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The Licensing Regime under The Securities and Futures Ordinance

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The Licensing Regime under The Securities and Futures Ordinance

Annex A

THE DEFINITION OF ‘PROFESSIONAL INVESTOR’ FOR THE PURPOSES OF PART V OF THE SECURITIES AND FUTURES ORDINANCE

‘Professional investors’ are defined in Schedule 1 to the SFO as:

    1. any exchange company, clearing house, exchange controller or investor compensation company recognised under the SFO or any person authorised under the SFO to provide automated trading services;
    2. any intermediary (i.e. an SFO licensed corporation or registered institution), or any other person carrying on the business of providing investment services which is regulated under the law of any place outside Hong Kong;
    3. any authorised financial institution (i.e. a bank, restricted licence bank or deposit taking company authorised under the Banking Ordinance) or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;
    4. any insurer authorised under the Insurance Companies Ordinance or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;
      1. any collective investment scheme authorised under the SFO; or
      2. any scheme which is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of that place, is permitted to be operated under that law,or any person who operates such scheme;
    5. any scheme registered under the Mandatory Provident Fund Schemes Ordinance, or its constituent fund, or any person who is an approved trustee or service provider of such registered scheme or who is an investment manager of such registered scheme or constituent fund;
      1. a registered scheme under the Occupational Retirement Schemes Ordinance;
      2. or an offshore scheme as defined under that Ordinance which, if regulated under the law of the place where it is domiciled, is permitted to be operated under the law of such place,or an administrator of any such scheme as defined in that Ordinance; and
    6. any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency.

Annex B

Minimum paid-up share capital and liquid capital requirements

The table below summarises the minimum paid-up capital and liquid capital that a licensed corporation is required to maintain for each type of regulated activity.

Regulated activity Minimum paid-up share capital Minimum liquid capital
Type 1 –
  1. in the case where the corporation is an approved introducing agent2 or a trader3
Not applicable $500,000
  1. in the case where the corporation provides securities margin financing
$10,000,000 $3,000,000
  1. in any other case
$5,000,000 $3,000,000
Type 2 –
  1. in the case where the corporation is an approved introducing agent, a trader or a futures non-clearing dealer4
Not applicable $500,000
  1. in any other case
$5,000,000 $3,000,000
Type 3 –
  1. in the case where the corporation is an approved introducing agent
$5,000,000 $3,000,000
  1. in any other case
$30,000,000 $15,000,000
Type 4 –
  1. in the case where in relation to Type 4 regulated activity, the corporation is subject to the licensing condition that it shall not hold client assets
Not applicable $100,000
  1. in any other case
$5,000,000 $3,000,000
Type 5 –
  1. in the case where in relation to Type 5 regulated activity, the corporation is subject to the licensing condition that it shall not hold client assets
Not applicable $100,000
  1. in any other case
$5,000,000 $3,000,000
Type 6 –
  1. in the case where in relation to Type 6 regulated activity, the corporation is subject to the licensing condition that it shall not hold client assets
Not applicable $100,000
  1. in any other case
$5,000,000 $3,000,000
Type 7 – $5,000,000 $3,000,000
Type 8 – $10,000,000 $3,000,000
Type 9 –
  1. in the case where in relation to Type 9 regulated activity, the corporation is subject to the licensing condition that it shall not hold client assets
Not applicable $100,000
  1. in any other case
$5,000,000 $3,000,000
Type 10 – Not applicable $100,000

Annex C

Test of competence for licensed representatives

Basic elements
Can be compensated by
(1) Academic qualification Passes in English or Chinese, and Mathematics in HKCEE or equivalent5
  • Degree in Accounting, Business Administration, Economics, Finance or Law; or other degree (with passes in at least two courses in the above disciplines); or
  • Internationally recognised professional qualifications in Law, Accounting or Finance6; or
  • An additional 2 years of relevant industry experience for lacking either (1) or (2); or
  • An additional 5 years of relevant industry experience for lacking both (1) and (2).
(2) Industry qualification Passed one of the recognised industry qualifications
(3) Regulatory knowledge Passed one of the recognised local regulatory framework papers Applicant may apply for exemption from taking the recognised local regulatory framework paper if he satisfies the exemption criteria as set out in Appendix E of the Guidelines on Competence.

Note: A representative licensed for Type 3 regulated activity (leveraged foreign exchange trading) who handles discretionary account activities has to obtain an additional 3 years of direct foreign exchange trading experience in the inter-bank foreign exchange market or currency futures market, or its equivalent over the past 6 years.

Annex D

Test of competence for responsible officers

Basic elements
Can be compensated by
(1) Academic qualification Passed one of the recognised industry qualifications
  • Degree in Accounting, Business Administration, Economics, Finance or Law; or other degree (with passes in at least two courses in the above disciplines); or
  • Internationally recognised professional qualifications in Law, Accounting or Finance7; or
  • Passes in English or Chinese, and Mathematics in Hong Kong Certificate of Education Examination (‘HKCEE’) or equivalent8 plus an additional 2 years of relevant industry experience9; or
  • An additional 5 years of relevant industry experience for lacking both (1) and (2).
(2) Industry experience Possesses 3 years of relevant industry experience over the 6 years immediately prior to the date of application Not applicable
(3) Management experience Has a minimum of 2 years’ proven management skill and experience Not applicable
(4) Regulatory knowledge Passed one of the recognised local regulatory framework papers Applicant may apply for exemption from taking the recognised local regulatory framework paper if he satisfies the exemption criteria as set out in Appendix E of the Guidelines on Competence.

Annex E

SFC circular(Ref : 250/LC/24)

SFC Adopts a Pragmatic Approach to Licensing Fund Managers

This circular provides practical guidance to overseas fund managers when applying for a licence from the SFC and clarifies certain key aspects of our licensing requirements for fund managers. Also explained in this circular is our initiative to streamline the process for licensing overseas fund managers and the key factors that we may consider when exercising our discretion to exempt individuals from the local regulatory examination requirement prior to approving them as Responsible Officers (“RO”)10.

The reason why this circular is principally directed at overseas fund managers is that we have observed some misunderstanding amongst this group as to the requirements that are imposed on them in the event of their applying for a licence in Hong Kong. We do not see the same need in relation to local institutions, which tend to be more aware of our licensing requirements and the flexibility that we are able to exercise in relation to matters such as the granting of exemptions from the local regulatory examination requirement.

The initiatives outlined in this circular are principally intended to make the licensing process easier and more streamlined for overseas hedge fund managers. They are not intended to lower our regulatory requirements because we recognize that these contribute to Hong Kong’s reputation amongst investors as being a jurisdiction in which appropriate standards are insisted upon amongst its market participants. This, in turn, is attractive to reputable market participants who appreciate the benefits that arise from being able to brand themselves as being Hong Kong licensed.

As part of our initiatives, we encourage fund managers and professionals to meet with our licensing staff prior to the submission of a licence application, to discuss the manner in which these initiatives might be applied in their particular circumstances, including those that might not fall strictly within the ambit of these initiatives. The purpose of such meetings is to enable us to offer guidance to licence applicants prior to the submission of their applications, with the objective of simplifying and accelerating the subsequent licensing process.

Exemption from licensing requirement for providing intra-group investment advice

We note that some overseas hedge fund managers only wish to set up an investment research operation in Hong Kong, to provide research on securities in Asia to their group companies outside Hong Kong.

Under the Securities and Futures Ordinance (“SFO”), a firm may be exempt from the obligation to be licensed to carry on business in Type 4 and/or 5 Regulated Activity if it is only advising on securities and/or futures contracts to any of its wholly owned subsidiaries, its holding company that wholly owns the firm or other wholly owned subsidiaries of that holding company (“group companies”).

In light of this exemption, we would normally regard an overseas hedge fund manager as being able to rely on this exemption if its Hong Kong office is only providing investment advice/research reports to its group companies outside Hong Kong, provided that the group companies assess such advice or reports before issuing any of this material, in their own name, to clients.

However, where a hedge fund manager sends out research analysis and/or provides investment advice to external clients, it may still be required to obtain a licence to carry on business in Type 4 or 5 Regulated Activity.

With respect to hedge fund managers that carry on the business of portfolio management of securities and/or futures contracts in Hong Kong, we expect them to obtain a licence to carry on business in Type 9 Regulated Activity.

Streamlined licensing process for UK or US licensed/registered hedge fund managers

Firms that are already licensed or registered by the US SEC or the UK FSA as investment managers or advisers, with a good compliance track record and which serve only professional investors11 (or which have parent companies that satisfy the first two of these requirements), can expect to benefit from an expedited licensing process. Firms should submit to the SFC a set of completed licence application forms relevant to their intended business activities in Hong Kong. Upon receipt of these forms, we will commence a streamlined review process focusing principally on key areas of operations such as risk management, valuation, internal controls and management of conflicts of interest.

Firms that have not been licensed or registered with the US SEC or the UK FSA as investment managers or advisers, but which have proven track records (or have parent companies with proven track records), may also be able to benefit from the streamlined review process.

All licence applications submitted to us by overseas investment managers or advisers will be considered on a case-by-case basis.

Clarification of the competence requirements for Responsible Officers

Under the SFO, each licensed corporation must have at least two ROs approved by the SFC for each of the regulated activities for which it is licensed. Every executive director12 of a licensed corporation must secure the SFC’s approval as a RO and every licensed corporation must have at least one RO who is an executive director. It is also a requirement of our Guidelines on Competence that a RO should have at least 3 years’ relevant industry experience over the 6 years immediately prior to the date of his/her application to the SFC for approval as a RO.

As we have seen an increasing number of overseas hedge fund managers applying to be licensed to carry on business in Type 9 Regulated Activity, we would like to clarify our requirements concerning ROs for the benefit of overseas hedge fund managers applying for a Type 9 licence:

    1. Physical presence of ROs in Hong Kong – We require at least one of the ROs to be based in Hong Kong, with at least one of the ROs being immediately contactable at all times by the SFC and by the hedge fund manager’s staff who are working from its Hong Kong office. Where only one RO is based in Hong Kong, he/she must not be subject to the “non-sole” condition, as more particularly described in the following paragraph.
    2. More flexible interpretation of “relevant industry experience” – Having regard to the unique nature of hedge fund managers’ operations, we will recognise a broader range of industry experience as being relevant when considering applications that are made to the SFC for the approval of a person as a RO of a hedge fund manager. Experience acquired by an individual from a broad range of activities and investment strategies, including asset management, proprietary trading, research, private equity, special situations, as well as experience in dealing with other alternative investments, will be considered as industry experience directly relevant to hedge fund management.However, experience acquired by individuals in sales, marketing or risk management of hedge funds will be considered as experience indirectly relevant to hedge fund management business. Hence, we are only prepared to accept these individuals as ROs if a licensing condition known as the “non-sole” condition is imposed at the time when they are approved as ROs (under which the individual must, when actively participating in or when directly supervising the business for which the firm is licensed, do so under the advice of another RO who is not subject to the “non-sole” condition). We would require the firm to ensure that apart from this “non-sole” RO, there will be a RO who possesses direct hedge fund management experience, as explained in the preceding paragraph.
    3. Exemption from regulatory examination for ROs of hedge fund managers – We are prepared to exercise our discretion to exempt an individual from meeting the local regulatory examination requirement for ROs if the following conditions are met:
      • The person has over 8 years of industry experience in recognized markets (being those identified in Parts 2 and 3 of Schedule 1 of the SFO).Alternatively, the person must already be registered or licensed in the UK or US for investment management or advisory business;
      • The firm will only serve professional investors (within the meaning of the SFO);
      • The firm is able to confirm that regulatory and compliance support will be provided to the person; and
      • The person should take a post-licensing refresher course on local regulations.

Office space

The SFC does not specifically prescribe the type of office space that hedge fund managers may occupy and we draw no distinction between business centres or serviced offices and other types of business accommodation.

It is up to licensed firms to choose their preferred business premises and to ensure that their business premises are, at all times, suitable for the purposes for which they are being used. Licensed firms should satisfy themselves that the business premises occupied by them are appropriately secure and that confidential/non-public information (such as price sensitive information) and client privacy will be sufficiently safeguarded against unauthorised access or leakage. Firms should refer to the FAQs posted by the SFC on its website for further guidance as to the suitability of business premises.

This circular is principally intended to provide general guidance to overseas hedge fund managers intending to apply to the SFC for a licence. In addition, however, we anticipate being able to apply some similar or analogous principles in connection with the licensing of fund managers more generally, where they will only be serving professional investors and where the particular circumstances of a case warrant this.

The contents of this circular should not be interpreted as being strictly binding upon the SFC. Whilst we intend to observe the principles referred to in this circular, our licensing regime requires us to exercise our discretion in each and every case. Accordingly, the manner in which we will do so in any case will be governed by the particular circumstances of that case.

The SFC is not in a position to provide licence applicants with legal advice. Accordingly, applicants are responsible for ensuring that they comply with the legal obligations arising out of their own particular circumstances and are urged to seek appropriate legal advice if they are in any doubt.

Intermediaries and Investment Products Division
Securities and Futures Commission
11 June 2007


2 ‘Approved introducing agent’ means a licensed corporation approved as such under section 58(4) of the Securities and Futures (Financial Resources) Rules.

3 ‘Trader’ means a licensed corporation licensed for Type 1 or Type 2 regulated activity which does not hold client assets or handle clients’ orders and, in carrying on the regulated activity for which it is licensed, conducts no business other than effecting, or offering to effect, dealings in securities, futures contracts or options contracts for its own account.

4 ‘Futures non-clearing dealer’ means a licensed corporation licensed for Type 2 regulated activity which is an exchange participant of a recognised futures market, but is not a clearing participant of a recognised clearing house.

5 All high school public examinations (such as university entry examinations) will be recognised as equivalent to HKCEE.

6 Internationally recognised professional qualifications in Finance include Chartered Financial Analyst, Certified International Investment Analyst and Certified Financial Planner.

7 All high school public examinations (such as university entry examinations) will be recognised as equivalent to HKCEE.

8 Internationally recognised professional qualifications in Finance include Chartered Financial Analyst, Certified International Investment Analyst and Certified Financial Planner.

9 In assessing the relevance of an applicant’s experience, the SFC will consider the role and functions to be undertaken by the applicant and whether the applicant possesses the recognised industry qualifications. Experience gained in Hong Kong or elsewhere that is closely related to the functions to be performed will be recognised.

10 Section 125 of the Securities and Futures Ordinance requires the appointment of at least two Responsible Officers for each regulated activity carried on by a licensed corporation.

11 The term “professional investor” is defined in Schedule 1 of the Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules prescribe certain additional individuals and institutions as being professional investors.

12 The term “executive director” is defined in section 113 of the Securities and Futures Ordinance to mean a director who actively participates in, or who is responsible for directly supervising, the business of a regulated activity for which a corporation is licensed.

The licensing regime under the Securities and Futures Ordinance in Hong Kong

Part V of the Securities and Futures Ordinance

Incidental exemption under the Securities and Futures Ordinance

Type 1 Regulated Activity (Dealing in Securities)

Type 4 regulated activity (advising on securities)

Type 6 (advising on corporate finance) regulated activities

Type 6 (advising on corporate finance) regulated activities

SFC’s Fit and Proper Guidelines

SFC’s Guidelines on Competence

SFC’s Guidelines on Competence

Hong Kong Monetary Authority (HKMA)
The Banking Ordinance in Hong Kong
Type 2 Regulated Activity (Dealing in Futures Contracts)
Type 3 regulated activity (leveraged foreign exchange trading)
Type 5 Regulated Activity (advising on futures contracts)
Type 8 (securities margin financing) regulated activities

 

Skills

Posted on

2014-10-16