Companies seeking SFC licensing
Charltons has broad experience in assisting financial intermediaries – including fund managers, corporate finance and investment advisers, and brokers – on SFC licensing approval criteria and application procedures. Our multi-disciplinary lawyers have a deep understanding of the business environments in which financial intermediaries operate.
We can advise on whether (and what type of) SFC licence is required in a particular case, whether the experience and qualifications of proposed “responsible officers” are sufficient, and identify other issues that may arise during the application process. We will also coordinate the licensing application process, including assisting corporations to draft business plans and compliance and operations manuals, working with clients to respond to queries raised by the SFC, and preparing applications for exemptions or waivers from particular licensing requirements.
Charltons offers practical advice on day-to-day SFO and SFC compliance and regulatory issues as well as assisting licensed corporations by preparing or reviewing compliance manuals, developing compliance programmes and training personnel and offering legal advice on the SFC license. We also offer compliance retainer services.
Charltons also assist clients in relation to SFC investigations, enforcement and disciplinary matters. Our experience includes advising SFC licensed corporations on misconduct by employees and advising distributors and other financial intermediaries on potential unauthorized selling of investment products and carrying on “regulated activities” without proper SFC licensing.
Charltons regularly drafts submissions on proposed changes to securities laws in Hong Kong on behalf of interested parties and industry groups. Julia Charlton also serves on a number of committees of regulatory and industry bodies, including the Hong Kong Securities Institute and the SFC’s Takeovers Panel and Takeover Appeals Panel. Charltons can assist with all aspects of SFC licensing.
Introducing Agent in Hong Kong
A sponsor licensed to carry out type 6 (advising on corporate finance) regulated activity with a client base may consider acting as an introducing agent in Hong Kong so that they may earn a commission by introducing clients/placees to placing agents and underwriters involved in capital raising. Below are some considerations for such type 6 licensed entity considering to act as an introducing agent in Hong Kong:
Scope of permitted activities of a licensee approved to act as an introducing agent in Hong Kong
An introducing agent in Hong Kong is generally a person who effects introductions between a securities dealer or his representative and a third person in return for a commission, rebate or other remuneration so that the third person may enter into securities dealing transactions through the securities dealer. The effecting of introductions by an introducing agent n Hong Kong falls squarely within the definition of “dealing in securities” and therefore requires a type 1 licence.
To be an introducing agent in Hong Kong, the applicant would need to be approved as such under section 58(4) of the Securities and Futures (Financial Resources) Rules (Cap.571N of the Laws of Hong Kong) (“FRR”). Under that section, a corporation may on application in writing and payment of a fee prescribed in the Securities and Futures (Fees) Rules (Cap. 571AF of the Laws of Hong Kong), being HK$4,740 for a type 1 application, apply to the Securities and Futures Commission (“SFC”) to be approved as an approved introducing agent in Hong Kong.
Where the corporation is already licensed to carry out type 6 regulated activity, the SFC must be satisfied, when considering whether to approve the corporation to act as an introducing agent in Hong Kong, that:
- the type 6 licence is subject to the SFC licensing condition that it does not hold any client assets;
- in respect of the type 1 licence, the scope of work (“Scope”) which would be carried out would be limited to:
- introducing persons to an exchange participant of a recognised exchange company or a specified exchange in order that they may (I) effect dealings in securities; or (II) make offers to deal in securities
- communicating offers to effect dealings in securities to an exchange participant of a recognised exchange company or a specified exchange, in the names of the person whom those offers are received;
- the corporation will not incur any liability to any person (except for its own negligence, wilful default or fraud) in connection with offers communicated or persons so introduced; and
- it does not hold any client assets.
“Recognised exchange companies” include The Stock Exchange of Hong Kong Limited and The Hong Kong Futures Exchange Limited and a “specified exchange” includes those set out in Schedule 3 of the FRR (as extracted in the Schedule to this memorandum). An “exchange participant” is a person who are permitted to trade through these stock markets in accordance with the rules of these exchanges. In respect of The Stock Exchange of Hong Kong Limited (being the recognised exchange company in respect of securities products and stock options), an exchange participant in respect of such trading of securities is normally a broker-dealer registered with the SFC as a licensed corporation to carry out type 1 (dealing in securities) regulated activities and which is a holder of Stock Exchange Trading Right.
The SFC may impose such reasonable conditions on the licensed corporation as it may deem appropriate from time to time.
The permitted scope of activities that may be carried out by the applicant, as an introducing agent in Hong Kong, would be the Scope described above but does not cover the following (and care must be taken to ensure that these activities are not carried out by any member of the applicant’s staff once it has been approved as an introducing agent in Hong Kong)
- conduct any marketing activity in respect of any securities to Hong Kong persons
- hold itself out to any Hong Kong persons as capable of dealing in securities
- take or execute any client orders relating to securities in Hong Kong
- take up a proprietary position in any trades communicated by it or in respect of the client introduced to the exchange participant
- pass any quotes or offers to any person who is not an exchange participant (this is differentiated from passing offers received by a person to an exchange participant which is permitted – i.e. a person may offer to purchase securities of a listing candidate/company and the introducing agent in Hong Kong may pass such offer to a sponsor or broker/dealer in order to effect the subscription/acquisition of the relevant securities, however, the introducing agent in Hong Kong may not pass an offer from a listed company or a broker/dealer to the same person
- conduct any market making activity
- communicate margin calls or provide hedge support
- provide any investment advice in respect of merits of certain dealing in securities, whether or not such advice is given incidental to the carrying on of type 1 activity
Minimum paid-up share capital and liquid capital requirement (type 1 (introducing agent) plus type 6 regulated activities)
The capital requirements of an approved introducing agent in Hong Kong which does not carry out any other regulated activity are as follows:
|Regulated activity||Minimum paid-up share capital||Minimum liquid capital|
|Type 1 –|
For a licensed corporation which carries out more than one type of regulated activity, the capital requirements that would be maintained shall be the higher or the highest amount required amongst those regulated activities.
The capital requirements for a type 6 licensee which do not hold assets or which acts as a sponsor are as follows:
|Regulated activity||Minimum paid-up share capital||Minimum liquid capital|
|Type 6 –|
Application process to be approved as an introducing agent in Hong Kong for a type 6 licensed corporation
To apply to the SFC to be approved as an introducing agent in Hong Kong, the applicant would be required to lodge the following documents and forms to the SFC together with a cheque in the amount of HK$4,740 made payable to the “Securities and Futures Commission”:
- an application letter setting out, inter alia, the new proposed business activities to be carried out and proposed responsible officers for supervising the same. The application would need to set out the scope of work proposed (which will include the restrictions and limitations described above) and request the relevant licensing conditions to be imposed
- Form 4 (Miscellaneous Application) – section 2 to be completed regarding addition of regulated activity
- Supplement 7 (Financial Resources) – regarding its compliance with the revised capital requirements (if any such revisions are necessary)
- Supplement 8 (Business Plan and Proposed Business Activities) together with:
- business plan for the proposed type 1 regulated activity as an introducing agent in Hong Kong – this should include such matters as corporate profile (including details of auditors and financial year end), business rationale, shareholding structure, organisation structure (including reporting line and compliance issues), details of proposed responsible officer, company location and facilities etc.
- operations/compliance manual for type 1 regulated activity – this should include internal controls measures and measures to ensure that the company will not breach the restrictions under its licensing conditions etc.
- standard client agreement regarding its acting as introducing agent in Hong Kong
The relevant Form 4 and supplements forms can be accessed at the following web address: http://www.sfc.hk/web/EN/forms/intermediaries/licensing-application-and-notification-forms.
The SFC has no performance pledge for processing applications for addition of regulated activity but it should be expected that the processing time should be less than that of an applicant which is not yet licensed for any regulated activity (the performance pledge for which is 15 weeks from the time it formally accepts the application – although the SFC may require preliminary questions to be answered prior to formally accepting the application) as it would not be necessary for the SFC to reassess the fit and properness of each substantial shareholder (and their respective directors) of the licensed corporation.
Competence of proposed responsible officers
The applicant must have not less than two (2) responsible officers accredited to it to directly supervise the conduct of its type 1 (introducing agent in Hong Kong) regulated activity. An individual may be appointed to be the responsible officer for more than one regulated activity provided that he is fit and proper to be so appointed and there is no conflict in the roles assumed.
The competency requirements for type 1 (introducing agent in Hong Kong) regulated activity is set out in the Guideline on Competence issued by the SFC as follows (subject to exemptions):
|Option 1||Option 2||Option 3|
|Academic /industry qualifications||
||Passes in Chinese or English and Mathematics in Hong Kong Diploma of Secondary Education (HKDSE)/ Hong Kong Certificate of Education Examination (HKCEE) or equivalent||N/A|
|Industry experience||At least 3 years relevant experience over past 6 years immediately prior to application||At least 5 years relevant experience over past 8 years immediately prior to application||At least 8 years relevant experience over past 11 years immediately prior to application|
|Management experience||Minimum of 2 years proven management skill and experience||Minimum of 2 years proven management skill and experience||Minimum of 2 years proven management skill and experience|
|Local regulatory framework paper||Passed one of the recognised local regulatory framework papers||Passed one of the recognised local regulatory framework papers||Passed one of the recognised local regulatory framework papers|
Competence of the licensed corporation
Business structure, internal controls, personnel, corporate governance and compliance
An applicant for a licence to carry out any regulated activity has to demonstrate to the SFC that it has proper business structure, good internal control systems and qualified personnel to ensure that proper management of risks that it will encounter in carrying on its proposed business as detailed in its business plan. In this regard, detailed information should be included in business plan and compliance manual for submission as to whether the applicant able to continue to satisfy these relevant requirements.
In respect of an application for a type 1 (introducing agent in Hong Kong) licence, the SFC may be particularly interested as to whether there are measures (such as adequate staff training) to ensure that its personnel do not breach the licensing conditions on the permitted Scope of activities.
Further, the following SFC requirements regarding corporate governance and compliance should be followed at all times:
- requirements under Code of Conduct for Persons Licensed by or Registered with the SFC that:
- a licensed or registered person should comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market (General Principle 7)”; and
- a licensed or registered person should comply with, and implement and maintain measures appropriate to ensuring compliance with the law, rules, regulations and codes administered or issued by the SFC, the rules of any exchange or clearing house of which it is a member or participant, and the requirements of any regulatory authority which apply to the licensed or registered person (Section 12.1 Compliance: in general).
- requirements under Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission that:
- policies and procedures shall be established and maintained to ensure the firm’s compliance with all applicable legal and regulatory requirements as well as with the firm’s internal policies and procedures”
- requirements under control guidelines which states that (i) the management should establish and maintain an appropriate and effective compliance function within the firm, subject to constraint of size, is independent of all operational and business functions, and which report directly to management; (ii) the management should ensure the staff performing the compliance function possess the necessary skills, qualifications and experience to effectively execute their duties; (iii) the staff performing the compliance function should establish, maintain and enforce effective compliance procedures; (iv) the staff performing the compliance function should promptly report to management upon the occurrence of material non-compliance by the firm etc.
For acting as an introducing agent in Hong Kong, the SFC may not be as stringent in terms of establishing “Chinese walls“ at the office premises given that the applicant will not be executing trades for clients. However, the SFC would nevertheless require office premises of the applicant be suitable with consideration as to, inter alia:
- the security of the premises and whether there is a proper segregated office area;
- whether confidential or non-public information and client privacy will be sufficiently safeguarded and ring-fenced against unauthorised access or leakage
- whether the premises are always accessible for visit by the SFC.
As an introducing agent in Hong Kong, the applicant should not be holding client assets and are therefore exempt (pursuant to section 3(b) of the Securities and Futures (Insurance) Rules (Cap. 571AI) to take out and maintain insurance for its type 1 regulated activity.