FCA follows up capital markets thematic

Following a court’s conviction of an unlicensed asset manager late last year, the Hong Kong regulator has clarified how this part of the regulatory framework affects private equity firms. Firms and individuals need to act now to align with the regulatory clarification, and if necessary apply for the appropriate licence. If not, they face tough action by the regulator.

The SFC’s fine in October for a breach to its Code of Conduct was the subject of an earlier article. The reprimand stressed the importance of employing ‘fit and proper’ staff, and criticised the use of unlicensed individuals for regulated work. On 6th January this year, the Eastern Magistrates’ Court convicted a fund manager for carrying on an asset management business without an SFC licence.

When it comes to licensing, the SFC is showing that it means business, as we have discussed before. The PE sector would be wise to take note of the SFC’s latest circular on the subject, published on 7th January. Below we’ll summarise the main points.

  1. The General Partner (GP) of a PE fund usually needs a type 9 licence for asset management activity (RA9) if:
    • The PE is a limited partnership (so that the GP is responsible for the fund)
    • Fund management business is conducted in Hong Kong
    • The activities count as asset management under the SFO’s definition
    • Responsibility hasn’t been completely delegated to a licensed ./ authorised entity
  1. To be licensed for Type 9 activity, asset managers must have full discretionary investment authority over the funds they manage. This differentiates asset management from just advising on securities or futures contracts. Alternative structures (where a Hong Kong adviser provides investment advice to an offshore manager) may still require the Hong Kong entity to seek an appropriate SFC licence.
  2. Where a Hong Kong based investment committee is established by an RA9-licensed PE firm, members need to be licensed representatives and sometimes also approved responsible officers. That’s if they play a part in investment decisions, as opposed to providing guidance on legal, compliance or internal control matters.
  3. The regulator will look at the entire portfolio to decide whether it contains securities and/or futures contracts, and therefore is regarded as asset management for RA9 purposes. Shares and debentures of Hong Kong private companies don’t generally count as securities. Something that may count, though, is securities and futures contracts held by special purpose vehicles (SPVs), either locally or overseas, as well as the SPVs themselves.
  4. In general, firms offering co-investment opportunities should apply for a type 1 licence (RA1, for dealing in securities). However, if the co-investment offering is solely incidental to the management of the fund vehicle, a type 9 licence is enough.
  5. The same is true of marketing activities. A PE firm licensed for RA9 usually needs an RA1 licence to market its funds, unless the marketing relates entirely to RA9 business. In other words, if the PE firm is marketing only the funds that it manages, it does not need to seek an additional RA1 licence.
  6. The SFC promises pragmatism around the requirement for responsible officers to have industry experience. For example, it may take account of research, management consulting and management buyout experience, as well as PE experience in an unregulated context.

We’d advise any unlicensed firms to read the circular. Licensed firms should also check to see whether they need to add to the licences they already hold. If you are unclear whether your business is affected, Bovill is here to help.