Asset management
FINANCIAL INSTITUTIONS ⋅ ENERGY ⋅ INFRASTRUCTURE, MINING AND COMMODITIES ⋅ TRANSPORT ⋅ TECHNOLOGY AND INNOVATION ⋅ PHARMACEUTICALS AND LIFE SCIENCES
Briefing
August 2011
Establishing an asset management
presence in Hong Kong and Singapore
Summary
Introduction
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.
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.
Hong Kong
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:
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Type 1: dealing in securities
Type 2: dealing in futures contracts
Type 3: leveraged foreign exchange trading
Type 4: advising on securities
Type 5: advising on futures contracts
Type 6: advising on corporate finance
Type 7: providing automated trading services
Type 8: securities margin financing
Type 9: asset management
Type 10: providing credit rating services
Establishing an asset management presence in Hong Kong and Singapore
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.
Which licence?
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 per cent 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
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Establishing an asset management presence in Hong Kong and Singapore
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.
Competency
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:
• either has high school level academic qualification or has passed one of
the recognised industry qualifications
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Establishing an asset management presence in Hong Kong and Singapore
• passed one of the recognised 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:
• has a relevant degree (Accounting, Business Administration, Economics,
Finance or Law or other associated degrees) or, professional qualification
in Law, Accounting or Finance
• possesses a minimum of three years’ relevant industry experience over the
six years immediately prior to the date of application
• a minimum of two years’ proven management skill and experience
• passed one of the recognised 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:
• The person has over eight years of industry experience in recognised
markets. Alternatively, the person must already be registered or licensed
in the UK or US for investment management or advisory business.
• The firm will only serve professional investors.
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Establishing an asset management presence in Hong Kong and Singapore
• The firm is able to confirm that regulatory and compliance support will be
provided to the person.
• 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 million and if it provides
securities margin financing, a minimum paid-up share capital requirement
of HK$10 million.
If a licensed corporation holds, for example, Types 1 and 4 licences,
the higher capital requirements will apply, ie, 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.
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Establishing an asset management presence in Hong Kong and Singapore
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.
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Establishing an asset management presence in Hong Kong and Singapore
Singapore
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 eight types of regulated activities which require capital
markets services licensing under the SFA:
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dealing in securities
trading in futures contracts
leveraged foreign exchange trading
advising on corporate finance
fund management
real estate investment trust management
securities financing
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).
Which licence?
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: (i) fund management; (ii) advising on corporate finance;
(iii) real estate investment trust management; and (iv) 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).
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Establishing an asset management presence in Hong Kong and Singapore
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 two full-time professionals, each with at least five years of
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 five years, and having a physical presence and substantive operations
in Singapore.
As regards personnel requirements, the applicant is required to employ
at least two 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
five years of relevant working experience (for REITs, the directors and CEOs
are expected to have at least 10 years of relevant experience, including five
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:
• honesty, integrity and reputation
• competence and capability
• 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.
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Establishing an asset management presence in Hong Kong and Singapore
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 three 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 shortterm 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:
• in the case of a Representative who sat for GCE “O” Level Examinations
before or in the year 1980:
– qualifications higher than or equal to at least four GCE “O” Level credit
passes
– qualifications higher than or equal to at least two GCE “O” Level credit
passes and at least three years of relevant and continuous working
experience over the past five years in respect of that regulated activity
• in any other case, qualifications higher than or equal to at least four 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:
• 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
• 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)
• 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
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Establishing an asset management presence in Hong Kong and Singapore
• 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 utilised 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$1 million, the
lower end being applied to fund managers serving only accredited investors
and the higher end being applied to fund managers serving collective
investment schemes offered to non-accredited investors.
In respect of other regulated activities, the BCR are:
10 Norton Rose Group August 2011
Regulated activity
BCR (S$)
Dealing in securities
250,000 to 5 million
Trading in futures contracts
250,000 to 5 million
Real estate investment trust management
1 million
Leveraged foreign exchange trading
1 million
Securities financing
1 million
Providing custodial services for securities
1 million
Advising on corporate finance
250,000
Establishing an asset management presence in Hong Kong and Singapore
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 three to five years, an organisation 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 eight 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.
Proposed changes
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:
• 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, ie, no more than 15 of the 30 qualified investors
may be funds, and to maintain a minimum base capital of S$250,000.
Norton Rose Group August 2011 11
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• Licensed Accredited/Institutional FMCs – must be licensed and may
serve only accredited or institutional investors.
• Licensed Retail FMCs – must be licensed and may serve retail
(ie, non-accredited or institutional) investors.
Conclusion
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. n
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Contacts
If you would like further information
please contact:
Hong Kong
Charlotte Robins
Partner
Norton Rose Hong Kong
Tel +852 3405 2465
charlotte.robins@nortonrose.com
Singapore
Daniel Yong
Partner
Norton Rose (Asia) LLP
Tel +65 6309 5349
daniel.yong@nortonrose.com
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