Common Ongoing Compliance, Regulatory Issues And Deficiency Relating To Hedge Fund Managers And Fund Managers Test

Securities and Futures (Licensing and Registration)(Information) Rules and SFC Licensing Information Booklet set out in details on information and circumstances that will trigger notification and reporting to the SFC and approval from the SFC.

Under Section 132 of the Securities and Futures Ordinance, a person (including a corporation) is required to apply for the SFC’s approval before he can become or continue to be a substantial shareholder of a licensed corporation.

Pre-approval from the SFC must be obtained before any individual or corporation becoming a "substantial shareholder" to a SFC licensed corporation. SFC Form 4 - Section 13: Approval as a Substantial Shareholder must be filled in and submitted to the SFC for approval.

Securities and Futures (Licensing and Registration)(Information) Rules and SFC Licensing Information Booklet set out in details on information and circumstances that will trigger notification and reporting to the SFC and approval from the SFC.

Under section 129 of the Securities and Futures Ordinance, the matters that shall be considered in assessing a person's fitness and properness include his:

(a) financial status or solvency;
(b) educational or other qualifications or experience having regard to the nature of the functions to be performed;
(c) ability to carry on the regulated activity competently, honestly and fairly; and
(d) reputation, character, reliability and financial integrity.

The term "substantial shareholder" has the same meaning as in Part 1 of Schedule 1 to the Securities and Futures Ordinance.

Section 132 of the Securities and Futures Ordinance provides that: a person shall, in relation to a corporation, be regarded as a “substantial shareholder” of the corporation, if he, either alone or with any of his associates – (a) has an interest in shares in the corporation – (i) the nominal value of which shares is equal to more than the nominal value of 10% of the issued share capital of the corporation; or (ii) which entitles the person, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at general meetings of the corporation; or (b) holds shares in any other corporation which entitles him, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of 35% or more of the voting power at the general meetings of the other corporation, or of a further corporation, which is itself entitled, either alone or with any of its associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at the general meetings of the corporation.

To apply for modifications or waivers of licensing requirements or conditions, the relevant SFC licensed corporation or SFC licensed individual will need to complete SFC Form 4 to request changing of licensing/registration condition to provide reason for the change for SFC to consider.

Financial Resources Return (FRR) under the Securities and Futures (Financial Resources) Rules requires reporting on proprietary derivative position under Form 10 of the FRR to the SFC.

Please however note that under SFC Guidelines on Competence paragraph 4 (Assessment of Competence for Corporation), in determining whether a corporation is competent to carry on any regulated activities, the SFC will consider the corporation's organizational structure and the combined competence of its personnel. A corporation should satisfy the SFC that it has proper business structure, good internal system and qualified personnel to enable it to properly manage the risks it will encounter in carrying on its business as detailed in its business plan.

SFC Licensing Information Booklet paragraph 6.4.5 states that at least ONE of the Responsible Officers must be an executive director as defined in section 113(1) of the Securities and Futures Ordinance that means a director of the corporation who-

(a) actively participates in; or
(b) is responsible for directly supervising,

the business of a regulated activity for which the corporation is licensed.

SFC licensed corporation must submit their FRR within 21 days after the relevant month end. SFC licensed corporation is required to comply with the Securities and Futures (Financial Resources) Rules at all times and they have the obligation to ensure that the liquid capital computation is correctly compiled from the books and records of the relevant SFC licensed corporation and is correctly prepared in accordance with the Securities and Futures (Financial Resources) Rules.

Securities and Futures (Licensing and Registration)(Information) Rules and SFC Licensing Information Booklet set out in details on information and circumstances that will trigger notification and reporting to the SFC.

SFC does not restrict a SFC licensed person from acting as a director for another company. Please however note that the SFC is unlikely to be satisfied that a SFC licensed person is fit and proper to be licensed or to remain licensed if he holds a directorship in, or is engaged in the business of, a company other than his principal, where such directorship or engagement will likely prejudice the interests of investors due to conflicts of interest, confidentiality concerns or other factors. You should check with your compliance before accepting any directorship appointment.

Section 132 of the Securities and Futures Ordinance provides that: a person shall, in relation to a corporation, be regarded as a “substantial shareholder” of the corporation, if he, either alone or with any of his associates – (a) has an interest in shares in the corporation – (i) the nominal value of which shares is equal to more than the nominal value of 10% of the issued share capital of the corporation; or (ii) which entitles the person, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at general meetings of the corporation; or (b) holds shares in any other corporation which entitles him, either alone or with any of his associates and either directly or indirectly, to exercise or control the exercise of 35% or more of the voting power at the general meetings of the other corporation, or of a further corporation, which is itself entitled, either alone or with any of its associates and either directly or indirectly, to exercise or control the exercise of more than 10% of the voting power at the general meetings of the corporation.

A SFC licensed corporation should appoint not less than 2 responsible officers to directly supervise the conduct of each regulated activity of the licensed corporation. For each regulated activity, the SFC licensed corporation should have at least one responsible officer available at all times to supervise the business. The same individual may be appointed to be a responsible officer for
more than one regulated activity provided that he is fit and proper to
be so appointed and there is no conflict in the roles assumed.