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Investor Characterization and Funds Using Derivatives

Hong Kong's SFC issued a circular on 20 May 2011 confirming that the commencement date for investor characterization as required under paragraph 5.1A of the revised Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) will be postponed for 3 months. The new effective date will be 4 September 2011.

This new requirement was introduced at the time when the SFC published the Consultation Conclusions on Proposals to Enhance Protection for the Investing Public in the middle of 2010.

By way of background, as part of the "Know Your Client" procedures, paragraph 5.1A of the Code of Conduct will require intermediaries to assess an investor's knowledge of derivatives and characterize the client based on his knowledge of derivatives. In determining whether a particular product is suitable for an investor, intermediaries will need to consider the extent to which and purposes for which a particular product uses derivatives. Distributors and issuers of investment products will need to determine whether an investment product is one which requires investors to have an understanding of derivatives in order to make an informed investment decision.

Whether a particular fund will be classified as a derivative product will depend on the investment strategy, and the nature, extent and function of the derivatives being used and the purpose for which they are used. The fact that an investor is not an expert in derivatives does not automatically mean that an investment in a fund which uses derivatives is not suitable for that investor. Intermediaries need to consider whether an investor has sufficient knowledge and understanding in order for them to make an informed investment decision.

The effective date of 4 June 2011 will remain unchanged for the other new requirements under the Code of Conduct, such as disclosure of pre-sale benefits and sales related information.

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