Hong Kong SFC clarifies competence requirements for existing licensed persons intending to provide asset management services

On 23 June 2017, the Securities and Futures Commission of Hong Kong (the “SFC”) issued the “Circular to clarify competence requirements for existing licensed persons intending to provide asset management services” (the “Circular”), with an aim to provide further guidance on how the SFC assesses the competence of a corporation or a responsible officer (“RO”) to carry on asset management activities.

The Circular focuses on the eligibility criteria for licensed persons to be approved to carry out Type 9 regulated activity of asset management with respect to industry experience that may be relevant and acceptable, and also on the conditions for seeking exemptions from passing the required local regulatory papers.

As the title of the Circular suggests, it is directed to existing licensed persons that may consider expanding their scope of business into asset management.  In a press release on the Circular, the SFC’s expresses that it welcomes existing licensees to broaden their business scope in light of the growth in Hong Kong’s asset management industry.

The Circular also emphasizes that the SFC will consider each application for exemption based on the specific circumstances of each case and that interested firms are encourage to approach the SFC to discuss their proposed business plans.

The Circular can be seen as the SFC’s effort to inform the industry that the SFC will continue to take a pragmatic approach in considering licensing applications, and spells the SFC’s intention to encourage existing licensed entities to apply to engage in Type 9 regulated activity of asset management as a stand-alone business, to spur further growth of Hong Kong’s asset management industry.

Considering the mention of the broader industry experience that the SFC would take into account including investment research, private equity and proprietary trading, as well as industry experience in other recognized local or overseas markets, the Circular also suggests the SFC’s welcome attitude for qualified and experienced investment professionals around the globe to seek to be licensed in Hong Kong to engage in asset management.

For details, please refer to our firm’s publication: SFC Clarifies Competence Requirements for Asset Management Services











SFC Consultation Paper on Online Distribution and Advisory Platforms

On 5 May 2017 the Securities and Futures Commission (“SFC”) issued the ‘Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms’ (“Proposed Guidelines”).

In view of the increasing use of electronic distribution channels, the use of algorithms to construct investment portfolios and to provide investment advice(e.g. automated portfolio construction or model portfolios based on a client’s personal circumstances) (commonly referred to as “robo-advice”), SFC issued the Proposed Guidelines to (1) provide guidance and control on the design and operation of online platforms; (2) clarify how suitability requirements would be triggered in terms of online trading; and (3) provide additional safeguard proposed for the sale of complex products on online platforms on an unsolicited basis.

The Proposed Guidelines will be applicable to all SFC licensed or registered persons when conducting their regulated activities in providing order execution, distribution and advisory (including discretionary and automated) services in respect of investment products via online platforms (“Platform Operators”).

We would urge asset management companies to take a closer look to the Proposed Guidelines and provide necessary feedback before the end of the consultation period (4 August 2017) since there is a growing trend for fund houses to develop their own trading platform, and provision of robo-advice. These activities will be caught under the Proposed Guidelines. It would also be helpful to be aware of these requirements when fund houses select distributors and assess whether they are compliant with such requirements.  Lastly, fund houses may wish to take a closer look at the proposed definition of ‘Complex Products’ as set out in the Proposed Guidelines as this will likely impact fund distribution and product design.

Here’s our Legal Update on the Proposed Guidelines under consultation: SFC Consultation Paper on Online Distribution and Advisory Platforms (May 2017)

SFC Further Guidance on Suitability Obligation

Following the regulatory changes in 2016 that increased suitability requirements on licensed persons when soliciting or recommending investment products to clients, the Hong Kong Securities and Futures Commission (SFC) has on 23 December 2016 issued two sets of Frequently-Asked-Questions (FAQs) to clarify and provide further guidance to the industry on meeting the suitability obligation.

The first set of FAQs on Triggering of Suitability Obligations clarifies the circumstances under which the suitability obligation would apply.  The second set of FAQs on Compliance with Suitability Obligations by Licensed or Registered Persons provides further guidance on the SFC’s expectations on satisfying the suitability obligation.

Please refer to our legal update for further information: SFC Further Guidance on Suitability Obligation

Hong Kong Securities & Futures Commission introduces Managers-in-Charge Regime

The Hong Kong Securities and Futures Commission (SFC) has issued its “Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management” which introduces additional specific requirements and expectations of the SFC regarding senior management personnel of licensed corporations (referred to below as “the Managers-in-Charge Circular”).

The Managers-in-Charge Circular was published on 16 December 2016 and shall be effective from 18 April 2017 (“Commencement Date”).  It is intended to enhance accountability and transparency of senior management of licensed corporations in the conduct of business operations. Existing licensed corporations will need to submit to the SFC additional information on and particulars of their senior management personnel who are responsible over 8 core functions (the “Managers-in-Charge”) within 3 months of the Commencement Date, latest by 17 July 2017.  With effect from the Commencement Date, applicants for license with the SFC to engage in regulated activities in securities and futures businesses will need to submit such additional information on their proposed Managers-in-Charge together with the intended human resources and organizational structure when applying to the SFC for license.   Any change in the appointment or particulars of the Managers-in-Charge of a licensed entity should be notified to the SFC within 7 business days.

Core Functions

The new Managers-in-Charge framework would impact senior management persons over the following 8 categories of functions within a licensed corporation:

  1. Overall Management Oversight (eg. Chief Executive Officer, President);
  2. Key Business Line (of the regulated activities – eg. Chief Investment Officer, Head of Equity, Head of Corporate Finance, Chief Rating Analyst, Head of Fund Marketing);
  3. Operational Control and Review (eg. Chief Operating Officer, Head of Operations, Head of Internal Audit);
  4. Risk Management (eg. Chief Risk Officer, Head of Risk Management);
  5. Finance and Accounting (eg. Chief Finance Officer, Financial Controller, Finance Director);
  6. Information Technology (eg. Chief Information Officer, Head of Information Technology);
  7. Compliance (eg. Chief Compliance Officer, Head of Legal and Compliance);
  8. Anti-Money Laundering and Counter-Terrorist Financing (eg. Head of Financial Crime Prevention, Head of Compliance).

Information regarding the job position and reporting lines of the Managers-in-Charge will need to be submitted, together with details on the identity and residence of the Managers-in-Charge.

Read our full publication here:  Managers-in-Charge Regime

Investing via the Shenzhen–Hong Kong Stock Connect – Disclosure and Approval Requirements for SFC authorized funds

Further to the Shanghai-Hong Kong Stock Connect announced in 2014, in August 2016, a good two years later, it was jointly announced by the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) that the Shenzhen–Hong Kong Stock Connect will soon be implemented.  It is anticipated that the Shenzhen-Hong Kong Stock Connect will be launched in November 2016.

Expanded universe of stocks for cross-market access

Stock Connect refers to the program that allows mutual stock market access between Mainland China and Hong Kong, whereby Mainland investors may access eligible Hong Kong stocks within scope through their domestic Mainland securities firms, while Hong Kong investors may access eligible Mainland stocks within scope through Hong Kong brokers. Hong Kong investors already able to access selected stocks listed on the Shanghai Stock Exchange under the Shanghai-Hong Kong Stock Connect will now also have access to selected stock lists on the Shenzhen Stock Exchange (SZSE) through the Shenzhen-Hong Kong Stock Connect.

The Shenzhen-Hong Kong Stock Connect will expand the universe of Mainland stocks that may be accessed by Hong Kong and international investors through the Hong Kong Stock Exchange, in particular eligible constituent stocks of the SZSE Component Index and SZSE Small/Mid Cap Innovation Index.  To be eligible, relevant constituent stock should have a market capitalization of RMB6 billion or above.  All SZSE-listed shares of companies which also has H-shares listed in Hong Kong would also be within scope.   On the other hand, Mainland investors will be able to access constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, any constituent stock of Hang Seng Composite SmallCap Index with market capitalization of HK$5 billion or above, and shares of all companies with both listed H shares and A shares.

ChiNext access restricted

However, while the range of accessible stocks have broadened for investors’ cross-market access, the regulators have stipulated that, for the Northbound link, at the initial stage, only institutional professional investors as defined under Hong Kong law and regulations will be able to invest in shares listed on the ChiNext Board of SZSE.

The restriction that only institutional professional investors may access ChiNext stocks may be considered to be in line with the SFC enhanced investor protection measures including around increased regulatory requirements around suitability of investments and financial products for investors, which may now be exempted only for institutional professional investors or corporate professional investors that satisfy relevant conditions under a designated assessment of investment decision-making process and investment personnel.[1]  The definition of “institutional professional investors” as defined in the Securities and Futures Ordinance (Cap 571) (SFO) covers mostly regulated financial institutions such as licensed investment intermediaries, banks, insurance companies, central banks.  Collective investment schemes authorized by the SFC under Section 104 of the SFO (SFC Authorised Funds), registered schemes or constituent funds under the Mandatory Provident Fund Schemes Ordinance (Cap 485) (MPF Schemes) and registered schemes under the Occupational Retirement Schemes Ordinance (Cap 426) (ORSO Schemes).

Accordingly, investors who are not “institutional professional investors” under Hong Kong law and regulations and initially unable to access ChiNext stocks under the Shenzhen-Hong Kong Connect may only have exposure through SFC-Authorized Funds.  Investment by MPF Schemes in Mainland securities are limited to 10% of the scheme’s net asset value.

SFC Updated FAQ re Shenzhen-Hong Kong Connect

On 25 October 2016, the SFC updated question No. 19 under its “Frequently Asked Questions on Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds” (SFC’s FAQ) regarding disclosure and approval requirements for participation in Stock Connect, to include Shenzhen–Hong Kong Stock Connect within scope.  Details are set out in our latest publication: shenzhen-hong-kong-stock-connect-requirement-for-sfc-authorized-funds.

[1] Please refer to our firm’s publication dated 20 July 2016 “New Changes to Hong Kong Professional Investors regime” regarding the enhanced investor protection and suitability requirements.


自内地与香港基金互认安排(“基金互认”)于2015年7月1日起正式实施至今,已有多达40余只内地基金成功南下获得香港证监会认可于香港市场公开销售。按照基金互认的相关规定,内地基金在获得香港证监会认可后(“内地互认基金”),除须符合相关内地法律法规及基金合同的要求外,还须遵守香港证监会不时颁布的有关内地互认基金获认可后的持续合规要求以及基金于香港销售方面的要求。下文就内地互认基金获香港证监会认可后的持续合规问题,从持续信息披露、基金销售文件更改以及基金广告/推广材料等多方面进行分析和阐释:  内地互认基金香港认可后持续合规解析








[1] 经合组织已建立一个门户网站,提供有关已承诺实施自动信息交换之司法辖区税务居住地规则的信息: http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/#d.en.347760


Hong Kong Implementation of Common Reporting Standard and Automatic Exchange of Information

The Common Reporting Standard (CRS) introduced by the Organization of Economic Cooperation and Development (OECD) for inter-governmental automatic exchange of information (AEOI) is a significant initiative that could be a paradigm shift in the financial industry.

CRS will soon be implemented in Hong Kong, following the Inland Revenue (Amendment) (No.3) Ordinance 2016, published in the Gazette and became effective on 30 June 2016. Financial institutions and intermediaries in Hong Kong will be under legal obligation to report to the Inland Revenue Department (IRD) on financial accounts for reportable persons, starting 2017, with first reporting to be made to IRD by 31 May the following year, ie. 31 May 2018. Hong Kong IRD will conduct the first automatic information exchange with relevant jurisdictions on a reciprocal basis by the end of 2018.

According to the IRD: Under the AEOI standard, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions in accordance with due diligence procedures.  FIs are required to collect the reportable information of these accounts and furnish such information to the Department.  The Department will exchange the information with the tax authorities of the AEOI partner jurisdictions on an annual basis.

The AEOI requirement will cover individuals who are tax residents of “reportable jurisdictions”, being jurisdictions with which Hong Kong has entered into an AEOI arrangement.  Financial institutions are not required to report information on accounts where the account holder is not tax resident in a jurisdiction with AEOI agreement with Hong Kong.

As stated, in general, whether or not an individual is a tax resident of a jurisdiction is determined by having regard to the person’s physical presence or stay in a place (e.g. whether over 183 days within a tax year) or, in the case of a company, the place of incorporation or where the central management and control of the entity lies.[1] FIs may request account holders to provide self-certifications on tax residency in order to determine whether the accounts fall within scope of reporting under AEOI.

On 9 September 2016, the IRD issued the “Guidance for Financial Institutions” (Guidance), with further detailed guidelines on the relevant reporting requirements and due diligence procedures, and includes clarifications with respect to collective investment schemes, and the treatment of trusts. A summary of the Guidance is set out in this update: crs-legal-update.

[1] OECD has established a portal which provides information on tax residency rules in jurisdictions which have committed to implementing AEOI:


Update on Fund Structures

Fund sponsors now have new legal forms to consider when structuring investment funds. This update highlights recent developments of note.

Cayman Islands Limited Liability Company

A long anticipated Cayman Islands Limited Liability Companies Law, 2016 came into force 8 July 2016.  The registration of a limited liability company (“LLC”) will commence 13 July 2018.  The LLC is an additional structure available in Cayman Islands which is closely aligned with that of a Delaware limited liability company, with certain modifications. For example, the Delaware limited liability structure provides for legal segregation of assets and liabilities, which is similar to the structure of a Cayman Islands segregated portfolio company, but not the LLC.

Similar to the Cayman Islands exempted company, the LLC is a body corporate with a separate legal personality, except that it also encompasses the flexibility of an exempted limited partnership (“ELP”).  It does not have share capital and the economic interests of members of an LLC is represented by way of capital account, which allows for different profits and loss allocation and fees arrangement amongst members.  In addition, the LLC may be governed by some or all of its members or appointed non-member managers, unlike an exempted company which is managed by the board of directors, or an ELP which is managed by the general partner.

Considering the flexibility, the potential usage of the LLC structure could be broad.  However we envisage that it may initially be utilized primarily by US-based managers or for US investors, due to administration efficiency and investors familiarity, adopting similar structures both onshore and offshore.  The LLC structure may be adopted in place of Delaware limited liability company.  The Asian market may move slower in adopting the LLC structure, but the LLC can become popular quickly, for the reasons noted above, as an alternative structure for private equity funds which traditionally adopts the ELP structure. The latter requires the appointment of a general partner and does not possess a separate legal personality.  The LLC structure could be well-suited for private equity funds and other closed-end funds where the afforded flexibilities would meet the varied commercial needs of fund promoters and partners.

Cayman Islands exempted companies may be converted into LLC structure upon complying with relevant procedures and filing requirements in the Cayman Islands.

Hong Kong open-ended fund company

Another structure which has been introduced as a result of market demand is the Hong Kong open-ended fund company (the “OFC”).  The Hong Kong Government published in the Gazette on 10 June 2016 the Securities and Futures (Amendment) Ordinance 2016 (the “Amendment Ordinance”), which introduces a new OFC structure in Hong Kong.  The main provisions of the Amendment Ordinance will commence operations on a date to be appointed by the Secretary for Financial Services and the Treasury.  It is anticipated that the OFC will also be subject to further implementing rules to be issued by the Hong Kong Securities and Futures Commission (SFC).

An OFC is an open-ended collective investment scheme set up in the form of a company, but with the flexibility to create and cancel shares for shareholders’ subscription and redemption in the funds, which is currently not possible for Hong Kong companies under the Companies Ordinance. Also, OFCs will not be confined by restrictions on distribution out of share capital under the Companies Ordinance. Instead, OFCs may distribute out of share capital subject to solvency and disclosure requirements.

Some of the other key features of the OFC are that a proposed OFC needs to be registered with the SFC before incorporation. The SFC will be the main regulatory of the OFC.  The OFC, apart from a board of individual directors of at least 2, must delegate asset management duties to an investment manager which is licensed by the SFC to conduct type 9 (asset management) regulated activity.  It must also appoint a custodian in respect of its assets.

Publicly-offered OFCs authorized by the SFC will be exempted from Hong Kong profits tax.  It is expected that the OFC will provide an alternative structure for retail funds in Hong Kong, particularly those applying for retail distribution in China under the Mutual Recognition of Funds scheme.  Prior to the OFC, the Hong Kong unit trust is the only legal form available for Hong Kong domiciled funds.

Along with the requirement that an OFC must appoint a Hong Kong licensed investment manager, the new legal form is intended to enhance Hong Kong’s position as an asset management and funds centre.  However, privately-offered OFCs need to have its central management and control outside of Hong Kong in order to be exempt of Hong Kong profits tax (ie. non-resident) and subject to certain conditions.  Therefore, the private funds industry may be slow in adopting this structure.  We anticipate that the industry will continue to lobby for more favorable tax position where OFC structure may be profit tax exempt, irrespective of where it is centrally managed and controlled.

This update is provided for general information only and is not intended as legal advice in any specific case.  

Please contact Vivien Teu (vivien.teu@vteu.co) or Penelope Shen(penelope.shen@vteu.co) for any enquiry or assistance on the subject matter.