outside Hong Kong as evidence of a person’s professional investor status.

Code of Conduct

A new paragraph 10.2 (independence) will be introduced to restrict the situations where a licensed person can represent itself as being independent (or its equivalence). A licensed corporation cannot describe itself as “independent” where (a) it receives monetary benefits by distributing a product and/or (b) links or other legal or economic relationships are likely to impair its independence to favour a particular investment product or a product issuer.

Amendments are also made to paragraph 8.3 (disclosure of monetary and non-monetary benefits) and 8.3A (disclosure of transaction related information). Under paragraph 8.3A, a licensed corporation is required to disclose, prior to or at the point of entering into a transaction, whether or not it is independent and the basis of its view. It can be done on a one-off basis prior to or at the point of entering into a transaction and upon any changes to such disclosure. The disclosure requirements under paragraph 8.3 will capture monetary benefits which are “receivable” (i.e. not just “received”) by a licensed corporation. Where the monetary benefits are not quantifiable prior to or at the point of entering into a transaction, the licensed corporation should disclose the existence and nature of such monetary benefits and the maximum percentage of such monetary benefits receivable per year.

A new paragraph 7.2 will be added to deal specifically with disclosure requirements for discretionary accounts. If there are monetary benefits under an explicit remuneration arrangement or trading profit made from a transaction, specific disclosure will be required. If there are monetary benefits under a non-explicit remuneration arrangement or non-monetary benefits, generic disclosure will be required.


The revised FMCC will apply to licensed corporations whose businesses involve the management of collective investment schemes (whether authorised or not, local or offshore) and/or discretionary accounts (in the form of an investment mandate or pre-defined model portfolio).

The new appendix 1 to the revised FMCC specifies the additional requirements that are applicable to discretionary account managers, such as minimum content requirements for client agreements (e.g. details of custody arrangements if the discretionary account manager provides custody arrangements by itself or through its associated entity and details of periodic reporting to be made to clients should be set out) and obligations to undertake a performance review at least twice a year and to provide valuation reports to clients on a monthly basis.

There will also be changes to the FMCC relating to securities lending and repurchase agreements, custody of fund assets, liquidity risk management and leverage disclosure which are relevant to fund managers.



Katherine Liu

Katherine Liu

T:  +852 2533 2717 M:  +852 6193 5227 Email Katherine | Vcard Office:  Hong Kong

Mark Reed

Mark Reed

T:  +852 2533 2888 M:  +852 9353 1359 Email Mark | Vcard Office:  Hong Kong

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