- Our Ref:
- G4/26/5C
B1/15C
13 March 2003
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Application for Registration by an
Authorized Institution to become a Registered Institution under the
Securities and Futures Ordinance
In the light of the impending commencement of the Banking
(Amendment) Ordinance 2002 (BAO 2002) and the Securities and
Futures Ordinance (SFO) on 1 April 2003, I am writing to inform you
of the HKMA's role in handling an application by an authorized
institution (AI) for registration under the SFO. You should pay
attention to this letter if your institution will become a deemed
registered institution1 (RI) or
intends to apply for registration under the SFO. Also covered in
this letter are some important administrative issues applicable to
an AI after registration with the Securities and Futures Commission
(SFC) as a RI.
Introduction
Section 114 of the SFO stipulates that no person shall carry on
a business in a regulated activity2
or hold himself out as carrying on a business in a regulated
activity unless it is a licensed corporation, a RI or a person
authorized under section 95(2) of the SFO to provide automated
trading services3. According to
section 119 of the SFO, an AI may apply for a single registration
with the SFC if it intends to engage in one or more regulated
activities set out in Schedule 5 of the SFO.
Notwithstanding the two-year transitional period for deemed RIs
to apply for registration with the SFC, they should begin to plan
ahead and keep the HKMA informed of their intention. The Guidelines
on Transitional Arrangements to be issued by the SFC will explain
the arrangements applicable to deemed RIs.
Application for registration
Application forms
Under section 119 of the SFO, the SFC may, upon application by
an AI, register the applicant for one or more regulated activities
specified by the SFC.
To apply for registration with the SFC, an AI needs to complete
the specified application forms and submit these, together with the
required supporting documents, to the SFC. The following points
should be noted:
- In the case of deemed RIs which are currently exempt dealers
and/or exempt investment advisers under the to-be-repealed
Securities Ordinance, there will be a separate set of application
forms which require less information4.
- Those deemed RIs which are licensed banks that engage in
investment advisory activities immediately before the commencement
of the SFO but are not exempt dealers or exempt investment advisers
have not previously been required to submit the details of their
investment advisory activities to the SFC. They will therefore be
required to complete a more comprehensive application form in the
same manner as a non-deemed AI.
- The application forms for RI applicants will be available for
download from the SFC's public website (www.hksfc.org.hk) and at the licensing counter
of the SFC office.
- When there is a change of the information already submitted to
the SFC and the relevant application for registration is still
under the latter's consideration, as required by section 4(2)(a) of
the Securities and Futures (Licensing and Registration)
(Information) Rules, an applicant must notify the SFC within 7
business days after the change takes place. The notice must be in
writing containing a full description of the change.
Any AI that intends to apply to the SFC for registration under
the SFO must submit applications to obtain the consent of the HKMA
for the appointment of at least two executive officers (EOs) in
relation to each regulated activity not later than its application
to the SFC for registration. Such submission should be made
directly to the HKMA. Further details of the arrangements for
applications in respect of EOs will be given in a separate letter
to be issued soon.
To facilitate planning (and allocation of the necessary
resources), all deemed RIs should
confirm with the HKMA that they intend to submit an application to
become a RI at least 4 months before they lodge the application
with the SFC5. The HKMA
may discuss with individual institutions whether to adjust their
schedule in the light of the workload and available resources.
Assessment of an application to become
a RI
In deciding whether to register or refuse to register an AI, the
SFC will refer the application to the HKMA. Upon receiving an
application referred by the SFC, the HKMA will consider the
application and consult the SFC upon the merits of the application.
In considering whether the applicant is fit and proper to be
registered for the regulated activity(ies) concerned, the HKMA will
take into account the factors set out in section 129 of the SFO as
well as any relevant rules6, codes,
guidelines or guidance7 made or
published by the SFC under the SFO.
For an application from a deemed RI which is currently an exempt
dealer or an exempt investment adviser, the HKMA will assess, among
other things, the AI's previous experience in its deemed regulated
activities with reference to the following:
- the findings of our previous examinations on such activities
and the current status of implementation of our recommendations;
and
- compliance history of the deemed RI with respect to the
to-be-repealed Securities Ordinance under the previous regime, the
SFO (and its subsidiary legislation), the BAO 2002, as well as
those codes, guidelines or circulars issued by the SFC or the HKMA
that are applicable to the deemed RIs' conduct of regulated
activities.
For the purpose of assessing the fitness and propriety of an
applicant that is not a deemed RI, the HKMA may request the
applicant to provide additional information and documents. This
will be necessary if the business plan and internal control
procedures submitted in the application package fail to provide
sufficient details for the purpose of the HKMA's assessment. The
HKMA will evaluate the application taking into account matters such
as the AI's management capabilities, controls and resources in
relation to its intended scope and scale of regulated
activities.
The HKMA will endeavour to advise the SFC, within 10 weeks of
receiving the application, whether the HKMA is satisfied that the
applicant is fit and proper to be registered for the regulated
activity(ies) concerned. The HKMA's advice to the SFC may include
recommendations in respect of any condition of registration. The
HKMA may consider making such recommendation where the condition(s)
can overcome concerns about the fitness and propriety of an
applicant. One typical example of such concerns would be where the
applicant cannot display sufficient experience and expertise in
relation to a regulated activity, and the resulting condition may
be an appropriate restriction on the scope of such activity.
Outcome of application
Pursuant to section 119 of the SFO, the SFC will have regard to
any advice given by the HKMA and may rely wholly or partly on that
advice in making its decision to approve (with or without
conditions) or refuse (the whole or a part of) an application. The
SFC will consult the HKMA before imposing any conditions on the
registration of a RI.
Under section 140 of the SFO, if the SFC forms a preliminary
view to:
- refuse the whole or a part of an application; or
- impose conditions on approving an application,
it will inform the applicant of the ground for the preliminary
view and give such applicant a reasonable opportunity of being
heard. When the SFC makes a final decision, it will notify the
applicant in writing of its decision and the reasons for making
such decision.
Under normal circumstances, it is expected that the SFC will
take about 15 weeks (including the 10 weeks mentioned above) to
process an application. It may take a longer time if the SFC
considers imposing any condition on the registration as prior
consultation with the HKMA is necessary.
The new Memorandum of Undertaking (MoU) signed between the HKMA
and the SFC on 12 December 2002 sets out details of the referral
and consultation procedures mentioned above in relation to AIs'
applications for registration. The MoU has been posted on the
public website of the HKMA. You may also refer to the SFC's
Licensing Information Booklet available on the SFC's public
website, which will be updated to reflect the registration
requirements under the new securities supervisory regime.
Registration status
Upon approving a registration, the SFC will grant a certificate
of registration to the RI specifying the regulated activities for
which the RI is registered. The conditions imposed on a
registration, if any, will also be shown on the certificate.
As required under the Securities and Futures (Miscellaneous)
Rules, after registration with the SFC, a RI must exhibit its
certificate of registration in a prominent place at its principal
place of business. If a RI has more than one place of business, it
must exhibit a copy of the certificate in a prominent place at each
of its other places of business that carries out any regulated
activity. The copy of certificate should be certified by a director
or an EO of the RI.
Upon commencement of the SFO, the SFC's public register will
display specified particulars of RIs and deemed RIs as well as the
EOs of RIs. The particulars of RIs' relevant individuals8 will be captured by the HKMA's public
register to be maintained under the new section 20(1)(ea) of the
Banking Ordinance.
Reporting of changes after registration
Pursuant to section 127 of the SFO, where a RI applies for
variation of the regulated activities specified in its certificate
of registration by adding any regulated activity, such application
will be regarded as an application for registration in respect of
that regulated activity. It will be required to provide additional
information, e.g. business plan and internal control procedures, in
relation to the new regulated activity. A RI that wishes to reduce
the regulated activities specified in the certificate of
registration should also submit an application to the SFC. To lodge
such applications, the RI should complete the SFC's specified forms
supported by relevant information/documents (as the case may be)
and submit these documents directly to the SFC.
The duty to report mentioned in the following paragraphs applies
to deemed RIs as well as RIs.
Under section 135 of the SFO and the Securities and Futures
(Licensing and Registration)(Information) Rules, a RI is required
to notify both the SFC and the HKMA in writing of the following
events and within the specified time limits:
- at least 7 business days' advance notice of any intended
cessation of any regulated activity;
- at least 7 business days' advance notice of any intended change
of address at which it proposes to carry on any regulated
activity9; and
- a notice (together with full description of the change) within
7 business days of any change in the information as specified in
Part 2 of Schedule 3 to the Securities and Futures (Licensing and
Registration)(Information) Rules.
In line with the reporting requirements imposed by the SFC on
licensed representatives under the Securities and Futures
(Licensing and Registration) (Information) Rules, RIs are required
to notify the HKMA in writing within 7 business days upon knowledge
of certain information10
(including any subsequent changes) relating to any of their
relevant individuals, whether deemed or not. RIs should have
procedures and systems in place to meet the reporting requirements.
To ensure full compliance, such notification requirements should be
clearly communicated to all relevant individuals.
The SFC has designed specified forms for various purposes, such
as variation of regulated activities and miscellaneous
application/notification. These forms will be available for
download from the SFC's public website and at the licensing counter
of the SFC office.
Application fee and annual fee
According to the Securities and Futures (Fees) Rules,
application fees and annual fees of RIs will be payable to the SFC.
The fees will be imposed on the basis of the number of regulated
activities11.
During the transitional period, no application fee will be
payable by deemed RIs which apply for registration solely for the
purpose of migration to the new regime, i.e. no new regulated
activities. They will, however, still be obliged to pay the annual
fees as prescribed in the Securities and Futures (Fees) Rules.
The SFC has adopted the "no worse-off" principle -
- Throughout the entire transitional period, exempt dealers and
exempt investment advisers will not incur extra registration fees
over and above the amounts they are currently required to pay. The
annual fee will be charged on the basis of the number of former
exemptions obtained and the current annual fee for these
exemptions.
- For a deemed RI which immediately before the commencement of
the SFO is a licensed bank engaging in investment advisory
activities but not an exempt dealer or an exempt investment
adviser, no annual fee is payable for the entire transitional
period.
- To encourage deemed RIs to submit their application for
migration early, if such applications are submitted within the
first year of the transitional period (i.e. 1 April 2003 to 31
March 2004), a 5% discount on the annual fee for the previously
deemed regulated activities (payable from the date of application
submission till the end of the transitional period) will be
offered.
You may refer to the Guidelines on Waivers of Certain Licensing
Fees to be issued by the SFC for details of fees applicable to
deemed RIs in relation to their conduct of regulated
activities.
Should you have any questions relating to this letter, please
contact Miss Polly Cheung at 2878-8229 or Mr Eric Fok at
2878-1538.
Yours faithfully,
D T R Carse
Deputy Chief Executive
1. Refer to our
circular "Register of relevant individuals to be maintained by the
HKMA under the Banking (Amendment) Ordinance 2002" of 12 September
2002 for details of deemed registered institutions.
2. Regulated activity,
in relation to an AI, means dealing in securities, dealing in
futures contracts, advising on securities, advising on futures
contracts, advising on corporate finance, providing automated
trading services, or asset management. AIs do not require
registration with the SFC to engage in leveraged foreign exchange
trading and securities margin financing.
3. This refers to a
person who provides automated trading services but does not engage
in traditional dealing activities.
4. This is however on
the basis that the deemed RI only applies for registration in
relation to its deemed regulated activities. The SFC considers it
desirable that a deemed RI should transit to the new regime before
applying for a new regulated activity. In other words the first
application for registration from a deemed RI is expected to cover
its deemed regulated activities only. Any intended engagement in a
new regulated activity should be considered at a later stage, when
the institution has become a RI.
5. For other AIs (i.e.
not being deemed Ris) it is also desirable that they notify the
HKMA of their intended application in advance.
6. The major
subsidiary legislation under the SFO that will be applicable to
RIs' conduct of regulated activities are the Securities and Futures
(Client Securities) Rules, the Securities and Futures (Contract
Notes, Statements of Account and Receipts) Rules and the Securities
and Futures (Keeping of Records) Rules. Refer to Annex 2 of our
circular "Subsidiary legislation under the Securities and Futures
Ordinance" of 18 November 2002 for a list of all applicable rules
for RIs.
7. The major SFC codes
and guidelines that will be taken into account for this purpose are
the Fit and Proper Guidelines and the Guidelines on Competence. In
respect of an application for registration in Type 7 regulated
activity (providing automated trading services), the HKMA will also
take into account the SFC Guidelines for the Regulation of
Automated Trading Services. A list of SFC codes, guidelines and
circulars applicable to RIs in respect of their regulated
activities is provided in the Annex of our circular "Commencement
of the Banking (Amendment) Ordinance 2002 and the Securities and
Futures Ordinance" of 20 December 2002.
8. The meaning of
relevant individuals is set out in our circular "Register of
relevant individuals to be maintained by the HKMA under the Banking
(Amendment) Ordinance 2002" of 12 September 2002. The term includes
deemed relevant individuals, i.e. those registered under
transitional arrangements.
9. The SFC adopts a
pragmatic approach and only requires RIs to notify any intended
change in the principal place for carrying on regulated activities
(i.e. the main location for receiving orders from clients or
meeting with clients).
10. For details of
the required information, refer to module SB-1 "Supervision of
Regulated Activities of SFC-Registered Authorized Institutions" of
the HKMA Supervisory Policy Manual, which will be issued
shortly.
11. No fee is
imposed on Type 7 regulated activity (providing automated trading
services).
- c.c.:
- The Chairman, HKAB
The Chairman, DTCA
SFC (Attn: Mrs Alexa Lam)
