SFC compliance and licensing hints – Jun 2017

Licensing conditions

Potential purchasers of a licensed company obviously need to check what type of activity the company is licensed to conduct, but they also need to check whether the company has any conditions to limit its scope of activities and whether any of the continuing responsible officers are subject to conditions. Conditions are commonly imposed on a licensed company based on the scope of business and target client base as disclosed in the company’s business plan as submitted to the SFC when it applied for its licence. Common licensing conditions are:

• The company shall not hold client assets.
• The company shall only provide services to professional investors.
• For Type 1 regulated activity, the company shall only carry on the business of dealing in collective investment schemes.
• For Type 9 regulated activity, the company shall not conduct business involving the discretionary management of any collective investment schemes.

If the continuing or remaining responsible officers have the “non-sole” condition imposed on their licences, the company would need to either have the “non-sole” condition removed or hire an additional responsible officer that is not subject to that condition.

If the scope of business activities is to be changed or expanded, the company should notify the SFC, and ensure that it has appropriate resources and internal control policies for the new or expanded activities.

What is in the new Licensing Handbook?

The SFC issued the new Licensing Handbook in April 2017 which consolidates information from its Licensing Information Booklet and some of its FAQs and circulars. The SFC normally does not grant licences to back-office staff (including compliance officers and in-house legal counsel) who do not conduct any regulated activities for the licensed company. In the new Licensing Handbook, it also mentions that if a licensed individual becomes a back-office staff by reason of a change of position within the firm, s/he should request a revocation of her/his licence forthwith under section 195(1)(d) of the SFO.

As mentioned in our articles on the new manager-in-charge regime, certain back-office staff may need to be notified to the SFC as manager-in-charge of a core function such as Compliance, although they may not need to be licensed as the core function does not involve regulated activity.

New client agreement requirements in force

The SFC published a revised Code of Conduct on 9 June 2017 which incorporates the new provisions relating to client agreement requirements which came into effect on that day. The requirements include the insertion of a clause on suitability and non-derogation and the observance of paragraph 6.5 which precludes the agreement containing any provisions which are inconsistent with the Code of Conduct or which might misdescribe the actual services to be provided to clients.