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The Securities and Futures Commission (SFC) announced a regulatory framework for virtual assets on 1 November 2018. Our article of 22 November 2018 explains the framework and answers various questions for asset managers. On 4 October 2019, the SFC issued terms and conditions (Terms and Conditions) which licensed corporations will need to comply with when managing portfolios, or portions of portfolios, that invest in virtual assets, such as cryptocurrencies, crypto-assets and digital tokens.
The Terms and Conditions will be imposed by way of a licensing condition on a licensed corporation that manages a fund or discretionary account (or portion of a fund or discretionary account) where either (i) the stated investment objective of the fund or discretionary account is to invest in virtual assets or (ii) the intention of the fund or discretionary account is to invest 10% or more of its gross asset value in virtual assets (Virtual Asset Fund Managers).
The Terms and Conditions make it clear that only “professional investors” (as defined under Schedule 1 to the Securities and Futures Ordinance (SFO)) are allowed to invest in virtual asset funds that are not authorized by the SFC under section 104 of the SFO.
The Terms and Conditions are substantially similar to the requirements set out in the Fund Manager Code of Conduct (FMCC), the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code of Conduct) and other requirements under subsidiary legislation of the SFO.
Set out below are the key additional requirements which Virtual Asset Fund Managers should be aware of to ensure compliance with the Terms and Conditions:
|Financial resources: Maintain at all times a minimum liquid capital of HK$3 million or its variable required liquid capital (whichever is higher).
|Operational control: Establish and maintain effective policies and operational procedures and controls including, but not limited to, controls over trading and safeguard of fund assets, IT systems and infrastructure.
Appointment of independent custodian
|Provision of information: Make adequate disclosure of information which is necessary for fund investors to make an informed decision about their investment (similar to the requirements under the FMCC) including, but not limited to, list of trading platforms and custodians which the fund uses and key risks associated with the fund’s investment in virtual assets (see Appendix 3 to the Terms and Conditions for examples of risks to be disclosed).
|Anti-Money Laundering and Counter-Terrorist Financing: Ensure proper safeguards to mitigate the risks of money laundering and terrorist financing, especially in respect of subscriptions made by fund investors using virtual assets.
|Initial Offerings: Record reasons for differences between the intended and actual allocation of virtual assets received in an initial offering.
|Marketing: Coordinate with distributors and establish and implement measures to ensure the virtual asset fund is only distributed to “professional investors”.
|Insurance: Use reasonable endeavours to acquire and maintain adequate insurance over the virtual assets.
|Report to SFC: Report to SFC as soon as practicable upon happening of any actual or suspected material non-compliance with the Terms and Conditions or any other applicable legal and regulatory requirements.
Appendix 1 to the Terms and Conditions sets out additional requirements that will apply to Virtual Asset Fund Managers managing discretionary accounts, as well as certain requirements of the Terms and Conditions that are not applicable to the management of discretionary accounts. The additional requirements are similar to those applicable under the FMCC and the SFC Code of Conduct on suitability and the minimum content of client agreement.
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