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Guidance to the Securities and Futures Ordinance, Cap. 571

Guidance to the Securities and Futures Ordinance, Cap. 571

The Securities and Futures Ordinance, Cap. 571 (“the SFO”) was enacted in March 2002 aiming to consolidate and modernize the 10 existing ordinances regulating the securities and futures market. It is anticipated that the SFO will not come into force until early 2003, possibly the first or second quarter when the Securities and Futures Commission (“the SFC”) and the Hong Kong Monetary Authority (“the HKMA”) have finalized all the corresponding subsidiary legislation, rules and code of conduct which will, as a whole, govern the financial sector in Hong Kong. The purpose of this note is to highlight a number of major changes brought by the SFO.

1. New Hong Kong Licensing and Registration Regime


One licensing concept (Part V of the Securities and Futures Ordinance)

1.1.1. Currently an intermediary must apply to the SFC for separate registrations in order to carry out different activities in different products. This multiple-registration regime brings considerable cost and administrative burden not only to the registered intermediaries but also the SFC.

Under the SFO, there would be a universally applicable single licensing system, with one licence and therefore one set of Financial Resources Rules returns each month and one annual return which covers all of the regulated activities (s. 116). The SFC regulated activities that could be covered under such a licence include :

  • dealing in securities (“Type 1”);
  • dealing in futures contracts (“Type 2”);
  • trading in leveraged foreign exchange contracts (“Type 3”);
  • advising on securities (“Type 4”);
  • advising on futures contracts (“Type 5”);
  • advising on corporate finance (“Type 6”);
  • providing automated trading services (“Type 7”);
  • providing securities margin financing (“Type 8”); and
  • providing asset management services (“Type 9”) (Schedule 5).

The licence would be granted to the applicant to carry on one or more than one SFC regulated activities only if the SFC is satisfied that the applicant is a fit and proper person to be licensed for the regulated activities. In considering whether a person is fit and proper, the SFC or the HKMA (as the case may be) may consider the following factors concerning the applicant :

  • the financial status or solvency ;
  • the educational or other qualifications or experience;
  • the ability to carry on the regulated activity competently; honestly and fairly; and
  • the reputation, character, reliability and financial integrity (s. 129).
1.1.3. The new regime only allows corporations and their individual representatives to be licensed. The licence so granted is subject to the conditions as imposed by the SFC who may at any time, if necessary, amend or revoke any condition or impose new conditions by notice in writing (ss. 116 & 120). Certain activities as stipulated in s. 114(5) and Schedule 5, for instances, incidental services provided by certain professionals (i.e. solicitors/accountants) and advice given to wholly-owned group companies, are not required to be so licensed. This change is able to tackle the problem that arises when the death of a licensed individual or partnership creates difficulties for the continuity of their business operations.


Application for temporary licences for a period not exceeding 3 months by corporations and their individual representatives is allowed under s. 117 and s. 121 respectively. However, only SFC regulated activities in respect of Type 1, Type 2, Type 4, Type 5 and Type 6 can be carried out under the temporary licence. Likewise, the applicant has to satisfy the SFC that it is a fit and proper person to be so licensed for the regulated activities as mentioned in para. 1.1.2 above.
1.1.5. With the introduction of the single licence regime, corresponding changes would be made to the provisions governing exempt authorized financial institution (i.e. a bank, a restricted licence bank and a deposit-taking company as defined under s. 2 of the Banking Ordinance, Cap. 155). Under s. 119, the SFC may, upon application by an authorized financial institutions in the prescribed manner and payment of prescribed fee, register the applicant for one or more than one SFC regulated activities (other than Type 3 and Type 8 regulated activities). In addition, the SFC is under the obligation to refer any application to the HKMA which would then consult with the SFC upon the merits of the application and advise the SFC whether he is satisfied by the applicant that the it is a fit and proper person to be registered for the SFC regulated activities concerned.

Concept of “management liability” (Part V of the Securities and Futures Ordinance)


Since licensed intermediaries would be registered as corporations and the fact that it is no longer adequate for the SFC to rely solely on it day-to-day supervision of intermediaries to promote ongoing compliance, the SFO introduces the concept of “management liability” under which the managerial staff responsible for the management of the licensed corporation would shoulder the responsibility for the acts of the corporation. Thus, all executive directors of the licensed corporation should be licensed as representatives and designated as responsible officers and not less than two individuals, at least one of whom is an executive director, should be licensed as responsible officers for each regulated activity.


The responsible representatives as well as the corporation itself would be held liable if the corporation breaches fundamental licensing requirements (ss. 125 & 126). However, a responsible officer would not be liable if he honestly and reasonably believes that the corporation is in compliance and he acts promptly in notifying the SFC of the relevant breach once it becomes known to them.


Transitional arrangement (Schedule 10 to the Securities and Futures Ordinance)


Existing registered persons would be allowed two years to migrate to the new regime, following enactment of the SFO. The deeming provisions in respect of Part V of Schedule 10 provide that existing corporations would become deemed licensed corporations; the existing representatives/dealing directors would become deemed licensed representatives/deemed responsible officers; the existing sole proprietorships/partnerships would become deemed licensed corporations; and the exempt authorized financial institutions would become deemed registered institutions. Any application for registration of a licence made before the commencement of Part V in any capacity specified in column 1 of the table below should be treated as an application for a licence in respect of certain deemed activities during the transitional period as specified opposite thereto.

Type of Registration Deemed Activities during the Transitional Period
Type 1 Type 2 Type 3 Type 4 Type 5 Type 6 Type 7 Type 8 Type 9
Securities Dealer & Rep X X X X X
Commodity Dealer & Rep X X X X
Leveraged Foreign Exchange Trader & Rep X
Investment Adviser & Rep X X X
Commodity Trading Adviser & Rep X X
Securities Margin Financier & Rep X
Exempt Dealer X X X X
Exempt Investment Adviser X X X


In addition, dealers who are currently providing internet trading services would be deemed to be licensed for Type 7. It is advised that the existing corporate registrants may consider consolidating existing businesses under one corporate entity with a view to saving cost, whereas the existing sole proprietors are required to incorporate their businesses before the end of the transitional period.


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