HKSI Paper 6 (Regulation of Asset Management) English Free Trial

A Fund Manager should ensure that:
(a) all client orders are allocated fairly;
(b) intended allocations are recorded prior to the transactions; and
(c) executed transactions are allocated promptly in accordance with prior intentions, except where any change would not disadvantage the client. The reasons for such change should be documented.

Cross trades between client accounts should only be done:
(a) if the trades are in the best interests of both clients and in line with their investment objectives and restrictions;
(b) the trades are done at arm’s length at current market value;
(c) the activities are disclosed to both clients; and
(d) the reasons are documented prior to executing the trades.

The message of the warning statements should be “clear and not disguised” and state that:
(a) investment involves risk;
(b) the offering document should be read for further details, including the risk factors;
(c) where past performance is presented, such information is not indicative of future results;
(d) where the advertisement is exempted from pre-vetting and authorisation by the SFC pursuant to the SFO, the advertisement has not been reviewed by the SFC;
(e) where the CIS is described as authorised by the SFC, this does not imply official recommendation; and
(f) where the CIS has special features or involves higher risk, a warning appropriate to the degree of risk inherent in the CIS is given.

Acceptable soft dollar goods and services include:
(a) research and advisory services;
(b) economic and political analysis;
(c) portfolio analysis including valuation and performance measurement;
(d) market analysis, data and quotation services;
(e) computer hardware and software incidental to the above goods and services; and
(f) clearing and custodian services and investment-related publications.

Of relevance to intermediaries engaged in asset management are the requirements to:
(a) keep such accounting, trading and other records as are sufficient to:
(i) explain and reflect the financial position and the operations of its business;
(ii) enable financial statements to be prepared from time to time which give a true and fair view of its financial affairs;
(iii) account for all client assets that it receives or holds;
(iv) enable all movements of such client assets to be traced through its accounting systems and stock holding systems;
(v) demonstrate compliance with the relevant provisions of the Client Money Rules and the Client Securities Rules, and that internal control systems are in place to ensure such compliance;
(vi) reconcile each month any differences that arise during that month in its balances or positions with external parties; and
(vii) enable it to readily establish whether it has complied with the FRR;
(b) keep records to show particulars of all:
(i) money received and how it was applied, all income received and expenses paid;
(ii) for transactions carried out, particulars of the initiators, orders, instructions, trading, settlement and accounting entries (there should be a full audit trail); and
(iii) client agreements and discretionary account agreements;
(c) keep records in such a manner as to enable an audit to be conveniently and properly carried out; and
(d) make entries in the records in accordance with generally accepted accounting principles.

When an intermediary enters into a transaction, it is required to prepare and provide a contract note to the client, subject to the following:
(a) it may prepare a consolidated contract note, if several contracts are executed on the same day, and provided that the client does not instruct otherwise; or
(b) instead of preparing and providing individual or consolidated contract notes, it may consolidate the contract notes in respect of all contracts entered into on the same business day into the statement account for that day.

An intermediary should provide at the request of a client:
(a) copies of contract notes, daily statements of account, receipts and monthly statements of account, or make these available for inspection; and
(b) a statement of account on the same day as the request, giving up-to-date details of the account.

Under s. 162, SFO, the appointed auditor has extensive powers to:
(a) examine on oath officers, employees, agents and auditors of the target entities;
(b) require all these persons and any persons holding client assets on behalf of the licensed corporation to produce relevant records and explain their contents; and
(c) exercise these powers in respect of any business carried on by the licensed corporation, if this is relevant to the audit

A licensed corporation may be subject to the reporting obligation as a result of:
(a) entering into a specified OTC derivative transaction as a counterparty;
(b) conducting a transaction in a specified OTC derivative transaction “in Hong Kong” on behalf of an affiliate; or
(c) losing its exempt status.

The SFC exercises its regulatory mandate to supervise the industry through several mechanisms:
(a) licensing: that only fit and proper persons are permitted to engage in regulated activities;
(b) supervision and monitoring: that intermediaries comply on an ongoing basis with applicable laws and regulations;
(c) marketing of investment products: that appropriate standards are adopted through the authorisation of CISs and structured products; and
(d) discipline: that persons in breach of laws or regulations are suitably dealt with.

An individual trustee must:
(a) ordinarily reside in Hong Kong;
(b) be of good reputation and character and not have committed any offence involving fraud or dishonesty; and
(c) provide a performance guarantee in the form of an insurance policy or a bank guarantee covering any failure to perform or other breach of duty, the value of which is 10% of the net asset value (“NAV”) of the scheme up to a maximum of HK$10 million.

Following the registration of any intermediary, the MPFA will assign the SFC, HKMA or IA as the frontline regulator for the purposes of the MPFSO.

The SFC may on application approve for a licensed corporation (s. 134, SFO and s. 58, FRR):
(a) redeemable shares and subordinated loans, with the effect that they are excluded from ranking liabilities;
(b) a modification or waiver in the calculation of the licensed corporation’s liquid capital; and
(c) the adoption of an accounting principle other than one of those generally accepted.

Subject to assessment and compliance arrangements usually undertaken in connection with the client on-boarding process, the requirements that may be waived in are:
(b) information about clients:
(i) the need to establish the client’s financial situation, investment experience and investment objectives (except in relation to providing advice on corporate finance);
(ii) the need to ensure the suitability of a recommendation or positive invitation; and
(iii) the need to assess the client’s knowledge of derivatives;

Features of the senior management’s role in such a structure are:
(a) Its assumption of full responsibility for the operations
(b) Setting up detailed definitions of authorities for key positions, policies, and procedures for necessary authorizations

The six data protection principles
(a) Lawful purpose
(b) Accuracy and retention
(c) Use
(d) Security
(e) Policies
(f) Access

UNSCRs are normally implemented in Hong Kong under the UNSO, which enables sanctions to be imposed on persons in breach of the relevant provisions.

Customer risks;
(i) background or profile of the customer;
(ii) unduly complex ownership structure without good reason;
(iii) nature, scope, and location of the customer’s business that generate the funds/assets, having regard to sensitive or high-risk activities;

The Hong Kong Exchanges and Clearing Limited (“HKEX”) is a recognised exchange controller under s. 59, SFO. The SEHK and the Hong Kong Futures Exchange Limited (“HKFE”) are recognised under s. 19, SFO as exchange companies that may operate a stock market and a futures market in Hong Kong respectively. The three clearing houses concerned with products traded on the SEHK and the HKFE are recognised under s. 37, SFO. The HKEX is responsible for ensuring, among other things, the operation of an orderly, informed and fair market in securities and futures contracts in the exchange companies it operates

The SFC and MPFA all regulate and supervise intermediaries operating within their respective jurisdictions, and there is considerable overlap in the regulatory regime for intermediaries engaged in the asset management industry.

The Mandatory Provident Fund Schemes (General) Regulation sets out detailed requirements for the operation of MPF schemes including requirements relating to trustees and other service providers, enrolment, contributions, portability, withdrawal of accrued benefit arrangements, and investment requirements.

The ORSO was enacted prior to the setting up of the MPF to:
(a) regulate the voluntarily established ORSO schemes operating in and from Hong Kong;
(b) ensure that the ORSO schemes are properly administered and funded; and
(c) provide greater certainty that retirement scheme benefits accruing to employees under the schemes will be properly paid

The specific requirements for handling client assets are covered by subsidiary legislation: the Securities and Futures (Client Securities) Rules (“Client Securities Rules”) and the Securities and Futures (Client Money) Rules (“Client Money Rules”).

As regards licensed corporations, the SFC regards the following persons as being senior management:
(a) all directors of the corporation (including any shadow director);
(b) the persons appointed as responsible officers of the corporation; and
(c) each individual who undertakes and is principally responsible for (either alone or together with others) any one or more of the eight MICs, which are as follows:
(i) overall management oversight;
(ii) key business line;
(iii) operational control and review;
(iv) risk management;
(v) finance and accounting;
(vi) information technology;
(vii) compliance; and
(viii) anti-money laundering and counter-terrorist financing.

the definitions for securities and futures contracts, there are three aspects to the definition:
(a) what is positively defined as a CIS;
(b) what is excluded; and
(c) what is prescribed by the Financial Secretary (under s. 393, SFO).

There are several exemptions provided for in s. 103, SFO which permit the issue of certain documents and the acts of special groups, including the following:
(a) a prospectus that complies with, or is exempt from, the Companies (Winding Up and Miscellaneous Provisions) Ordinance;
(b) listing documents and certain other offer documents in relation to securities traded on a recognised stock market;
(c) advertisements, invitations and documents issued by certain licensed corporations (in the case of securities, they must hold a Type 1, Type 4 or Type 6 licence; and in that of futures contracts, they must hold a Type 2 or Type 5 licence);
(d) advertisements etc. in respect of securities or interests in CISs intended to be disposed of only to PIs.

Each licensed corporation is required to:
(a) appoint not less than two responsible officers, at least one of whom must be an executive director (see Note 1 below) (s. 125, SFO);
(b) ensure that every individual executive director of the licensed corporation is approved as a responsible officer (s. 125, SFO); and
(c) ensure that it has, for each regulated activity, at least one responsible officer available at all times to supervise the business of the regulated activity for which it is licensed, and who is based in Hong Kong (s. 118(1)(a)(ii), SFO

A discretionary account manager may receive and retain cash or money rebates in relation to client transactions, provided that:
(a) the client has consented to this in writing;
(b) the brokerage rates are not in excess of customary full-service brokerage rates; and
(c) the rebates and their approximate values are disclosed to the client

The Guidelines on Continuous Professional Training set out the SFC’s expectations regarding CPT to foster the fitness and properness of the licensed or registered persons through periodic training to enhance their technical skills and their regulatory knowledge.

The Code of Conduct applies to all persons licensed by or registered with the SFC, both corporations and individuals and, in that sense, is the primary code on which all others are based.