The licensing and registration of persons operating in Hong Kong’s securities and futures markets and non-bank retail leveraged foreign exchange market is dealt with in Part V of the Securities and Futures Ordinance (the ‘SFO’) which came into effect on 1 April 2003. The SFO is administered by the Securities and Futures Commission (the ‘SFC’).
2. ‘SINGLE LICENCE’ REGIME
Part V of the SFO establishes a ‘single licence’ regime whereby a person requires only one licence or registration to conduct different types of regulated activities. The only exception to the single licence arrangement is that securities margin financiers and their representatives must conduct their business through a separate corporation (Section 118(1)(d)) and therefore require a separate licence.
3. REGULATED ACTIVITIES
There are ten types of ‘regulated activities’ which are as follows:
Type 1: Dealing in Securities
Type 2: Dealing in Futures Contracts
Type 3: Leveraged Foreign Exchange Trading
Type 4: Advising on Securities
Type 5: Advising on Futures Contracts
Type 6: Advising on Corporate Finance
Type 7: Providing Automated Trading Services
Type 8: Securities Margin Financing
Type 9: Asset Management
Type 10: Providing Credit Rating Services
In order to retain flexibility to accommodate new products and services, Section 142 of the SFO entitles the Financial Secretary to amend the list of regulated activities and their definitions contained in Schedule 5 of the SFO.
In summary, the SFO prohibits any person from carrying on a business (or holding himself out as carrying on a business) in a regulated activity unless an appropriate authorisation has been granted or an exemption or exclusion applies (Section 114(1) and (2)). Certain persons are excluded from the licensing/registration requirements of Part V SFO in the definitions of the regulated activities in Part 2 of Schedule 5.
4. DEFINITIONS OF REGULATED ACTIVITIES AND GENERAL EXEMPTIONS
There are a number of general exemptions from the definitions of regulated activities which are detailed below. In sections 4 and 5 of this note, the terms ‘licence’ and ‘licensed’ include the terms ‘registration’ and ‘registered’ respectively, unless
A corporation may not be required to be licensed for certain regulated activities if such activities are performed wholly incidental to its carrying out of other regulated activities for which it is already licensed. This is the case in the following circumstances:
Licensed for Type 1 Regulated Activity (Dealing in Securities)
A corporation licensed for Type 1 regulated activity does not need to be licensed for regulated activities Type 4 (advising on securities), Type 6 (advising on corporate finance) or Type 9 (asset management) provided that such activities are carried out wholly incidental to its securities dealing business. This exemption is normally available to stock brokers who provide investment advice or manage discretionary accounts for their securities clients.
Licensed for Type 2 Regulated Activity (Dealing in Futures Contracts)
A corporation licensed for Type 2 regulated activity does not need to be licensed for regulated activities Type 5 (advising on futures contracts) or Type 9 (asset management) provided that such activities are carried out wholly incidental to its futures dealing business. This exemption is normally available to futures brokers who provide investment advice or manage discretionary accounts for their futures clients.
Licensed for Type 9 Regulated Activity (Asset Management)
A corporation licensed for Type 9 regulated activity does not need to be licensed for regulated activities Type 1 (dealing in securities) or Type 2 (dealing in futures contracts) provided that such activities are carried out solely for the purposes of its asset management business. This exemption is normally available to fund managers who place trade orders to dealers in the course of managing their clients’ securities or futures contracts portfolios.
In addition, a Type 9 licensed corporation which provides a service of managing a portfolio of securities or futures contracts under a collective investment scheme and gives advice or issues analyses or reports in relation to securities or futures contracts solely for the purposes of providing the collective investment schemes that it manages, is exempted from the requirement to be licensed for regulated activity Type 4 (advising on securities) or Type 5 (advising on futures contracts), as the case may be. The exemption allows fund managers to introduce their products to the market without having to obtain a separate licence for advising on their products. For instance, a Type 9 licensed fund manager who intends to market the funds under his management may first provide certain investment advice or related research results to prospective investors to demonstrate his expertise in the area without being licensed for Type 4 or Type 5.
ADVISING GROUP COMPANY EXEMPTION
A corporation is not required to be licensed for Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) or Type 9 (asset management) regulated activity if it provides the related investment advice or services solely to its wholly owned subsidiaries, its holding company holding all of its issued shares, or to other wholly owned subsidiaries of that holding company.
In Relation to Advisory Activities/
The exemption should not be applied to a corporation advising its group company in respect of that group company’s client assets. However, where the investment advice and/or related research reports are provided to the group company for its own consumption, notwithstanding that the group company may rely, in whole or in part, on such advice/research reports to service its clients, the above exclusion will still apply if the advice/research reports are issued to the clients by the group company in its own name and that group company has assessed the corporation’s input before issuing such advice/research reports.
In Relation to Asset Management Activities
The exemption is only applicable to a corporation providing asset management service to its group company (on a wholly owned basis) in respect of that group company’s assets. It should not be read as applying to the management of assets belonging to the group company’s clients. Managing assets belonging to third parties would constitute “asset management” and attract a licensing requirement.
PROFESSIONAL ADVISERS’ EXEMPTION
Solicitors, counsel and professional accountants are not required to be licensed for Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) or Type 9 (asset management) regulated activity where they provide such advice or services wholly incidental to their professional practice.
TRUST COMPANY EXEMPTION
In Relation to Dealing in Securities/
A trust company registered under Part VIII of the Trustee Ordinance is not required to be licensed for Type 1 regulated activity (dealing in securities) if it acts as an agent for a collective investment scheme in distributing application forms, redemption notices, conversion notices and contract notes, receiving money and issuing receipts on behalf of its principal.
In Relation to Investment Advisory Activities
A trust company registered under Part VIII of the Trustee Ordinance is not required to be licensed for Type 4 regulated activity (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) or Type 9 (asset management) regulated activity if it provides such investment advice or services wholly incidental to the discharge of its duties as a trustee.
In Relation to Asset Management Activities
If a trustee company acting as trustee of a discretionary trust has appointed an appropriate person to manage the portfolio or in practice acts on professional advice in carrying out its duties as trustee, it would not be required to be licensed. However, if the provision of portfolio management services becomes a separate or distinct business of the trustee company, it is unlikely that the trustee company could rely on the wholly incidental exemption and it would have to apply for a licence for Type 9 regulated activity.
A person who gives advice on securities, futures contracts or corporate finance or issues related analyses or reports through:
a newspaper, magazine, book or other publication which is made generally available to the public; or
television or radio broadcast for reception by the public, whether on subscription or otherwise,
is not required to be licensed for regulated activities Type 4 (advising on securities), Type 5 (advising on futures contracts) or Type 6 (advising on corporate finance).