SFC licensing and compliance hints

You will need a new licence if the activity is not “incidental” anymore!

There are various situations in which a firm can be exempted from having to have an SFC licence and one of them is where the “incidental exemption” applies. The way this exemption works is that a firm is not required to also be specifically licensed for a regulated activity if the firm is only conducting that activity wholly incidentally to the main activity for which it is licensed. This means that a firm must have a licence in the first place to be able to rely on this exemption (unlike the “wholly owned group exemption”).

It is important of course to understand the scope of permitted “incidental” activities when the licence is first granted; but it is almost more important to consider the scope of this exemption prior to giving up one of several licences (and remaining licensed to conduct other regulated activities).

For example if a firm decides to terminate all the sub-advisory arrangements between a Hong Kong Type 9 asset manager and its parent company (the manager of the fund), and move its portfolio managers back to the parent, the Hong Kong firm will need to give up its Type 9 licence (unless it has any of its own funds or managed accounts). But if the firm wants to keep the trading desk in Hong Kong in order to continue to handle securities or futures contracts trades for those portfolio managers (who have moved to the parent company), the Hong Kong company would also need to apply for a Type 1 (securities) and a Type 2 (futures contracts) licence (and its minimum liquid capital and paid-up share capital requirements would both go up even though the level of activity had been reduced).

This is because the placing of securities / futures contracts orders by an asset management firm for funds / portfolios managed by the firm itself (although technically a Type 1/2 regulated activity) does not require an actual Type 1/2 licence for the reason that the activity is wholly incidental to its Type 9 asset management activity. On the other hand, the placing of orders for funds / portfolios managed by a group company or an affiliate is not considered incidental to any of the other activities conducted by the Hong Kong firm, which means that to do so the asset management firm would also need a Type 1/2 licence.

This concept is also relevant in a fund specific context. If the asset manager does not need to give up its Type 9 licence, but ceases to manage one of the group funds, it will automatically lose its entitlement to continue placing trades for that fund under the “incidental exemption”. Therefore it would need to get a Type 1/2 licence to continue providing the trading function.

Care therefore needs to be taken even before reducing a business line just in case the reduction triggers the need for a new licence, as illogical as this may sound.

You can find more information about the “incidental exemption” in paragraphs 1.3.3 to 1.3.6 of the SFC’s Licensing Handbook, or speak to us if you wish to know more.