SFC Simplifies Licensing Process for Overseas Fund Managers - International Law Office

Introduction

The Hong Kong Securities and Futures Commission (SFC) has issued a circular to clarify certain licensing application issues and the licensing process for fund managers as part of its initiatives to streamline and simplify the process. The circular provides practical guidance to overseas fund managers (particularly hedge funds) when applying for an SFC licence in Hong Kong.

A streamlined review process will be adopted for fund managers licensed in the United Kingdom or United States applying, or intending to apply, for an SFC licence, which could significantly reduce the time taken to process applications. The process may also be available to fund managers in other jurisdictions.

Although the circular is intended to provide general guidance to overseas hedge fund managers, the SFC anticipates that relevant principles may also apply generally when considering the licensing of fund managers that act for professional investors only.

Streamlined Licensing Process

The circular means that an applicant intending to serve professional investors only can expect to benefit from an expedited licensing process if it or its parent company is already licensed or registered by the Securities and Exchange Commission (SEC) in the United States or the Financial Services Authority (FSA) in the United Kingdom as an investment manager or adviser with a good compliance track record. Although the applicant will still be required to submit a set of completed licence application forms (as all applicants must do), the SFC will adopt a streamlined approach to the review and focus on key areas of operations, such as risk management, valuation, internal controls and management of conflicts of interest.

For an applicant which is not licensed or registered by the SEC or FSA as an investment manager or adviser, the streamlined review process may apply if the applicant or its parent company has a proven compliance track record. However, there is no further explanation of the term 'proven track record' in the circular.

Although the circular does not indicate the likely reduction in processing time, a more focused and streamlined approach could potentially reduce the number of queries which are unrelated to operations and significantly shorten the process. The SFC indicates that the current processing time is approximately 15 weeks, but applications may take up to four months to be processed in practice. In contrast, Singapore hedge fund managers seeking to act for 30 or fewer professional investors may be licensed within one week.

Competence Requirements for Responsible Officers

An applicant for an SFC licensed corporation licence must have at least two responsible officers approved by the SFC for each of the regulated activities for which it is to be licensed. Owing to the special nature of hedge fund managers' operations, the SFC is prepared to adopt a more flexible interpretation of responsible officers' relevant industry experience in the case of hedge fund managers, including a broader range of activities and investment strategies, such as asset management, proprietary trading, research, private equity and dealing with other alternative investments.

The SFC is also prepared to accept experience acquired by an individual in sales, marketing or risk management of a hedge fund management business, provided that the individual's licence is subject to the 'non-sole' condition, which effectively requires the restricted-licensed responsible officer to be subject to the advice of another responsible officer with an unrestricted licence in the relevant regulatory activities in the licensed corporation when the restricted-licensed responsible officer participates in or directly supervises the fund management business.

The circular also states that the SFC is prepared to exercise its discretion to exempt an individual from the local regulatory examination requirements for responsible officers if:

• the applicant has more than eight years' industry experience in recognized markets or is already registered or licensed in the United Kingdom or the United States for investment management or advisory business;

• the licensed corporation will serve only professional investors;

• the licensed corporation is able to confirm that regulatory and compliance support will be provided to the applicant; and

• the applicant agrees to take a post-licensing refresher course on local regulations.

Office Space

In general, a licensed corporation should satisfy the SFC requirement that its office space is appropriately secure and that confidential/non-public information and client privacy will be sufficiently safeguarded against unauthorized access or leakage. However, the SFC does not specifically prescribe the type of office space that hedge fund managers must occupy. In particular, the SFC does not draw a distinction between business centres or serviced offices and other types of business premises.

Future Developments

This circular could signal further simplification or relaxation of regulatory requirements for hedge funds and other types of intermediary in Hong Kong. The jurisdiction is competing with Singapore and other Asian jurisdictions to host international investment businesses in a period of fast-growing demand for hedge funds in the region.

For further information on this topic please contact Matthew Barnard or Steven Cheng at Allens Arthur Robinson by telephone (+852 2840 1202) or by fax (+852 2840 0686) or by email (matthew.barnard@aar.com.au or steven.cheng@aar.com.au).