SFC's Licensing Guidance for PE Firms and Family Offices

On 7 Jan 2020, SFC issued guidance on the licensing obligations of private equity (PE) firms and family offices which conduct business in Hong Kong.

In the circular for PE firms, SFC provides more information about the licensing requirements for PE firms’ general partners, investment committee members and fund marketing activities. It also clarifies how SFC assesses PE firms’ discretionary investment authority and investments in securities of private companies as well as the industry experience requirement for their responsible officers.

Key points of the circular for PE firms:

• It is common for a PE fund to be constituted in the form of a limited partnership, where the general partner (GP) assumes ultimate responsibility for the management and control of the fund in return for management fees, carried interest or other remuneration. Then the GP should be licensed for RA9 if it conducts fund management business in Hong Kong.However, GPs themselves would not need to be licensed for RA9 if they have fully delegated all of the asset management functions to another entity which is licensed for RA9.
• To differentiate RA9 from RA4 or RA5, SFC takes the view that licensed asset managers must be granted full discretionary investment authority in respect of the funds they manage.
• Some PE firms licensed for RA9 have established investment committees in Hong Kong for the funds they manage. Members of an investment committee who play a dominant role in making investment decisions for the funds should be licensed as representatives or approved as ROs.  But members who do not have any voting right or veto power for investment decisions and their primary role is to provide input from a legal, compliance or internal control perspective would not need to be licensed.
• Many PE funds set up SPVs, incorporated locally or overseas, for investment holding purposes. In determining whether an investment portfolio of a PE fund comprises securities or futures contracts for the purposes of RA9, SFC will consider the composition of the entire investment portfolio. If underlying investments held through SPVs fall within the definition of "securities" (even if the SPVs are carved out) or the SPVs themselves fall within the definition of "securities", SFC will regard the management of the portfolio as RA9.
• If a PE firm offers investment opportunities to other persons whereby they may enter into securities transactions alongside the PE fund, the firm should be licensed for RA1. Nonetheless, the PE firm may not need to be licensed for RA1 if it is licensed for RA9 to manage the PE fund and its act of offering the co-investment opportunities is conducted solely for the purposes of carrying on RA9.

You may still remember in Oct 2019 SFC fined SEAVI Advent Ocean Private Equity Limited (SAOPEL) $1 million because it had allowed its director and an investment manager, both unlicensed, to conduct regulated activities by introducing clients to invest in the fund managed by SAOPEL, answering clients' queries and arranging for execution of the subscription agreements for the fund.


In the circular for family offices intending to carry out asset management or other services in Hong Kong, SFC explains the potential implications for both single and multi-family offices. Licensing exemptions, or carve-outs, may be available depending on how a family office operates.

Key points of the circular for family offices:

• A family office set up as a business to manage assets which include securities or futures contracts may be required to hold a licence for RA9. The licensing implications of providing asset management services in Hong Kong do not hinge on whether clients are families. The relationships amongst the beneficiaries of a family trust or between family members are not relevant in determining whether a licence is required.
• The way in which a single family office operates can lead to different consequences under the licensing regime.
• In cases where a family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets, the family office will not need a licence because it will not be providing asset management services to a third party.
• If the family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family, it will not need a licence if it provides asset management services solely to related entities (i.e. intra-group carve-out).
• A multi-family office serves more than one high net worth family. If it provides services to clients who are not related entities, it will not be able to make use of the intra-group carve-out.

Licensing is only the first step. I look forward to seeing more specific regulations (like Code of Conduct) formulated by SFC for PE firms and family offices.

RHB Securities and Inadequate Compliance Monitoring

On 2 Jan 2020, SFC reprimanded and fined RHB Securities Hong Kong Limited (RHBSHK) $6.4 million for its failures to comply with regulatory requirements on conflicts of interest and supervision of account executives.

SFC found that RHBSHK failed to:

• effectively implement its policy for avoiding actual and potential conflicts of interest between its research reports and investment banking relationships;
• adequately disclose its investment banking relationship with the listed company covered in a research report; and
• effectively monitor the trading activities of its research analysts.

SFC further found that RHBSHK did not have adequate controls to supervise its account executives (AEs).  In particular, the frequency and extent of its sample checking procedures for ensuring that client orders received by AEs through telephone are tape-recorded are not commensurate with the size of RHBSHK's business.  As a result, the discretionary trading activities without written authorization of an account executive went undetected for 23 months.

The Statement of Disciplinary Action of this case revealed that:

• RHBSHK explained that the discretionary trading went undetected because the client account and the account executive were not selected in its sample telephone recording checking. The sample checking only involved checking the order records of 10 trades each month.
• At the material time, RHBSHK had over 70 AEs, its sample checking of 10 orders each month is inadequate to offer any meaningful control for the detection and prevention of irregularities stemming from missing telephone recordings of order instructions.

I am not sure to what extent the penalty imposed on RBHSHK was attributable to the inadequate compliance monitoring to detect trading irregularity.  This case may shed some light on SFC's benchmark of effective sample checking.  Would SFC sanction RHBSHK's MIC of Compliance later?


Subsequent update on 29 Jan 2020:

• SFC announced the suspension of RHBSHK's AE Mr Shiu Yau Wah for 5 months, because he conducted trades involving over $1.62 billion worth of shares for a client account on a discretionary basis for almost two years between 2014 and 2016 without obtaining the client's written authorization.

Subsequent update on 6 Feb 2020:

• SFC announced that it has banned Mr Christopher Tse, a former research analyst at RHBSHK, from re-entering the industry for 12 months.
• Tse conducted trades through his father's securities trading account held at another brokerage between August 2013 and October 2015 without informing RHBSHK, and traded in a stock on RHBSHK's restricted list on two occasions. 
• Some of the trades conducted by Tse through his father's account between November 2013 and July 2015 were: (a) in a manner contrary to his recommendations; and (b) in the shares of companies covered in some of his research reports within 30 days prior to or three days after the issue of the reports.  
• Tse also failed to disclose his financial interests in his father's account in relation to four companies in a number of research reports between September 2013 and June 2015.