Type 13 – Licensing and Registration of Depositories of SFC-authorised CISs
On 27th July 2023, the SFC published the ‘Circular on licensing and registration of depositaries of SFC-authorised collective investment schemes and related transitional arrangements’.
This circular is a follow-up on the Consultation Conclusions released on 24th March 2023, on proposed amendments to subsidiary legislation, codes and guidelines with the objective to usher in the regulatory regime for depositories of SFC-authorized collective investment schemes (“CIS”).
This article provides an overview on the licensing and registrations requirements for the new Type 13 licence, including transitional arrangements, for trustees and custodians (depositaries) of SFC-authorised Collective Investment Schemes (“CISs“) in Hong Kong.
PDF version: Type 13 – Licensing and Registration of Depositories of SFC-authorised CISs
Introduction
Under the Securities and Futures Ordinance (“SFO“), depositaries would need to be licensed or registered for Type 13 Regulated Activity (RA 13) commencing from 2nd October 2024, unless otherwise exempted.
Corporate Practitioners
Depositaries at the top of the custodial chain for an SFC-authorised CIS need to be licensed or registered for RA 13 (excluding entities acting as delegates or sub-delegates of the depositary, within or outside Hong Kong).
Exemptions include:
- a registered Mandatory Provident Fund (“MPF“) Scheme or a constituent fund of such a scheme; or
- an approved pooled investment fund, not offered to retail investors.
In certain cases, depositaries may perform additional roles as fund administrators or transfer agents for CISs. However, solely providing fund administration or transfer agency services does not automatically qualify as RA 13.
Key functions* in relation to depositary services:
- custody and safekeeping of relevant CIS property; and
- oversight of a relevant CIS to ensure its operation in accordance with its scheme documents.
Licensed or registered depositaries under RA 13 are allowed to conduct other business activities, including as acting as a trustee for family trusts or private investment funds, provided that they have implemented robust internal controls to ensure confidentiality and effectively handle any actual or potential conflicts of interest that may arise.
Individual Practitioners
In relation to the key functions* of a depositary above, staff members of the depositary should also be licensed or registered for RA 13 as the depositary’s representatives, including:
i) staff members responsible for oversight duties who ensure that a relevant CIS operates in line with its scheme documents.
Examples of duties: monitoring operational aspects of the scheme, such as custody of scheme property, compliance with investment and borrowing restrictions, cash flow, fund accounting and valuation, as well as managing issuance, repurchase, redemption, and cancellation of CIS units or shares.
ii) staff members authorised to approve instructions or transactions for custody-related purposes, where the depositary is responsible for performing all or part of the custody operations for a relevant CIS by itself.
Examples of duties: approving payments or asset transfers, signing-off cash reconciliation.
Where a depositary of a CIS performs the roles of a fund administrator or transfer agent for a CIS, the staff members who are involved in providing only those services are generally not required to be licensed or registered for RA 13.
Highlights of the Regulatory Requirements for RA Depositaries
Most of the SFC’s existing licensing publications, including the Fit and Proper Guidelines and the Guidelines on Competence, also apply to depositaries and their representatives. As such a depositary should satisfy the SFC that it could comply with all relevant regulatory requirements.
Capital requirements:
- At all times, maintain a paid-up share capital of not less than $10 million.
- At all times, maintain a liquid capital not less than the required liquid capital (as defined under the amended Securities and Futures (Financial Resources) (“FRR”) Rules), which equals to the higher of its:
- minimum amount of required liquid capital ($3,000, 000 for an RA 13 licensed corporation); and
- variable required liquid capital.
- A depositary is required to ensure compliance with the requirements set out in the Code of Conduct, in particular the new Schedule 11 to the Code of Conduct which sets out additional requirements for RA 13 depositaries.
A depositary is required to ensure compliance with the requirements set out in the Code of Conduct, in particular the new Schedule 11 to the Code of Conduct which sets out additional requirements for RA 13 depositaries.
A depositary licensed for RA 13 must submit monthly financial returns under the FRR (Form 10) and other periodic statutory returns required under the SFO.
Application Requirements and Deadlines
Corporations
- Existing depositaries are required to submit their corporate license or registration applications on or before 30th November 2023.
- Applications must be submitted to the SFC along with the firms’ proposed Responsible Officers.
- In the event that the corporation is an authorised institution, the Executive Officers’ application must be submitted to the Hong Kong Monetary Authority (“HKMA“).
Individuals
- Given that Responsible Officers’ applications will be processed along with corporate applications, the SFC has urged for individual practitioners seeking to become a Licensed Representative of existing depositaries to submit their applications to the SFC between 1st June 2024 and 31st July 2024.
Grandfather Arrangement
The SFC has introduced a grandfather arrangement for individuals who are currently engaged by existing depositaries to provide depositary services. This arrangement allows for individuals to be exempted from taking the local regulatory framework paper for RA13.
To rely on this exemption, the following conditions need to be met:
- Sponsored by an existing depositary*(* There is no minimum work experience needed for this one-off exemption)
- Complete 5 hours of Continuous Professional Training within 12 months immediately before or after being licensed or registered*(*This requirement is in addition to the required CPT hours for licensed individuals)
This arrangement will only be available until the commencement of the regime. After 2rd October 2024, individual applicants within the depositary industry will be subject to fulfilling the requirements under the SFC’s Guidelines on Competence (i.e., academic qualifications, relevant experience, local regulatory framework paper examinations, etc.).
With regards to the Local Regulatory Framework Paper, the Hong Kong Securities and Investment Institute is currently in the process of preparing the relevant examination for Type 13 applicants.
