SFC licensing and compliance hints – Mar 2019

Licensing for private equity firms  

Do private equity firms need SFC licences?

In paragraphs 1.4.18 and 1.4.19 of the latest edition of its Licensing Handbook (February 2019), the SFC has confirmed that private equity firms do indeed need to be licensed if their investment and/or advisory services involve shares or debentures of private offshore companies. This is because only shares or debentures of Hong Kong incorporated private company are carved out of the definition of “securities” under the Securities and Futures Ordinance. 

What type of licence does a private equity firm require? 

The SFC’s position is that a private equity firm can only obtain a Type 9 licence if it will have power to make discretionary investment decisions for a (private equity) fund. Otherwise, the firm would need to obtain a Type 1 licence (to conduct deal sourcing, negotiation and execution for the fund); and/or a Type 4 licence (to provide investment advice for the fund, unless the wholly-owned group company exemption was available).  

In the case of many of the private equity firms operating out of Hong Kong however, while the decision as to whether or not to make an investment following the due diligence report is usually made by the investment committee, Hong Kong office staff have broad discretion in relation to the subsequent contract negotiations with the seller / issuer and it could be argued that this is an integral part of the investment decision-making process and that therefore, in our view, the SFC should be willing to grant type 9 licences in these situations. It is hoped that moving forward the SFC will be willing to interpret “asset management” in this way so that Type 9 licensed private equity firms can also conduct dealing in relation to these type 9 activities without having to obtain a separate type 1 licence.

Responding to SFC survey – reminder 

Responses to the 2018 SFC Asset and Wealth Management Activities Survey are due on 1 April 2019 (see circular). We recommend that clients participate in the survey to assist the SFC in its understanding of the industry and to promote a good relationship with the regulator. From this year onwards, submissions may be made through the SFC’s online portal: https://wings.sfc.hk/awmas/#/en