Guide for Hong Kong Fund Management Compliance
The activity of fund management is defined as Type 9 (asset management) regulated activity under Schedule 5 of the Securities and Futures Ordinance (“SFO”).
These corporations, which will be referred to in these Guidelines as Hong Kong Fund Management Companies [“FMCs”], based in Hong Kong and will be subject to the requirement under the Securities and Futures Ordinance (“SFO”) to obtain a license for Type 9 (asset management) regulated activity from the Securities and Futures Commission (“SFC”). Licensed corporations and registered institutions are referred to as “intermediaries”. Sole proprietorship or partnership is not an acceptable form of business structure for the purposes of licensing.
Examples of Type 9 (asset management) regulated activities include managing a portfolio of securities or futures contracts for clients on discretionary basis or managing funds on discretionary basis.
Broadly speaking, you need a licence if you are not an authorized financial institution and:
- you are a corporation carrying on a business in a regulated activity in Hong Kong (Section 114(1) and (2) of the SFO); or
- you are a corporation actively marketing, whether by yourself or another person on your behalf and whether in Hong Kong or from a place outside Hong Kong, to the public any services that you provide, which would constitute a regulated activity if provided in Hong Kong (Section 115 of the SFO); or
- you are an individual performing a regulated function for your principal which is a licensed corporation in relation to a regulated activity carried on as a business. In that case, you have to be a licensed representative accredited to your principal (Section 114(3) and (4) of the SFO). In addition, if you are an Executive Director of that corporation, you also need to be approved as a responsible officer (Section 125(1)(a)of the SFO).
What does “actively markets” mean under the Section 115 of the SFO?
This may include those who frequently call on Hong Kong investors and market their services (including offering products); running a mass media programme targeting at the investing public in Hong Kong; or Internet activities that target Hong Kong investors.
Generally, no person may actively market, whether in Hong Kong or from a place outside Hong Kong, to the public in Hong Kong any services which would constitute a regulated activity if provided in Hong Kong, unless that person is registered or licensed by the SFC. In determining whether or not a person “actively markets” its services to the public, the SFC will consider the nature of the business activities as a whole and have regard to a number of factors, including (but not limited to) the following:
- whether there is a detailed marketing plan to promote the services;
- whether the services are extensively advertised via marketing means such as direct mailing, advertisements in local newspapers, broadcasting or other “push” technology over the Internet (as opposed to where the services are passively available e.g. on a “take it or leave it” basis);
- whether the related marketing is conducted in a concerted manner and executed in accordance with a plan or a schedule which indicates a continuing service rather than an one-off exercise.
- whether the services are packaged to target the public of Hong Kong, e.g. written in Chinese and denominated in Hong Kong dollars; and
- whether the services are sought out by the customers on their own initiative.
There may be exemptions for licensing such as:
- performing activities wholly incidental to carrying out of another regulated activity for which you are already licensed;
- providing the relevant advice or services solely to your wholly owned subsidiaries, your holding company which holds all your issued shares, or other wholly owned subsidiaries of that holding company;
- providing such advice or services wholly incidental to your practice as a solicitor, counsel or a professional accountant; or
- 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 (unless the provision of portfolio management services becomes a separate or distinct business of the trustee company).
Overview of Licensing
Under the SFO, licensing requirements extend to both the Hong Kong Fund Management firm and its individual representatives.
The process of applying for a Hong Kong Fund Management license from the SFC involves completing prescribed forms for the firm, be it a sub-manager or otherwise, and its individual representatives. Representatives will need to pass licensing examination.
Business Structure and Internal Control
You have to satisfy the SFC that you have proper business structure, good internal control systems and qualified personnel to ensure the proper management of risks that you will encounter in carrying on your proposed business as detailed in your business plan.
The Board has the ultimate responsibility for the conduct, operations and financial soundness of the corporation. All members of the board (regardless executive or non-executive) have a duty to exercise independent judgement in relation to the exercise and delegation of the Board’s powers. The Board retains responsibility for delegated decisions and is required to have systems and controls in place to supervise those who act under its delegated authority.
The Internal Control Guidelines state that a licensed corporation should establish, document and maintain an effective management and organisational structure. The SFC may request licensed corporations to provide the document for its review.
Risk Management Framework
A Hong Kong Fund Management Corporation may consider putting in place a risk management framework to identify, address and monitor the risks associated with the business and the customer assets that it manages. They may take into account industry best practices that might be relevant. They should also be cognizant that these risks are dependent on the nature and size of its operations and the nature of assets that it manages. As such, the risk management framework of a Hong Kong Fund Management Corporation should address the following:
(i) Governance, independence and competency of the risk management function
(ii) Identification and measurement of risks associated with customer assets
(iii) Timely monitoring and reporting of risks to management
(iv) Documentation of risk management policies, procedures and reports
Fit and Proper Criteria
Licensed corporations, licensed representatives and registered institutions must remain fit and proper at all times. They have to comply with all applicable provisions of the SFO and its subsidiary legislation as well as the codes and guidelines issued by the SFC.
With reference to Section 129 of the SFO, in considering whether a person is fit and proper for the purposes of licensing or registration, the SFC shall, in addition to any other matter that the SFC may consider relevant, have regard to the following of the applicant and other relevant persons as appropriate:
- financial status or solvency,
- educational or other qualifications or experience having regard to the nature of the functions to be performed,
- ability to carry on the regulated activity concerned competently, honestly and fairly, and reputation, character, reliability and financial integrity
The above criteria serve as the fundamental basis when the SFC considers each licence or registration application.
Substantial Shareholders, Officers and Other Persons
Your substantial shareholders, officers (Eg. a director, manager or secretary of, or any other person involved in the management of, the corporation.) and any other person who is or is to be employed by, or associated with, you for the purposes of the regulated activity for which the application is made shall be fit and proper. A person, being aware that he became a substantial shareholder of a licensed Hong Kong Fund Management corporation without the SFC’s prior approval should as soon as reasonably practicable and in any event within 3 business days after he became so aware, apply to the SFC for approval to continue to be a substantial shareholder of the corporation. A group chart depicting the related change in shareholding structure including the respective number of shares and percentage of shareholdings shall be submitted together with the application.
Through a circular, SFC has informed prospective acquirers of licensed Hong Kong Fund Management corporations that the assessment and vetting process for a new substantial shareholder applicant is equally as stringent as that for a new licensed corporation application, particularly where the licensed corporation in question appears to be dormant. SFC is able to revoke the licences of Hong Kong Fund Management corporations and individuals who do not genuinely carry on a business in a regulated activity.
An application to become a substantial shareholder may be refused if the SFC does not believe that the licensed Hong Kong Fund Management corporation will remain fit and proper after the approval is granted. The SFC may also enquire into the substantial shareholder’s source of funding and financial strength in order to assess the legitimacy of the funds and to confirm that any ultimate beneficial owners who are substantial shareholders have applied for approval.
The SFC will assess any potential changes to the business plan and senior management of the licensed corporations after a change of ownership. Licensed Hong Kong Fund Management corporations must inform the SFC of certain changes, including significant changes to their business plan and changes to their senior management, within 7 business days. The SFC may seek to confirm what changes have actually occurred in order to make sure that parties are forthcoming in providing information. It should be noted that providing false or misleading information to the SFC constitutes an offence punishable by a fine and imprisonment.
A person shall, in relation to a corporation, be regarded as a “substantial shareholder” of the corporation, if he, either alone or with any of his associates –
(a) has an interest in shares in the corporation –
(i) the nominal value of which shares is equal to more than the nominal value of 10% of the issued share capital of the corporation; or
(ii) which entitles the person, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at general meetings of the corporation; or
(b) holds shares in any other corporation which entitles him, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of 35% or more of the voting power at the general meetings of the other corporation, or of a further corporation, which is itself entitled, either alone or with any of its associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at the general meetings of the corporation.
Please refer to Part 1 of Schedule 1 to the SFO for the definition of “associate”, “hold” and other related terms
As defined in Part 1 of Schedule 1 to the SFO, “director” includes a shadow director and any person occupying the position of director by whatever name called. “Shadow director” means a person in accordance with whose directions or instructions the directors of a corporation are accustomed or obliged to act, but a person shall not be regarded as a shadow director by reason only of the fact that the directors act on advice given by him in a professional capacity
Responsible Officers (ROs)
The Hong Kong Fund Management corporation must employ at least two responsible officers in respect of each regulated activity for which it is seeking to be licensed. The same individual can be appointed to be a responsible officer for more than one regulated activity provided that he is “fit and proper” to be appointed and there is no conflict in the roles assumed. At least one of the proposed responsible officers must be an executive director of the corporation or institution. Both of the responsible officers must hold a representative’s license for the relevant regulated activity. The SFC generally expects that the Managers-in-Charge (MICs) of the Overall Management Oversight function and the Key Business Line function described as “Senior Management” by SFC should seek SFC’s approval as responsible officers in respect of the regulated activities they oversee. The SFC will examine if the proposed officers possess appropriate ability, skills, knowledge and experience to effectively manage and supervise the business of the regulated activities. All applications for approval as responsible officers should be lodged with the SFC for consideration together with your licence application.
(1) Sufficient authority
You should have sufficient authority to supervise the business of regulated activity within the licensed corporation that you will be accredited to. You may or may not be a director of the licensed corporation. However, if you are a director of the corporation and actively participate or directly supervise the business of regulated activity, you must apply to become a responsible officer of that corporation in respect of the regulated activity concerned.
You should possess appropriate ability, skills, knowledge and experience to properly manage and supervise the corporation’s business of regulated activities. Please refer to “Table 1: Test of Competence for Responsible Officers” for more information.
It is not acceptable to hire responsible officers in name only, where the relevant persons do not in fact supervise the licensed corporation’s business. Otherwise, there will be doubt as to whether the licensed corporation’s senior management is properly supervising its regulated activities, and the SFC may regard the licensed corporation and its responsible officers to be not fit and proper. This could lead to disciplinary action, including public reprimand and licence revocation.
In an application for approval as a responsible officer, an applicant should describe his or her proposed specific duties concerning their supervision of the business of the licensed corporation. When necessary, the SFC may contact the responsible officer directly to confirm his or her area of responsibilities and the business of the licensed corporation under his or her supervision. If it is discovered that a responsible officer does not in fact participate in the supervision of the licensed corporation’s business, the licensed corporation and the responsible officer may have committed an offence of providing false or misleading information to the SFC in their licence applications.
To determine whether an applicant is fit and proper to be licensed as a responsible officer, the SFC will take into account the amount of time he/she is able to dedicate to carrying out the duties of a responsible officer, and also whether he/she can properly manage any potential conflict of interest arising from his/her other capacities or business interests. Therefore, it is unlikely that an individual will be considered to be fit and proper to be licensed to act for more than 1 licensed corporation, unless the licensed corporations are in the same corporate group or owned by the same controlling shareholders. A conflict of interest may also arise if the responsible officer acts as a director, external consultant or compliance adviser for other licensed corporations or applicants.
Licensed Representatives (other than Responsible Officers)
You have to establish that you have the requisite basic understanding of the market in which you are to work as well as the laws and regulatory requirements applicable to the industry. In assessing your competence to be licensed as a representative, the SFC will have regard to three basic elements mentioned in Table 2.
A licensed representative may apply for transfer or addition of accreditation (Section 122 of the SFO). When submitting such application, the licensed representative is required to return his licence concurrent with his application to the SFC for necessary amendment if he has not already done so.
A licensed representative may apply to become a responsible officer of his principal(s) in respect of all or any regulated activities for which he is licensed. If the application is approved, the representative should return his old licence to the SFC for amendment.
The senior management of your Hong Kong Fund Management corporation should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by you.
The SFC is of the view that senior management of a licensed corporation includes, among others:
- directors of the corporation,
- responsible officers of the corporation, and
- individuals whom we call the Managers-In-Charge of Core Functions (MICs)
Note that these three categories are not mutually exclusive. For instance, an individual can simultaneously be a director, responsible officer and MIC of a licensed corporation.
When applying for a licence under Section 116(1) of the SFO, you are required to provide information regarding your MICs and your organisational chart. All licence applicants and all existing licensed corporations must submit a formal document setting out their management structure. This must include the roles, responsibilities, accountability and reporting lines of senior management personnel and information required in respect of MICs. For each MIC, the following particulars should be submitted:
- full name;
- identification information;
- job title indicating the individual’s position and his/her particular business or operational area (e.g. Chief Executive Officer, Chief Investment Officer, Head of Risk Management, etc.);
- place of residence;
- the Core Function(s) which he or she is in charge of; and
- the job title(s) of the person(s) to whom he or she reports within the corporation and, if applicable, within its corporate group.
The management structure of a licensed corporation (including its appointment of MICs) should be approved by the Board of the corporation. Furthermore, the Board should ensure that each of the corporation’s MICs has acknowledged her/his appointment as MIC and the particular Core Function(s) for which s/he is principally responsible.
After being licensed, you are required to notify the SFC of any changes in your appointment or termination of MICs or any changes in certain particulars of your MICs within 7 business days of the changes. In some situations, you are also required to submit an updated organisational chart in your notification of that change. For example, in the case of a new appointment or cessation of appointment, or a change in the particulars of MICs referred to in items (e) and (f) above, an updated organisational chart should be submitted with the notification of change. The Board of a licensed corporation is responsible for making sure the information submitted to the SFC is complete and accurate.
Managers-In-Charge of Core Functions (MIC)
MIC is an individual appointed by a licensed corporation to be principally responsible, alone or with others, for managing any of 8 “Core Functions” which are:
- Overall Management Oversight
- Key Business Line
- Operational Control and Review
- Risk Management
- Finance and Accounting
- Information Technology
- Anti-Money Laundering and Counter-Terrorist Financing
The SFC considers that for each Core Function, a licensed corporation should appoint at least one individual as its MIC responsible for managing that function. Depending on its scale of operations and control measures, a licensed corporation may appoint one individual as the MIC for several Core Functions and/or appoint two or more individuals as MICs to jointly manage a Core Function. However, the SFC does not mandate any particular organisational or governance structure for licensed corporations. The Board of a licensed corporation is thus responsible for delegating authority and responsibilities among its senior management (including MICs).
(i) Apparent or actual authority
In determining whether any particular individual is an MIC, licensed corporations should take into account the individual’s apparent or actual authority. An individual may be considered an MIC if one or more of the following applies:
- he/she occupies a position within the corporation which is of sufficient authority to enable the individual to exert a significant influence on the conduct of that Core Function;
- he/she has authority to make decisions (e.g. assume business risks within pre-set parameters or limits) for that Core Function;
- he/she has authority to allocate resources or incur expenditure in connection with the particular department, division or functional unit carrying on that Core Function; and
- he/she has authority to represent the particular department, division or functional unit carrying on that Core Function (e.g. in senior management meetings or in meetings with outside parties).
The seniority of the individual should also be taken into account. The SFC generally expects an MIC to:
- report directly to the corporation’s Board, or to the MIC who assumes the overall management oversight function of the corporation; and
- be accountable for the performance or achievement of business objectives set by the Board, or by the MIC who assumes the overall management oversight function.
MICs may or may not be employees of the licensed corporation and may be located in or outside Hong Kong. Depending on the particular functions they perform in relation to the business, they may or may not be licensed under the SFO. However, since they hold positions of authority within the licensed corporation, they must not be external parties who merely provide outsourced services. An MIC who is not a licensed person does not require SFC approval. However, the licensed corporation will need to ensure that any person it employs or appoints to conduct business is fit and proper and qualified to act in the capacity in which he or she is employed or appointed for.
(iv) MICs supervising certain Core Functions should be Responsible Officers
The SFC expects MICs of the Overall Management Oversight function and the Key Business Line function to be Responsible Officers in respect of the regulated activities they oversee, since they will normally be responsible for supervising these regulated activities or will actively participate in those activities. MICs of other Core Functions are not expected to be Responsible Officers, nor does the SFC require every Responsible Officer to be an MIC.
In considering an Responsible Officer application or waiver application, the SFC takes into account specific facts of the case. In assessing whether an Responsible Officer applicant, who is or will be an MIC of the Overall Management Oversight function, satisfies the industry experience tests under the Guidelines on Competence, the SFC will consider the applicant’s career history within the industry, his/her proposed activities and the licensed corporation’s resources including systems and expertise.
An applicant who has held a senior position to manage a control or operational function (e.g. risk management, compliance, etc.) for a long time may be approved as an Responsible Officer subject to appropriate licensing conditions. This is so even if he or she has not had any experience in conducting or directly supervising the regulated activity concerned. In this situation, a typical licensing condition may be that the applicant would be required to work together with another fully competent Responsible Officer. After accumulating sufficient experience in the regulated activity concerned, the applicant may apply for a waiver of the licensing condition under Section 134(1) of the SFO. There are also various exemptions to the licensing examinations recognised under Appendices D and E to the Guidelines on Competence.
Minimum Paid-up Share Capital and Liquid Capital Requirements
An FMC shall at all times meet its prescribed minimum paid-up capital and liquid capital thresholds according to its license category, upon obtaining its licence with SFO. It would be prudent for the FMC to maintain an additional capital buffer, over and above the requisite base amount. An FMC should make a reasonable assessment of the amount of additional capital buffer it needs, bearing in mind the scale and scope of its operations.
|Regulated Activity Type 9||Minimum Paid-up Share Capital||Minimum Liquid Capital|
|a) In the case where in relation to Type 9 regulated activity, the corporation is subject to licensing condition that it shall not hold client assets||Not Applicable||$100,000|
|b) In any other case||$5,000,000||$3,000,000|
The Securities and Futures (Insurance) Rules set out the insurance requirements applicable to corporations licensed for certain regulated activities. If you are licensed for Type 1 (dealing in securities), Type 2 (dealing in futures contract) or Type 8 (securities margin financing) regulated activity, you are required to take out and maintain insurance against specific risks for specified amount when the SFC approves a master policy of insurance applicable to you. You are exempted from the above requirement if you are not an exchange participant and your licence is subject to a condition that you shall not hold client assets.
An FMC shall comply with the requirements on Anti-Money Laundering and Countering the Financing of Terrorism [“AML/CFT”] requirements set on them under Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), Cap. 615. This Ordinance provides for the statutory requirements relating to customer due diligence (CDD) and record-keeping on specified financial institutions; and to provide for the powers of the relevant authorities to supervise financial institutions’ compliance with the requirements under this Ordinance. Under the AMLO, the designated relevant authorities (i.e. Hong Kong Monetary Authority, Insurance Authority, Securities and Futures Commission and Customs and Excise Department) published guidelines for their respective sectors.
The AMLO (Amendment of Schedule 2) Notice 2015 came into effect on 1 April 2015 so as to enable financial institutions to continue to carry out relevant CDD measures by means of specified intermediaries until 31 March 2018. AMLO presently requires Licensed Corporations to maintain the identification data, account files, business correspondence and records of transactions for a period of 6 years.
Continuous Professional Training (CPT)
FMCs shall design and implement a continuous education program best suited to the training needs of the licensed representatives or relevant individuals they engaged. Such programs should be able to enhance the individuals’ industry knowledge, skills and professionalism. Sufficient records on the programs and the CPT activities undertaken by the individuals should be kept for a minimum of 3 years and be made available for inspection upon request by the SFC or the HKMA.
Representatives of licensed corporations and relevant individuals of registered institutions are generally required to complete 5 CPT hours per calendar year for each regulated activity which they may carry out except for Type 7 regulated activity (providing automated trading services). They should also retain their own CPT compliance records for a minimum of 3 years.
The license or certificate of registration will indicate:
- Your name
- Your Central Entity number (CE number)
- Effective date of your license or registration
- Types of regulated activity that you are licensed or registered to conduct
- The conditions imposed on your license or registration, if any
- In the case of licensed representatives, the licensed corporations that you are accredited for as a principal
The license must be displayed on the office premises at all times. If you have more than one place of business, a certified copy of your license must be exhibited in a prominent place at each of your other places of business.
All licensed or registered individuals, corporations and authorized financial institutions will need to pay annual license fees within one month after each anniversary date of their licenses or registrations. Failure to make full payment of the annual fee before the due date will attract surcharge on the outstanding amount and possible suspension and revocation of a licence or registration.
Notifications of Events and Changes
Licensed corporations, licensed representatives and registered institutions are required to notify the SFC of certain events and changes in their particulars within the specified time limit.
Notification of Financial Year
As a licensed corporation, you are required to notify the SFC of your financial year end within one month upon the grant of your licence. A licensed corporation or an associated entity of an intermediary may apply for an alternation of financial year end previously notified to the SFC and/or adoption of a period exceeding 12 months as its financial year (Section 155(3) of the SFO).
New premises for record or documents keeping
A licensed corporation needs to apply for the SFC’s approval for each new premises to be used for keeping records or documents (Section 130 of the SFO). An intended new business address will inevitably trigger this application.
Submission of Audited Accounts
Licensed corporations and associated entities of intermediaries (except for those which are authorized financial institutions) are required to submit their audited accounts and other required documents within 4 months after the end of each financial year.
A licensed corporation or an associated entity of an intermediary may apply for an extension of time to lodge its audited accounts (Section 156(4) of the SFO) and the SFC may grant an extension if it is satisfied that there are special reasons for doing so. If a licensed corporation or an associated entity anticipates that an extension of the submission deadline may be required, it should submit its application to extend the submission period well before the deadline.
Furthermore, if a licensed corporation ceases carrying on all of the regulated activities for which it is licensed, it should submit to the SFC its audited accounts and other required documents, made up to the date of cessation, not later than 4 months after the date of the cessation. The same submission requirement applies to an associated entity (which is not an authorized financial institution) of an intermediary upon its ceasing to be such an associated entity.
Submission of Financial Sources Returns
Licensed FMCs are required to submit monthly financial resources returns to the SFC except for those whose licences are subject to the condition that they shall not hold client assets. In such latter case, the corporations concerned shall submit semi-annual financial resources returns to the SFC.
Submission of Annual Returns
Licensed corporations and licensed representatives are required to submit annual returns 30 to the SFC within one month after each anniversary date of their licences. Failure to submit annual return before the due date could result in suspension and revocation of the licence concerned.
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