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Focus: Financial Services – March 2005

Proposed amendments to Securities and Futures Ordinance – Hong Kong licensing requirements

In brief: A number of proposed changes to the licensing regime under the Hong Kong Securities and Futures Ordinance were recently announced by the Hong Kong Securities and Futures Commission, as Partner Matthew Barnard (view CV) and Senior Associate Daniel Yeo report. 

Announcement

The SFC recently released a consultation paper proposing amendments to the licensing requirements under the Hong Kong Securities and Futures Ordinance (the SFO). Comments in relation to these amendments are required to be submitted to the Hong Kong Securities and Futures Commission (the SFC) by 15 March 2005, following which the SFC will issue its final recommendations. A summary of the proposed changes is set out below.

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Disposal of securities to non-professional investors to require licence

The SFO contains an exception to what constitutes 'dealing in securities' for the act of acquiring, disposing, underwriting or subscribing for securities as principal. The SFC proposes to remove from this exception 'disposing' of securities as principal.

This means that a person that disposes of securities as principal will need to obtain a securities dealing licence, unless another relevant exception applies (such as the disposal of securities to professional investors). If this change is made, then persons that are currently relying on the exception for disposals of securities as principal, as a basis for:

  • the person not needing to have a securities dealing licence; or
  • not taking steps to ensure that a counterparty is a professional investor,

will need to review their securities issuing arrangements and related licensing issues.

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Licensing of real estate investment trust managers

Under the current licensing regime, management companies managing investment portfolios comprised of 'securities' or 'futures contracts' as defined under the SFO require an asset management licence. This may not apply to a manager of REITs because the manager may only be managing direct investments in real estate. The SFC proposes to extend the definition of 'asset management' to include 'real estate investment scheme management', ie, providing a service of operating a collective investment scheme for another person where:

  • the property that is being managed under the scheme consists primarily of immovable property; and
  • the scheme is authorised for retail distribution in Hong Kong under the SFO.

To obtain an asset management licence, the applicant must:

  • comply with the SFC's guidelines on competence and internal controls regarding the appointment of qualified personnel and risk management;
  • appoint at least two responsible officers to supervise the asset management activities directly, one of whom must be an executive director directly responsible for supervising the asset management activities;
  • ensure that all substantial shareholders (generally, those holding at least 10 per cent of voting shares) and senior officers of the manager are acceptable to the SFC; and
  • meet relevant minimum capital requirements (generally, HK$5 million paid up capital and HK$3 million liquid capital).

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Money brokers not required to obtain a securities dealing licence

Entities that carry on money broking business in Hong Kong are required to be approved by the Hong Kong Monetary Authority (the HKMA) under the Hong Kong Banking Ordinance.

Money broking includes negotiating, arranging or facilitating agreements with an authorised bank or deposit taking institution for the making of deposits and the selling or buying currencies.

Certain activities of money brokers may fall within the existing definition of 'dealing in securities' under the SFO, requiring the money broker to also obtain a securities dealing licence from the SFC. Hence, the proposal to amend the definition of 'dealing in securities' to exclude HKMA-approved money brokers dealing on behalf of authorised banks or deposit taking institutions constitutes a relaxation of the regulation of that industry.

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Fund managers may provide incidental advisory activities

Under the existing licensing regime, fund managers that provide portfolio management services for funds are required to hold an asset management licence.  If they also advise their fund clients on the purchase or sale of securities or futures contracts (including the issue of research reports and specific dealing advice) they are also required to be licensed to undertake these activities. In response to industry comment, the SFC proposes to amend the definition of 'advising on securities' and 'advising on futures contracts' to exclude a person licensed to conduct asset management activities where:

  • the person provides portfolio management services consisting of 'securities' or 'futures contracts'; and
  • the relevant advisory activities are carried out solely for the purposes of carrying on portfolio management services and other asset management activities.

This means fund managers licensed to undertake the above asset management activities will not be required to become licensed to provide incidental advice on related securities or futures contracts.

For further information, please contact:

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