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This is the final article in our SFC compliance health check series, and we will focus on the issues we commonly identify in health checks on SFC licensed private placement agents. References in this article to the Code of Conduct are to the Code of Conduct for Persons Licensed by or Registered with the SFC.
| 1. | Insufficient records on professional investor (PI) assessment. Some private placement agents do not keep records of their PI assessments even though most firms are only permitted by the terms of their licences to solicit investments for their GP clients from PIs. In a routine SFC inspection, the SFC is likely to review how these firms (i) establish and verify the PI status of investors; and (ii) assess and treat PIs, for the purpose of the Code of Conduct, so private placement agents need to make sure that they keep relevant records and can make them available to the SFC. |
| 2. | Lack of documents on suitability assessment.We still find that some private placement agents do not have any records of the suitability assessments they have performed (e.g. on single family offices). Private placement agents need to make sure that records (including any material queries raised by the investor and the responses given) which support the suitability conclusions are kept unless they are serving institutional PIs or eligible corporate PIs (which may not be the case with a single family office investor). |
| 3. | Investment products not classified in accordance to risk rating and whether they are derivative products. Some private placement agents do not assign a risk rating to the funds for which they are raising capital or classify the funds as derivative products or otherwise. Suitability involves matching the risk return profile of the fund with the investor’s circumstances. Private placement agents therefore need to understand each fund they try to sell and assign a risk rating to it as part of their suitability obligations (as and when they apply). They also need to determine whether the fund is a “derivative product”, and if so, they need to make sure that the investors understand that and have sufficient net worth to be able to assume the risk associated with investing in the fund. |
| 4. | Disclosure of fees. Some private placement agents do not disclose the fee arrangements they have with the fund manager clearly enough to investors as required under the Code of Conduct. This is never required with institutional PIs but it may be with corporate investors and is always required with individual investors. When such obligations apply, the agent needs to disclose to the investor, before or at the point of the execution of the subscription agreement, whether they will receive a fee and how it is calculated. |
| 5. | Licensing/registration requirements not assessed prior to overseas private placement. From our health check interviews, we note that some staff members who travel out of Hong Kong to meet with potential investors are not very familiar with the local licensing/registration requirements in those other countries. Licensed firms need to adhere to the legal and regulatory requirements of all relevant jurisdictions so it is important that compliance establish policies and procedures around staff conducting overseas marketing activities. |
If you would like advice on any of the obligations referred to above or to discuss our health check service, please do not hesitate to contact Jane McBride.
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