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Ongoing compliance matters for a licensed corporation to carry out certain regulated activities

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Ongoing compliance matters for a licensed corporation to carry out certain regulated activities

Definitions

  • AE: associated entity
  • AGM: annual general meeting
  • Board: board of directors of the Company
  • Company: licensed corporation
  • Companies Ordinance: Companies Ordinance (Cap. 32 of the Laws of Hong Kong)
  • Compliance Officer: compliance officer of the Company, appointed by the Board from time to time
  • CPT: continuous professional training
  • Executive Director: executive director of the Company
  • Financial Director: financial director of the Company, appointed by the Board from time to time
  • FR: financial resources
  • FRR: Securities and Futures (Financial Resources) Rules (Cap. 571N of the Laws of Hong Kong)
  • IRD: Inland Revenue Department
  • LR: licensed representative(s)
  • RO: responsible officer as approved by the SFC pursuant to section 126 of the SFO
  • SFO: Securities and Futures Ordinance (Cap.571 of the Laws of Hong Kong)
  • SFC: Securities and Futures Commission of Hong Kong
  • SS: substantial shareholder of the Company

We set out below the specific on-going compliance obligations of the Company.

Compliance regarding matters the Company is required to notify the SFC

Section 135 of the SFO and parts 1 to 3 of Schedule 3 to the Securities and Future (Licensing and Registration) (Information) Rules (“Information Rules”) set out the events for which notifications to the SFC is required.

Changes requiring notification to the SFC and which are applicable to the Company are set out in Part A of Schedule 1 of this note. These relevant to changes of information and particulars of directors, LRs, ROs, SSs and the Company, where applicable.

The following table summarizes the relevant forms to be lodged with the SFC and relevant notification time limits on common events that require notification to the SFC:

Type of change/ events Notification time limit Form required
Cessation of business At least 7 days in advance for intended cessation of business Form 5
Cessation to act as licensed representative Within 7 business days Form 5
Change in name Within 7 business days Form 5
Change in business address At least 7 business days in advance for intended change in business address Form 5
Change in director or his particulars Within 7 business days Form 5
Change in compliant officer or his particulars Within 7 business days Form 5
Change in emergency contact person or his particulars Within 7 business days Form 5
Change in share capital or shareholding structure Within 7 business days Form 5
Change in contact information Within 7 business days Form 5
Change in bank accounts Within 7 business days Form 5
Give notice of motion to change auditor in general meeting, etc. (see section 154 of SFO) Within 1 business day Form 5
Change in associated entity or its particulars Within 7 business days Form 5

Certain other changes require the prior approval of the SFC. If the Company intends to make any such change, it or the person concerned (e.g. a proposed substantial shareholder of the Company) must lodge the required application form and fee with the SFC. Part B of Schedule 1 of this note sets out matters relevant to the Company which require the prior approval of the SFC.

The following table summarizes the relevant forms to be lodged with the SFC for matters that require prior approval from the SFC:

Type of change/ events Form required
Addition of regulated activity Form 4
Reduction of regulated activity Form 4
Modification or waiver of licensing or registration condition Form 4
Change of financial year end Form 4
Adoption of period exceeding 12 months as financial year Form 4
Extension of deadline for submission of audited accounts Form 4
New premises to be used for keeping records or documents Form 4
Becoming a substantial shareholder of licensed corporation Form 4
Transfer or addition of accreditation Form 4

Further to the above, certain events will also require notification to the SFC. These relevant to certain breaches, infringements and non-compliance of laws, rules, regulations and codes and are set out in more detail in Part C of Schedule 1 of this note.

Compliance regarding Continuous Professional Training(“CPT”)

Obligations on the Company

The Company is primarily responsible for designing and implementing a continuous program best suited to the training needs of LRs of the Company. Such programs should be able to enhance the LRs’ industry knowledge, skills and professionalism and to enable them to perform their duties competently and professionally.

Sufficient records on the programs and the CPT activities undertaken by the LRs should be kept for a minimum of 3 years and be made available for inspection upon request by the SFC.

Obligations on the individual LRs

For LRs to remain fit and proper at all times, one of the assessment criterion is that they remain continuously competent to perform the regulated activities and this is achieved by undertaking training that enhances his technical skills, professional expertise, ethical standards and regulatory knowledge.

Each LR must undertake a minimum of 5 CPT hours per calendar year for each regulated he engages in.

LRs are also required to retain appropriate records of all CPT activities completed in a calendar year. Documentary evidence sufficient to support their attendance or completion of CPT activities issued by course providers and examination results should be kept for a minimum of 3 years.

The SFC may impose higher CPT hour requirements under certain circumstances.

A list of approved CPT providers is set out in Part A of Schedule 4 and topics relevant for CPT purposes is set out in Part B of Schedule 4.

Compliance regarding financial resources

Pursuant to the FRR, the Company is required to maintain prescribed minimum paid-up share capital and minimum liquid capital at all times during which it is licensed. With a condition on its license that no client assets will be held, the Company may not be subject to any minimum paid-up share capital requirement despite the fact it is licensed to carry out regulated activities.

Under the FRR, “liquid capital” is the amount by which a licensed corporation’s liquid assets (including cash in hand and monies in an authorised institution beneficially owned by it) exceed its ranking liabilities.

For the purpose of the FRR, ranking liabilities include all of the Company’s liabilities including:

  • any amount payable by it in relation to any overdraft obtained by it;
  • any amount payable by it in relation to any loan obtained by it;
  • any accrued interest payable by it to any other person;
  • any accrued expenses incurred by it;
  • any tax payable by it, less any tax prepared by it, to the extent that the tax payable and the tax prepaid are of the same description and levied by the same taxation authority;
  • any provision made by it for contingent liabilities; and
  • any provision made by it for floating losses in respect of open positions held for its own account; and any other liabilities provided for in accordance with generally acceptable accounting principles,

but excluding the following:

  • any approved subordinated loan; and
  • any liability that it is not required to be settled within the next 12 months and is secured by a first legal charge on immovable property beneficially owned by it and used in carrying on the regulated activity for which it is licensed, to the extent that the net realizable value of that property equals such liability (“exempted liability”) (s53(2) of the FRR).

The Company must understand the above concept very clearly. In particular, the Company should be aware that any shareholders’ loans made to the Company would need to be either (i) capitalised into share capital (with an amounts exceeding the nominal amount being the premium on share allotment; (ii) validly released or discharged; or (iii) be approved as an approved subordinated loan.

Please refer to Schedule 5 for further information in connection with approved subordinated loans.

Submission of financial resources returns

As long as the Company is subject to the condition that it does not hold client assets, it will only be required to submit semi-annual financial resources returns to the SFC (c.f. monthly returns). Such returns shall include:

  • the Company’s liquid capital computation, as at the end of the 6 month period;
  • the Company’s required liquid capital computation, as at the end of the 6 month period;
  • an analysis of the Company’s profit and loss account;
  • an analysis of the Company’s clientele, as at the end of the 6 month period; and
  • an analysis of the assets under the Company’s management (in respect of Type 9 regulated activities), as at the end of the 6 month period.

The submission of the semi-annual financial resources returns shall be made by an online communication system, i.e. e-FRR System of the SFC through https://efrr.sfc.hk.

Skills

Posted on

2014-10-16