Top Questions and Answers in Applying for an SFC License

This article answers some of the most common questions and addresses some of the most common concerns which firms applying for a license from the Securities and Futures Commission (“SFC”) encounter. It complements our article “A Guide to Applying for an SFC License”, which provides a broad overview of the SFC licensing regime. For specific advice on the SFC licensing issues, please contact our Financial Services Regulatory lawyers and SFC Licensing lawyers.

1. What are the SFC license requirements? What type of SFC license do I need? Do I qualify for any exemptions from SFC licensing?

When an SFC license is needed

The Securities and Futures Ordinance (“SFO”) requires firms who carry on a business in a regulated activity (“RA”) or who hold themselves out as so doing to be licensed.  Any firm which actively markets its services to the public in Hong Kong will be deemed to be carrying on a business in a regulated activity if the services it provides constitute that regulated activity.  The SFO further requires that each individual who performs a regulated function in relation to a regulated activity carried on as a business or who holds himself out as performing such a function be licensed.

What type of SFC license is needed

Under the SFO, there are currently 10 types of regulated activities. The more commonly encountered ones are:-

Common Regulated Activities	Examples
SFC Type 1 License Dealing in Securities	Securities brokerage firms and firms looking to market their own funds or distribute funds managed by other fund managers will normally be carrying on Type 1 regulated activity (RA1) and thus may require an SFC Type 1 license. However, there are specified circumstances where exemptions (e.g. principal exemption) may apply to exempt a firm from having to apply for an SFC Type 1 license.
SFC Type 4 License Advising on Securities	Investment advisory firms which provide securities advice to clients will normally be carrying on Type 4 regulated activity (RA2) and thus may require an SFC Type 4 license. However, there are specified circumstances where exemptions (e.g. group company exemption or incidental exemption) may apply to exempt a firm from having to apply for an SFC Type 4 license.
SFC Type 9 License Asset Management	A hedge fund manager will normally be carrying on Type 9 regulated activity (RA9). However, some asset managers may require an SFC Type 1 license for dealing in securities rather than a SFC Type 9 license for asset management, depending on the nature of activities to be undertaken by the asset managers.

Some of the SFC licenses have sub-categories. For example, an SFC Type 6 license (advising on corporate finance) will not normally allow the holder to carry out activities as a sponsor for a listing on the Stock Exchange of Hong Kong or to advise on takeovers and mergers governed by the Code on Takeovers and Mergers unless an application is made specifically for an SFC Type 6 license to act as a sponsor or to act as a takeovers adviser.

What SFC licensing exemptions are available

Under the SFO, each regulated activity is subject to prescribed exemptions. An exemption applicable to one type of regulated activity does not necessarily constitute an exemption from a different type of regulated activity. At the same time, each regulated activity has a defined scope and any person who falls outside that defined scope would not need a license to carry on a business in that regulated activity. A common misconception is that a hedge fund manager who deals only with professional investors is exempt from licensing. This is untrue.

2. Do I qualify as an SFC licensed representative or a responsible officer (“RO”)? Is there a specific responsible officer test? Am I eligible for any exemptions from the SFC licensing exams?

What are the requirements for an SFC responsible officer

The SFC’s Guidelines on Competency set out the qualifications which are required for an SFC responsible officer. These requirements cover industry knowledge, industry experience, management experience and regulatory knowledge. In a typical scenario, an individual with a CFA or MBA qualification will meet industry knowledge requirements and an individual with 3 years of relevant experience in the past 6 years will meet industry experience requirements. The ideal relevant experience would comprise the performance of job duties identical to those proposed to be undertaken in the licensing application within a firm licensed or registered with the SFC.

What are the SFC licensing exam requirements & exemptions

The Hong Kong Securities Institute (“HKSI”) offers exams which the SFC recognizes for the purpose of determining whether an SFC licensed representative or an SFC responsible officer candidate meets regulatory knowledge and industry knowledge requirements. LE Papers 1 to 6 are local regulatory framework papers and LE Papers 7 to 12 are recognized industry qualification papers. LE Papers 1 and 7 are the basic exams for all SFC licensed representative candidates. LE Papers 2 to 6 are exams for SFC responsible officer candidates. LE Papers 8 to 12 are exams for SFC licensed representative candidates and SFC responsible officer candidates depending on the type(s) of regulated activities engaged in. Individuals holding a business degree or a professional designation such as a Chartered Financial Analyst (“CFA”) are likely to be exempt from the recognized industry qualification papers. Individuals who have been licensed with the SFC in the past 3 years may be eligible for exemption from the local regulatory framework papers but this will depend on individual circumstances.

3. Will my firm qualify for an SFC license? What are the main components of an SFC licensing application? What are the main ongoing regulatory obligations of an SFC licensed firm?

What are the qualifications for an SFC license

Under the SFO, the SFC must be satisfied that an applicant for an SFC license is “fit and proper” before it grants a license. The Fit and Proper Guidelines issued by the SFC set out at a high level the basic criteria upon which the SFC will grant a license. The criteria fall into 4 categories, namely:

• financial status or solvency;
• educational or other qualifications or experience, having regard to the nature of the functions to be performed,
• ability to carry out the regulated activity competently, honestly and fairly; and
• reputation, character, reliability and financial integrity.

The SFC has issued a wide range of codes, circulars and guidelines to provide further guidance in respect of how an applicant can meet these basic criteria. The most significant of these are the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission ("SFC Code of Conduct"), the Fund Manager Code of Conduct ("FMCC”), the Corporate Finance Adviser Code of Conduct and the Management, Supervision and Internal Control Guidelines (“Internal Control Guidelines”).

What information does the SFC need for a licensing application

At a high level, an SFC licensing application comprises the SFC forms, a business plan, a compliance manual and various submissions to address potential areas of regulatory concern. The business plan is unlike a typical business plan as its primary focus is on describing the business activities of the applicant and how those activities are controlled and supervised to meet regulatory requirements rather than on describing the growth path of the proposed business. The compliance manual sets out policies and procedures for meeting regulatory requirements.

4. How much capital do I need for an SFC licensing application? Do I need to incorporate a Hong Kong company to apply for an SFC license?

What are SFC licensing capital requirements

Under the Securities and Futures (Financial Resources) Rules (“FRR”), unless exempted, each licensed corporation must meet 2 different capital requirements, one for paid-up capital and one for liquid capital. Paid-up capital is a balance sheet item.

Regulated activity	Minimum paid-up share capital (HK$)
SFC Type 1 License Dealing in Securities	$5,000,000 (if no securities margin financing), or $10,000,000 (if securities margin financing) Note 1
SFC Type 2 License Dealing in Futures Contracts	$5,000,000 Note 1
SFC Type 3 License Leveraged Foreign Exchange Trading	$30,000,000 Note 1
SFC Type 4 License Advising on Securities	Nil (if does not hold client assets) Note 2
SFC Type 5 License Advising on Futures Contracts	Nil (if does not hold client assets) Note 2
SFC Type 6 License Advising on Corporate Finance	$10,000,000 (if acts as sponsor), or Nil (if does not act as sponsor and does not hold client assets), or $5,000,000 (if does not act as sponsor but holds client assets) Note 2
SFC Type 7 License Providing Automated Trading Services	$5,000,000
SFC Type 8 License Securities Margin Financing	$10,000,000
SFC Type 9 License Asset Management	Nil (if does not hold client assets) Note 2
SFC Type 10 License Providing Credit Rating Services	Nil (if does not hold client assets) Note 2

 Note 1 – Where a corporation holding an SFC Type 1, 2 or 3 license is approved as an introducing agent or trader or futures non-clearing dealer, paid-up capital requirements are nil for SFC Type 1 and 2 licenses and HK$5,000,000 for SFC Type 3 licenses. An “approved introducing agent” is a person who conducts no business other than communicating offers in the name of a client to a prescribed counterparty or introducing clients to a prescribed counterparty so that the client may effect dealings or trades and make offers to deal or trade. A “trader” is a corporation holding an SFC Type 1 or Type 2 license which does not hold client assets or handle client orders and, in carrying on the regulated activity for which it is licensed, conducts no business other than effecting, or offering to effect, dealings in securities, futures contracts or options contracts for its own account. A “futures non-clearing dealer” is a corporation holding an SFC Type 2 license which is an exchange participant of a recognized futures market, but is not a clearing participant of a recognized clearing house.

Note 2 – Where a corporation holding only SFC Type 4, 5, 6, 9 or 10 licenses is subject to the licensing condition that it shall not hold client assets, as is generally the case, the paid-up capital requirement for an SFC Type 4, 5, 9 and 10 license holder is nil and for a SFC Type 6 license holder is nil if it does not act as a sponsor. Where such corporation is not subject to such licensing condition (i.e. where it holds client assets), the paid-up capital requirement for a holder of an SFC Type 4, 5, 6 (if it does not act as a sponsor), 9 and 10 licenses is HK$5,000,000.

Liquid capital is determined under a formula which, in broad terms, takes a subset of current assets and deducts from that a wide range of liabilities including certain contingent liabilities. Some licensed corporations may qualify for relief from capital requirements. For example, an asset manager who holds an SFC Type 9 license (asset management) may be eligible to reduce liquid capital to HK$100,000 if it meets the specified condition (i.e. it does not hold client assets). The minimum liquid capital is as follows:

Regulated activity	Minimum liquid capital (HK$)
SFC Type 1 License Dealing in Securities	$3,000,000 Note 1
SFC Type 2 License Dealing in Futures Contracts	$3,000,000 Note 1
SFC Type 3 License Leveraged Foreign Exchange Trading	$15,000,000 Note 1
SFC Type 4 License Advising on Securities	$100,000 (if does not hold client assets) Note 2
SFC Type 5 License Advising on Futures Contracts	$100,000 (if does not hold client assets) Note 2
SFC Type 6 License Advising on Corporate Finance	$100,000 (if does not hold client assets) Note 2
SFC Type 7 License Providing Automated Trading Services	$3,000,000
SFC Type 8 License Securities Margin Financing	$3,000,000
SFC Type 9 License Asset Management	$100,000 (if does not hold client assets) Note 2
SFC Type 10 License Providing Credit Rating Services	$100,000 (if does not hold client assets) Note 2

Note 1 – Where a corporation holding an SFC Type 1, 2 or 3 license is approved as an introducing agent or trader or futures non-clearing dealer, liquid capital requirements are HK$500,000 for SFC License Types 1 and 2 and HK$3,000,000 for SFC License Type 3. An “approved introducing agent” is a person who conducts no business other than communicating offers in the name of a client to a prescribed counterparty or introducing clients to a prescribed counterparty so that the client may effect dealings or trades and make offers to deal or trade. A “trader” is a corporation holding an SFC Type 1 or Type 2 license which does not hold client assets or handle client orders and, in carrying on the regulated activity for which it is licensed, conducts no business other than effecting, or offering to effect, dealings in securities, futures contracts or options contracts for its own account. A “futures non-clearing dealer” is a corporation holding an SFC Type 2 license which is an exchange participant of a recognized futures market, but is not a clearing participant of a recognized clearing house.

Note 2 – Where a corporation holding only SFC Type 4, 5, 6, 9 or 10 licenses is subject to the licensing condition that it shall not hold client assets, as is generally the case, the liquid capital requirement is HK$100,000. Where such corporation is not subject to such licensing condition (i.e. where it holds client assets), the liquid capital requirement is HK$3,000,000.

Is a Hong Kong company required for an SFC licensing application

The SFO requires that an applicant for an SFC license be a company incorporated in Hong Kong, a non-Hong Kong company registered in Hong Kong or a corporation which is not registered in Hong Kong and which principally carries on its business outside of Hong Kong. The vast majority of firms licensed by the SFC are Hong Kong incorporated companies.

5. How long will it take to get an SFC license? What happens after I submit my licensing application?

What is the timeline for an SFC licensing application

The SFC has a service pledge of 15 weeks to process a licensing application. The precise time is difficult to predict and will depend upon the case officer handling the application as well as the individual applicant’s background. For example, if the SFC case officer is facing a heavy caseload, the application may take longer. Equally, for example, if the applicant has a number of weaknesses in its application, the application may undergo lengthier back and forth discussions with a view to trying to ensure the SFC is satisfied that these weaknesses should not be fatal to the application.