- Establishing an Asset Management Presence in Hong Kong and Singapore
- August 19, 2011
- Law Firm: Norton Rose Canada LLP - Montreal Office
Asia is viewed as a key area for the future growth of the asset management industry, with many financial institutions showing a keen interest in expanding in the region. Hong Kong and Singapore with developed financial markets providing access to mainland China and India, as well as other countries in the region, are key jurisdictions for asset management companies to grow their businesses. Reasons for such growth differ, for example whether it is to raise capital or make investments and have assets managed by regionally experienced personnel. However regardless of the motive or the investment strategy or type of funds managed, a greater understanding of the regulatory regimes in these jurisdictions can help asset managers make business expansion plans.
This briefing provides an overview of the key regulatory and licensing issues required to establish an asset management business in Hong Kong and Singapore. In particular it covers the licensing requirements for a corporation and its officers to conduct asset management, the local regulatory authorities’ licensing process and the key considerations for obtaining regulatory approval in these jurisdictions.
Overview of the Hong Kong regulatory and licensing regime
In Hong Kong the Securities and Futures Commission (SFC) is responsible for administering the securities and futures market. The principal legislation in this area is the Securities and Futures Ordinance, Cap. 571 (SFO), together with subsidiary legislation, regulations and guidelines.
Under the SFO, the following activities constitute regulated activities:
a. Type 1: dealing in securities
b. Type 2: dealing in futures contracts
c. Type 3: leveraged foreign exchange trading
d. Type 4: advising on securities
e. Type 5: advising on futures contracts
f. Type 6: advising on corporate finance
g. Type 7: providing automated trading services
h. Type 8: securities margin financing
i. Type 9: asset management
j. Type 10: providing credit rating services
If a firm carries on a business in any of the above regulated activities in or from Hong Kong, or holds itself out as carrying on such a business, it is required to set up a presence in Hong Kong and be appropriately licensed by the SFC.
For each regulated activity, there are exemptions from licensing that need to be looked at on a case-by-case basis.
This briefing focuses on the licensing of a corporation by the SFC. Whilst the terminology for a bank being registered with the SFC to carry out a regulated activity is different, the process is broadly similar - although the primary regulator will be the Hong Kong Monetary Authority. An explanation as to the differences is beyond the scope of this briefing, but we would be happy to discuss.
The most relevant licences for the asset management industry are Type 9 (asset management) licence, Type 4 (advising on securities) licence and Type 5 (advising on futures contracts) licence. In addition a Type 1 (dealing in securities) licence may be necessary for the purposes of marketing, or dealing on behalf of, a fund product.
Broadly, a Type 9 licence covers the provision of a service to manage a portfolio of securities or futures contracts for another person. This category of regulated activity will cover discretionary investment managers, whether managing a hedge fund, account or related fund.
Of interest, the Fund Management Activities Survey 2010 published by the SFC in July 2011 reports, amongst other things, a 10% increase in Type 9 Licensees and as at April 2011 there were 814 Type 9 licensed corporations (16 more than at the end of 2010). The number of individuals licensed to conduct a Type 9 regulated activity grew in the same period by 719.
Type 4 licence covers giving advice or issuing analyses or reports on the timing or terms on which particular securities should be acquired or disposed of. Based on a typical structure (with an offshore investment committee), this is a more common licence held by private equity fund advisers in Hong Kong.
A Type 5 licence is similar to a Type 4 licence but relates to future contracts.
A Type 1 licence covers the making of an agreement and its offer or inducement and attempted inducement of another person to acquire, dispose of, subscribe for, underwrite or secure a profit from securities. In the context of an asset management industry this is relevant to the marketing of funds, as well as dealing in securities in the absence of a Type 9 licence.
In this regard, it is relevant to note that the Type 9 licence not only covers portfolio management activities, but also permits incidental marketing of funds which are managed by the licensed corporation as well as incidental research and securities analysis. Consequently, such incidental activity allows a Type 9 licensed corporation to carry out activities (on a limited basis) without the need to obtain Type 1 and Type 4 licences, respectively.
Who is required to be licensed?
A Hong Kong incorporated company (Applicant Company) will need to obtain a licence if any of its proposed activities fall within the definition of one of the regulated activities.
The individuals who carry on regulated functions on behalf of a licensed corporation are required to be licensed representative accredited to the licensed corporation (LRs). For the purpose of obtaining a licence, an Applicant Company will need to appoint at least two such individuals as responsible officers (ROs). ROs are LRs who actively participate in or directly supervise the regulated activity to be conducted by the application corporation. At least one RO must be an executive director of the corporate entity that actively participates in or is responsible for directly supervising the conduct of the Type 9 regulated activity for which they are licensed. Every executive director who is an individual must be approved by the SFC as a RO.
The SFC acknowledges that in certain circumstances it is not practicable for a fund manager to have two ROs in Hong Kong at all times, but there must in all cases be at least one RO resident in Hong Kong. However where an RO is based outside of Hong Kong, he or she must be subject to the “non-sole” condition (see the section headed “What licence restrictions can be imposed?”).
What are the criteria to be licensed?
The main criteria are the fitness and propriety and competency of both the Applicant Company, and those who will carry out regulated functions on its behalf.
Fitness and propriety
The SFC will refuse to grant a licence unless the Applicant Company satisfies the SFC that it is fit and proper and its officers, including LRs and ROs, are also fit and proper to be licensed for the relevant regulated activity; the assessment is based on whether the person is financially sound, competent, honest, reputable and reliable.
In determining whether an Applicant Company is competent to carry on a regulated activity, the SFC will consider the Applicant Company’s organisational structure and the combined competence of its LRs, directors and its substantial shareholders.
In determining whether a LR is competent to carry on a regulated activity, generally the individual will need to satisfy the SFC that he/she:
a. either has high school level academic qualification or has passed one of the recognised industry qualifications; and
b. passed one of the recognized local regulatory framework papers unless the SFC exercises discretion to grant an exemption.
The SFC will expect the LR to have basic understanding of the market he/she will work in.
In determining whether a RO is competent to carry on a regulated activity, the individual will need to satisfy the SFC that he/she:
a. has a relevant degree (Accounting, Business Administration, Economics, Finance or Law or other associated degrees) or, professional qualification in Law, Accounting or Finance;
b. possesses a minimum of 3 years relevant industry experience over the 6 years immediately prior to the date of application;
c. a minimum of 2 years proven management skill and experience; and
d. passed one of the recognized local regulatory framework papers unless the SFC exercises discretion to grant an exemption.
The SFC’s Pragmatic Approach to Licensing Fund Managers (June 2007) (Circular) clarified that the SFC accepts both direct and indirect asset management experience in the assessment of individual RO’s competency. Direct asset management includes experience in the areas of proprietary trading, research, private equities, special situations and other alternative investments. Indirect experience may have been gained in the marketing and sale of financial products or risk management of funds. An RO with indirect experience only will be subject to the “non-sole” licensed condition (See section headed “What licence restrictions can be imposed?”).
Whilst the Circular focused on the hedge fund industry, the pragmatic approach may be applied to other discretionary fund managers.
What are the exemptions to regulatory exams?
The SFC has provided various exemptions from the requirement to pass local regulatory framework exams. These may be applied on a case-by-case basis, and the grant of any exemption is entirely at the SFC’s discretion.
It is worth noting that the Circular sets out a particular exemption from meeting the local regulatory examination requirement for Type 9 ROs if the following conditions are met:
a. The person has over 8 years of industry experience in recognized markets. Alternatively, the person must already be registered or licensed in the UK or US for investment management or advisory business;
b. The firm will only serve professional investors;
c. The firm is able to confirm that regulatory and compliance support will be provided to the person; and
d. The person should take a post-licensing refresher course on local regulations.
What are the capital requirements?
A licensed corporation is required to comply at all times with the Securities and Futures (Financial Resources) Rules. The level of capital required varies depending on the licence but for a Type 9 licensed corporation, that does not hold client assets, there is a minimum liquid capital requirement of HK$120,000. There is no minimum paid-up share capital requirement. The same requirements apply to a licensed corporation with a Type 4 and/or Type 5 licence (whether they also hold a Type 9 licence or not).
In contrast, a Type 1 licensee that is not an approved introducing agent or trader requires a minimum liquid capital of HK$3,000,000 and if it provides securities margin financing, a minimum paid-up share capital requirement of HK$10,000,000.
If a licensed corporation holds, for example, Types 1 and 4 licences, the higher capital requirements will apply, i.e. the capital relevant to a Type 1 licence.
What is the licence application process?
The SFC requires a number of forms to be completed which can be found on the SFC’s website (www.sfc.hk). These should be accompanied by various documents in support of the application. Of particular importance is the regulatory business plan setting out in detail the proposed activities to be undertaken, including operation details such as risk management, segregation of functions, etc. It is also necessary to submit a draft client agreement and compliance manual.
The SFC requires information in relation to the structure of the Applicant Company and its substantial shareholders, and as such, all the directors (both active and non-active directors, including alternate directors) of the Applicant Company and substantial shareholders will need to complete SFC application forms.
The SFC also requires individual shareholders and executive directors of the intermediate and ultimate holding companies to complete and submit application forms.
Prior to the submission the SFC encourages applicants to meet them, and we would advise this at a stage when the business plan is clear and the timeframe for setting up the business is generally established.
What is the timing?
The SFC’s stipulated timeframe for processing a full licensing application is 15 weeks, although this may be longer or shorter depending on the complexity of the application, and the SFC’s work load.
It is worth mentioning that under the Circular, the SFC’s approach is to provide an expedited process for hedge fund managers serving professional investors only and which are already licensed or registered by overseas regulatory bodies such as the Financial Services Authority in the UK or the Securities and Exchange Commission in the US, provided they have satisfactory compliance records. This process may also be available where the parent company of an Applicant Company is so licensed or registered and has satisfactory compliance records.
What licence restrictions can be imposed?
A licence may be limited by conditions, for example common for hedge fund managers and other private fund managers is that the licensed corporation will serve "professional investors" only (as defined in the SFO and will include high net worths individuals and unregulated investment companies), and more generally that the licensed corporation will not hold client assets.
Further if an RO is based outside of Hong Kong he/she will be subject to a “non-sole” condition. Such condition means that he or she, when actively participating in or directly supervising the regulated activity, must be under the general supervision of another RO who is not subject to the “non-sole” condition.
For LRs, where an individual satisfies the competence requirements other than having passed the local regulatory exam, the SFC may grant approval on condition that he/she must pass a recognised local regulatory framework paper within six months of obtaining the approval.
What may I do before the licence is granted?
Relying on an exemption from a Type 4 or 5 licence contained in the SFO, and as interpreted in SFC FAQs, a person such as a fund manager may, as a precursor to obtaining a licence, establish a presence in Hong Kong and, conduct securities research and analysis. This may only be provided to any of its wholly owned subsidiaries, its holding company that wholly owns the company or other wholly owned subsidiaries of that holding company and for such group companies’ own consumption. This will be of assistance to many overseas fund managers wishing to open an “advisory and research only” operation in Hong Kong whether prior to (or instead of) committing to a larger management office in Hong Kong.
Overview of the Singapore regulatory and licensing regime
The Securities and Futures Act, Cap. 289 (SFA) governs the activities of the securities and futures markets and is administered by the Monetary Authority of Singapore (MAS). The principal legislation in this area is the SFA, together with subsidiary legislation, guidelines and notices.
Under the SFA, any person who wishes, whether as principal or agent, to carry on business in any regulated activity or to hold himself out as carrying on such business must be licensed by the MAS, unless specific exemptions apply.
There are currently 8 types of regulated activities which require capital markets services licensing under the SFA:
a. dealing in securities;
b. trading in futures contracts;
c. leveraged foreign exchange trading;
d. advising on corporate finance;
e. fund management;
f. real estate investment trust management;
g. securities financing; and
h. providing custodial services for securities.
Provision of financial advisory services in respect of investment products including collective investment schemes, securities, futures and life insurance is separately regulated by the MAS under the Financial Advisers Act (Cap. 110).
The SFA prohibits a person from carrying on business in any of the above regulated activities under the SFA or holding himself out as carrying on such business unless such person holds a capital markets services licence (CMSL) for that regulated activity or is otherwise exempted from holding a CMSL.
Regulated activities under the SFA which are relevant to asset managers typically include: (a) fund management; (b) advising on corporate finance; (c) real estate investment trust management; and (d) dealing in securities. Exemptions are available in certain cases including servicing no more than 30 qualified investors and or where the conduct of a regulated activity is incidental to licensed activities (for instance, an exemption from applying for CMSL may apply to a person whose dealing in securities is solely incidental to his carrying on business in fund management or a person who is licensed as a financial adviser and who carries on fund management for or on behalf of a client in connection with advice given by such financial adviser).
Who is required to be licensed?
A Singapore incorporated company (or branch of a foreign company registered in Singapore) will need to apply for and obtain a CMSL if its proposed activities fall within the definition of any of the SFA regulated activities.
Persons who are employed by or acting for the CMSL holder in carrying out a regulated activity are also required to be notified as appointed, provisional or temporary representatives (Representative) under the Representative Notification Framework (RNF). The CMSL applicant is required to employ at least 2 full-time professionals, each with at least 5 years relevant working experience in reputable jurisdictions, who are appointed Representatives.
What are the criteria to be licensed?
Application for CMSL
An applicant for a CMSL will be required to complete and submit to the MAS prescribed application forms for a CMSL in respect of each regulated activity. Pursuant to MAS guidelines, the applicant should satisfy certain key criteria including maintaining prescribed base capital requirements (BCR), having an established track record in the regulated (or related) area for the past 5 years, and having a physical presence and substantive operations in Singapore.
As regards personnel requirements, the applicant is required to employ at least 2 full time individuals as appointed Representatives in respect of each regulated activity for which it is seeking to be licensed. The CEO, Representatives and directors are typically expected to have a minimum of 5 years of relevant working experience (for REITs, the directors and CEOs are expected to have at least 10 years relevant experience, including 5 years at management level) and there is a requirement that the CEO or an executive director who exercises management oversight of operations must be resident in Singapore.
As a general requirement, the applicant, its officers, employees (including Representatives) and substantial shareholders should satisfy “fit and proper” criteria in MAS guidelines. The “fit and proper” requirements have to be met on an on-going basis and the onus is on each person to establish that it or he is “fit and proper”. The MAS will broadly consider the following factors:
a. honesty, integrity and reputation;
b. competence and capability;
c. financial soundness.
The MAS may grant a CMSL to an applicant which does not satisfy all the prescribed requirements at the time of application, subject to such additional conditions as may be imposed.
Notification of Representatives under the RNF
An applicant intending to appoint an appointed, provisional or temporary Representative in respect of a regulated activity under the SFA must lodge a notification of intent with the MAS. The provisional Representative scheme gives the relevant individual a grace period of 3 months to pass requisite entry and qualification examinations while the temporary Representative scheme is intended to address unexpected business needs by allowing overseas-based representatives to conduct regulated activities on a short-term basis. In all other cases, employees who are conducting the regulated activities which an application is to be licensed for will be notified as appointed Representatives.
An appointed Representative is required to satisfy certain minimum academic qualification requirements:
a. in the case of a Representative who sat for GCE “O” Level Examinations before or in the year 1980,
i. qualifications higher than or equal to at least 4 GCE “O” Level credit passes; or
ii. qualifications higher than or equal to at least 2 GCE “O” Level credit passes and at least 3 years of relevant and continuous working experience over the past 5 years in respect of that regulated activity; and
b. in any other case, qualifications higher than or equal to at least 4 GCE “O” Level credit passes.
An appointed Representative is also required to sit and pass relevant modules of the Capital Markets and Financial Advisory Services Examinations.
In the case of Representatives, the onus is on the CMSL holder to establish to MAS’ satisfaction, that the Representative is “fit and proper”.
What are the exemptions to applying for a CMSL?
Certain persons are exempted from having to apply for a CMSL. These include persons identified in Section 99 and Schedule 3 of the SFA such as:
a. banks licensed under the Banking Act, merchant banks approved as financial institutions under the Monetary Authority of Singapore Act, finance companies licensed under the Finance Companies Act and companies or societies registered under the Insurance Act;
b. advocates, solicitors and public accountants whose carrying on of business in a regulated activity is solely incidental to their practice of law or accounting (as the case may be);
c. an approved trustee for a collective investment scheme whose carrying on of business in a regulated activity is solely incidental to its carrying on of activities as such approved trustee; and
d. a foreign company whose carrying on of any regulated activity is effected under an arrangement between the foreign company and its related corporation which is licensed or exempted under the SFA, where such arrangement is approved by the MAS (commonly terms a “Para 9 arrangement”).
Additional exemptions are provided for in subsidiary legislation to the SFA.
A specific exemption which is often utilized by fund managers relates to the exemption whereby fund management in Singapore is undertaken on behalf of not more than 30 “qualified investors” (essentially high net worth individuals or corporations with assets exceeding S$10 million in value). The exempt fund manager (EFM) must be resident in Singapore and have a certain level of “business substance”. If the EFM is a shell entity with no business operations in Singapore, it would contravene the conditions attached to the exemption. An EFM is required to conduct its own due diligence to verify that its clients are “qualified investors” and to meet and maintain prescribed “fit and proper” requirements in respect of the EFM, its representatives, directors and substantial shareholders.
What are the exemptions to regulatory exams?
There are specified exemptions to the minimum entry and examination requirements that are otherwise prescribed for Representatives who possess specified qualifications and experience or who confine their regulated activities to a limited segment of the market.
What are the capital requirements?
An applicant for a CMSL may be required to maintain prescribed base capital requirements (BCR) depending on the regulated activity concerned. In respect of ‘fund management’, the BCR ranges from S$250,000 to S$1 million, the lower end being applied to fund managers serving only accredited investors and the higher end being applied to fund managers serving collective investment schemes offered to non-accredited investors.
In respect of other regulated activities, the BCR are:
Dealing in securities
250,000 to 5 million
Trading in futures contracts
250,000 to 5 million
Real estate investment trust management
Leveraged foreign exchange trading
Providing custodial services for securities
Advising on corporate finance
In addition to the BCR requirements, an applicant for fund management should have global funds under management of at least S$1 billion (unless the Boutique Fund Management Scheme (BFM) or Start-up Boutique Fund Management Scheme (Start-up BFM) applies) and will also be required to procure professional indemnity insurance (level of coverage depending on AUM of the fund).
If capital requirements are not satisfied, MAS nonetheless has a discretion to grant the licence subject to the provision of a letter of responsibility or letter of undertaking from the applicant’s parent company in support of any liquidity shortfall or other financial obligations.
What is the licence application process?
An applicant for a CMSL must submit prescribed application forms to the MAS, which may be found on the MAS website. Key information to be submitted include a business plan setting out information relating to the manner in which and type of customers with whom the applicant proposes to conduct business, an outline of the expansion of its business in Singapore and in the region over the next 3 to 5 years, an organization chart showing its directors and key officers, up-to-date audited balance-sheet and profit and loss statements, details of the CEO and directors and information relating to the applicant’s parent company and ultimate controlling shareholder(s).
What is the timing?
The estimated time for processing a CMSL application by the MAS is 8 to 12 weeks upon receipt of the application form. The MAS may also request for additional information or clarification on a case-by-case basis.
What may I do before the licence is granted?
As a precursor to obtaining a fund manager’s licence, an applicant could rely on available exemptions and commence operations on a smaller scale, for instance, by serving not more than 30 qualified investors. A notification to the MAS to commence business as an EFM will have to be made. Operating under an exemption does not, however, permit the EFM (or its representatives) from representing itself as being licensed, regulated, supervised or registered by the MAS.
Following a public consultation on the review of the regulatory regime for fund management companies conducted by the MAS in mid-2010, it is anticipated that the regulatory regime for fund management will be revised and will take effect later this year. Under the proposed new regime, fund management companies (FMCs) will be regulated in three categories:
a. Notified FMCs, whose assets under management are not more than S$250 million and who serve no more than 30 qualified investors.
Notified FMCs will not be required to apply for a CMSL but it will have to comply with certain restrictions, i.e. no more than 15 of the 30 qualified investors may be funds, and to maintain a minimum base capital of S$250,000.
b. Licensed Accredited/Institutional FMCs - must be licensed and may serve only accredited or institutional investors.
c. Licensed Retail FMCs - must be licensed and may serve retail (i.e. non-accredited or institutional) investors.
With the regulatory infrastructure in both Hong Kong and Singapore together with their developed financial markets, either jurisdiction is well placed to support the continued growth of the asset management industry in Asia.