SFC compliance and licensing hints – Sep 2017

Cold shoulder orders 

The SFC imposed a cold shoulder order against an individual for breaching the mandatary general offer obligation of the Takeovers Code on 30 August 2017, denying direct or indirect access to the Hong Kong securities market for a period of 24 months. According to the SFC’s website, there are currently eight cold shoulder orders in effect. 

When the SFC imposes a cold shoulder order, SFC licensed or registered persons should check whether (i) the individual, or (ii) a corporation controlled by him/her, is a client.  If so, they must stop providing any regulated services to such client for the relevant period unless SFC consent can be obtained and they must not knowingly assist directly or indirectly in breach of the order. Compliance departments should maintain block lists of persons against which cold shoulder orders have been issued, which should be part of the client take-on due diligence process.

What is (not) in the new Licensing Handbook 

The new SFC Licensing Handbook, which was issued in April, consolidated the Licensing Information Booklet and the Licensing FAQs. The SFC’s guidance in relation to the incidental exemptions is now contained in the Licensing Handbook. It provides that persons who are licensed for Type 9 (asset management) regulated activity who wish to carry out Type 1 (dealing in securities) regulated activity do not need to be licensed for Type 1 regulated activity provided the Type 1 activity is carried out solely for the purposes of the asset management business.  The Handbook says “This exemption normally applies to fund managers who place trade orders to dealers […] in the course of managing their clients’ portfolios of securities and/or futures contracts.”. 

The old Licensing FAQs went on to say that the Type 1 incidental exemption also extends to the marketing by Type 9 licensed fund managers of funds which they manage but this language has not been included in the Licensing Handbook. However, our understanding is that there has not been a change of policy so that the exemption still extends to marketing. 

It is clear however that the exemption does not extend to the marketing of, or placing of orders for, funds which are not under the management of the Type 9 licensed manager seeking to rely on the exemption (regardless of whether they are managed by group companies or third parties).