Schedule 5 to the Securities and Futures Ordinance (SFO) stipulates 10 types of regulated activity and provides a detailed definition for each of them. These activities are:

Please see Q51 for application of participantship and trading rights under the HKEx for broker-dealers.

Analytical tools facilitating the making of investment decisions are often available from financial information web sites. In general, where the tools are able to identify a variety of investment possibilities or recommendations presenting different choices to users, the providers of such tools would be regarded as “advising on securities” or “advising on futures contracts”. An example would be an analytical tool able to make specific recommendations on the basis of the investment profile (such as risk aversion, age or projected cash flow) as determined by the user. However, the mere provision of analytical tools that solely filter publicly available data in a transparent process does not constitute an advisory activity. For example, the provision of a computer programme that identifies stocks of a particular industry sector having price earning ratios below a predetermined level, or that identifies investment funds having past annual returns above a predetermined level, should not trigger a licensing requirement.

The mere presence of hyperlinks, notwithstanding the links maybe with a licensed or registered person, does not of itself trigger a licensing requirement. However, the presence of any inducement, or invitation, to visit the related sites through the links concerned may mean a licence or registration is required. It should be noted that effecting an introduction of a client to a securities/futures/leveraged foreign exchange dealer or its representative in return for a commission, rebate or other remuneration may constitute a regulated activity, for which a licence or registration may be required. Please also refer to Q20 for details.

It should be noted that the provision of electronic order routing facilities and online facilities that simply allows clients to register for monthly subscription plans of authorized collective investment schemes or transmit regular subscription and redemption orders generally would not be regarded as Type 7 regulated activity. If an intermediary intends to conduct dealing activities in the form of the above facilities via the Internet, it is required to:

• complete and submit a Questionnaire for Providing Electronic Trading Services which can be downloaded from the SFC’s website (http://www.sfc.hk/web/EN/forms/intermediaries/licensing- questionnaire/electronic-trading-services.html), and
• notify the SFC in writing the effective date of launching such internet services and the address of the web site.

An intermediary is responsible for ensuring that the order routing services or other electronic services that it wishes to provide do not fall within the definition of “providing ATS” under Schedule 5 to the SFO. If the services do fall within the definition, the intermediary would need to be licensed or registered for Type 7 regulated activity (as the case may be).

Intermediaries offering promotional schemes organized in conjunction with their affiliates should pay special attention to the licensing requirements. In particular, care should be taken to ensure that the marketing activities do not cause the affiliates (which may not be licensed or registered) to engage in dealing in securities, dealing in futures contracts, or other regulated activities.

The implementation of incentive schemes, whereby any member of the public (as conducting a business himself) would be remunerated in the form of commission, rebate, etc. after successfully introducing clients to a licensed person or a registered institution, is generally unacceptable. Such practice could potentially result in the introducing party engaging in unlicensed regulated activities. The licensed person or registered institution concerned could also be liable for aiding and abetting the offence. It is of concern that the clients so introduced may not receive the appropriate protection afforded by the regulatory regime. In addition, the introducing party may not be fit and proper to carry out that function.

The obligation of inter-dealer brokers to be licensed under the SFO is largely dictated by the nature of the financial instruments that they trade, their clients, and the booking structures which they employ. However, it is likely in most cases that inter-dealer brokers are carrying on a business in Type 1 regulated activity (dealing in securities), Type 2 regulated activity (dealing in futures contracts), and/or Type 3 regulated activity (leveraged foreign exchange trading). If an inter-dealer broker is conducting any of these activities, it must be appropriately licensed under the SFO unless it is able to rely upon any of the exemptions stipulated in the SFO.

For details, please see also “Circular concerning the licensing obligations of Inter-dealer Brokers under the Securities and Futures Ordinance”

In general, the following key regulatory requirements are to be satisfied by the SFC:

• Legal structure (Q24)
• Fit and proper criteria (Q25)
• Substantial shareholders (Q26)
• Senior management (Q27)
• Manager-in-charge (MIC) of core functions (Q28)
• Responsible Officers (RO) (Q29)
• Licensed representatives (LR) (Q30)
• Financial resources (Q31)
• Anti-money laundering (“AML”) and counter- financing of terrorism (“CFT”) framework (Q32)
• Internal control and risk management framework (Q33)
• Securing a business and record-keeping premise (Q54)

It should either be a Hong Kong incorporated company; or an overseas company registered with the Hong Kong Companies Registry (that is, a branch)

The applicant is necessary to demonstrate to the SFC that it fit in the following:-

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

Your substantial shareholders who will be acting for or on behalf of you in relation to the regulated activity for which the application is made shall be fit and proper. Please refer to section 129 of the SFO and Q25 for details (Q25). In addition, the SFC may enquire into a proposed substantial shareholder’s source of funding and financial strength in order to assess the legitimacy of the funds and confirm that ultimate beneficial owners who are substantial shareholders have applied for approval.

The senior management holds the primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures includes:

• Directors
• Responsible Officers (“RO”)
• Manager-In-Charge (“MIC”) of core functions

The general requirements are:-

• To designate at least one MIC for each of the eight core functions;
• MICs of overall management oversight function and the key business line function must be ROs;
• The remaining MICs are appointed individual(s) who are responsible for operational control and review, risk management, finance and accounting, information technology, compliance, AML/CTF; and
• A MIC can be in charge of more than one core function or appoint two or more individuals as MICs to jointly manage one core function

For details of the requirements, please refer to the SFC’s “Circular to licensed corporations regarding measures for augmenting the accountability of senior management” and FAQ (Measures for augmenting senior management accountability in licensed corporations).

1. You should appoint not less than two responsible officers to directly supervise the conduct of each regulated activity you apply for.
2. For each regulated activity you apply for, you 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 s/he is fit and proper to be so appointed and there is no conflict in the roles assumed.

• At least one of your proposed responsible officers must be an executive director as defined under the SFO.

1. The SFC generally expects that the Managers-In-Charge of the Overall Management Oversight function and the Key Business Line function described in the section of “Senior Management” of this chapter should seek the SFC’s approval as responsible officers in respect of the regulated activities they oversee.
2. You can apply to be a responsible officer for more than one regulated activity simultaneously provided that you meet the fit and proper (including competence) requirements for the regulated activity concerned, and demonstrate that there is no conflict of interest for you to carry on the regulated activities concurrently. You can also apply to be a responsible officer for more than one licensed corporation simultaneously provided that you demonstrate there is no conflict of interest. Typically this will only be possible where the licensed corporations belong to the same group of companies. For requirements for a licensed individual to hold a directorship in, or outside business interests, please refer to Q53.

For approval criteria, please refer to Q36 and relevant industry experience requirements, please refer to Q42

All personnel carrying on regulated activities need to be licensed as an LR, and subject to the similar fit and proper criteria as RO. For approval criteria, please also refer to Q37

To maintain paid-up share capital and liquid capital at all times not less than the specified amounts according to the Securities and Futures (Financial Resources) Rule.

To design and implement anti-money laundering and counter financing of terrorism policies, procedures, and controls to meet the relevant legal and regulatory requirements. Please refer to SFC’s “Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations)” for details.

To Implement adequate and effective internal control procedures to protect their operation and clients from financial loss caused by theft, fraud, and other misconduct.

Please refer to the SFC’s Code of Conduct, “Management, Supervision, and Internal Control Guidelines For Persons Licensed by or Registered with the Securities and Futures Commission” for details. For fund managers and corporate finance advisers, please also refer to the industry-specific Code of Conduct for details.

As defined in section 113(1) of the SFO, “executive director”, in relation to a licensed corporation, means a director of the corporation who –

• actively participates in; or
• is responsible for directly supervising,

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

An executive director may reside outside Hong Kong so long as s/he is able to satisfactorily discharge his/her responsibility to supervise the business of regulated activity for which you are licensed. In this regard, factors which the SFC would consider include the frequency of his/her visit to attend to regulated activities in Hong Kong and the systems of internal controls. In addition, you should have at least one responsible officer who is available at all times to supervise the business of the regulated activity for which you are licensed.

It is unlikely that a director who resides outside Hong Kong and does not participate in your day-to-day management will be required to be approved as a responsible officer. Please also refer to Q for SFC’s approval criteria for licensed persons who reside overseas (Q38).

First, you need to satisfy the SFC that you have fulfilled the fit and proper requirement, having regard to:

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

For details, please refer to the “Fit and Proper Guidelines”.

Second, as part of the fit and proper requirement, you should fulfill competence criteria relating to:

• academic / industry qualification
• relevant industry experience
• management experience
• the local regulatory framework paper

*conditional exemption may be granted

An individual may obtain a conditional exemption from taking the local regulatory framework paper if he can demonstrate the following:

The individual has proven substantial related experience but simply lacks the required level of local regulatory exposure. “Substantial” means having at least:

• 8 years related experience in recognized markets (with reference to Parts 2 and 3 of Schedule 1 to the SFO); or
• 6 years related experience with at least 2 years licensed or being an executive officer or relevant individual of a registered institution in Hong Kong;

with some part of it gained in the recent 3 years.

Third, you should have sufficient authority to supervise the business of regulated activity in the licensed corporation that you will be accredited to. However, you may or may not be a member of the board of directors of the licensed corporation.

You need to satisfy the SFC that you have fulfilled the fit and proper requirement, having regard to:

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

As part of the fit and proper requirement, you should fulfill competence criteria relating to:

• academic / industry qualification
• relevant industry experience / recognized industry qualification
• local regulatory framework paper

For more details, please refer to the “Guidelines on Competence”.

The SFC will only grant licenses to individuals if they will come to Hong Kong to carry on regulated activities on behalf of the licensed corporations they are accredited to. If a responsible officer will be stationed overseas and come to Hong Kong to carry on regulated activity from time to time, s/he should expect a non-sole condition (i.e. under which the individual must, when actively participating in or when directly supervising the business for which the firm is licensed, do so under the advice of another responsible officer who is not subject to the non-sole condition) to be imposed on her/his licence. Her/His principal should ensure that it has sufficient onshore responsible officers who are free from any licensing condition with respect to the regulated activity to supervise the business of regulated activity in Hong Kong.

For details, please refer to the “Circular clarifying the licensing obligations of corporations and individuals and more particularly those conducting business outside Hong Kong”.

In general, the following documents are required for submission:-

• Application forms
• Supplements
• Questionnaires
• Business profile and clientele
• Financial strength and sustainability of substantial shareholders
• Management (including corporate governance, responsible officers, and managers-in-charge of core functions)
• Risk management and internal control measures

The SFC may return your application if it is incomplete and/or it has unresolved fundamental issues. You may re-submit it later with additional documents and/or information for our re-consideration and further processing. Examples of situations in which the SFC may return your application are:

• You have not applied for the appropriate type(s) of regulated activity;
• You have not completed the required forms, supplements and questionnaires, or have not provided necessary supporting documents.
• You have not provided explanations as to why you are fit and proper to be licensed in the light of your “Yes” answer to any question in the following sections of the respective forms or supplements:
  1. Disciplinary Actions and Investigations
  2. Financial Status

• Character

1. Mental Health (for individuals only)

• You do not appear to have met the competence requirements set out in “Guidelines on Competence”. (Note: Section 4/Appendix A and section 5/Appendix B of the Guidelines set out the competence requirements applicable to corporations and individuals respectively for licensing purposes. If there are exceptional circumstances which you would like us to take into account in your application, please provide us with further information.)
• You indicated that you are required to have an employment visa in Hong Kong to carry out the proposed regulated activities but you have not applied for it.
• You are a director (as defined under Schedule 1 to the SFO) of your proposed accredited principal and only apply to be its licensed representative but not responsible officer.
• You have not provided sufficient information on your proposed business and operational workflow.
• Unclear source of funds or inadequate financial strength.
• You do not have at least two proposed responsible officers who appear to have met the competence requirements (with one of them being fully competent) for each regulated activity that you intend to carry on.

The SFC recognises a broad range of industry experience as being relevant when considering responsible officer applications. For example, experience acquired from sales and marketing of funds, although not directly relevant to investment management, may be recognised in respect of Type 9 regulated activity (asset management). In some situations, the SFC may impose a non-sole condition on the related licence (under which the individual must, when actively participating in or when directly supervising the business for which the firm is licensed, do so under the advice of another responsible officer who is not subject to the non-sole condition). In considering whether an applicant meets the industry experience tests, the SFC will also take into account, amongst other things, his/her overall career history accumulated in the industry.

For asset management experience, as an example, if a Type 1 licensed person is currently allowed to conduct asset management activity which is wholly incidental to his or her conduct of dealing activity (such as discretionary account management), the SFC will consider such experience as relevant when considering his or her responsible officer application for Type 9 regulated activity. The SFC also recognises other industry experiences such as research, private equity, and proprietary trading, as being relevant when it considers such an application. For details, please also refer “Circular to clarify competence requirements for existing licensed persons intending to provide asset management services”.

For Technology-related experience, as an example, is that where the regulated activity carried on by a licensed corporation is based on the utilisation of highly innovative technology, a proposed responsible officer’s direct previous experience in the relevant technology itself may be essential in integrating the technology into the regulated activity carried on by the licensed corporation. If so, the SFC may recognise such technology experience as relevant industry experience. Please also refer “Circular to clarify the “relevant industry experience” requirement for Responsible Officers under the Guidelines on Competence”.

For dormant firms, when assessing the industry experience claimed by an applicant, please note the SFC will take into account the business activities of the firm to which he/she was accredited to. In particular, if the firm was largely or completely dormant for a prolonged period, the industry experience purportedly gained by the applicant may be less effectual for fulfilling the competence requirements.

For a responsible officer of a private equity firm, please also refer to Q43.

If a person will repeatedly visit Hong Kong on business for a short period each time, you may apply for a representative licence to be an itinerant professional. Itinerant professionals who perform regulated activities in Hong Kong may be exempted from taking the relevant local regulatory framework paper, subject to the following conditions and undertakings:

• Conditions

The SFC may impose conditions on the licence of itinerant professionals to the effect that they (i) shall not carry out the regulated activity(ies) in Hong Kong for more than 30 days in each calendar year; and (ii) shall at all times be accompanied by a licensed/registered person in performing regulated activities in Hong Kong. Without compromising investor protection, the SFC may consider removing the chaperoning requirement as mentioned in condition (ii) and impose an alternative condition to the effect that the individual can only provide services that constitute regulated activities to professional investors as defined under the Securities and Futures Ordinance.

• Undertakings

For itinerant professionals subject to conditions (i) and (ii), the principal should provide a written undertaking to the effect that it will assume full responsibility for the supervision of the individual’s activities during her/his stay in Hong Kong and ensure s/he will comply with the relevant rules and regulations at all times. For those subject to the alternative condition, the principal shall provide additional undertakings that it will: (i) provide training in the form of a structured course to the individual to ensure that s/he is fully aware of the Hong Kong regulatory framework before s/he commences carrying out the regulated activity(ies) in Hong Kong; and (ii) comply with the requirements set out under Paragraph (6)(c) of Appendix E of the “Guidelines on Competence”, in which it will arrange at least one approved responsible officer for the regulated activity to directly supervise or otherwise responsible for advising the individual in conducting regulated activity in Hong Kong.

Please note Itinerant professionals should not be responsible officers because responsible officers are required to be responsible for overseeing the regulated activity for which their principal is licensed. Itinerant professionals spend only short periods in Hong Kong from time to time and for specific purposes. This is generally incompatible with the performance of the obligations that are imposed on responsible officers.

Trading Rights

To fulfill the Participantship requirement, all Exchange Participants (“EP”s) are required to hold at least one Trading Right of the respective Exchanges, i.e. a Stock Exchange Participant must hold a Stock Exchange Trading Right (“SETR”) whereas a Futures Exchange Participant must hold a Futures Exchange Trading Right (“FETR”). All new Trading Rights are issued by the SEHK and HKFE.

? SETR – Participantship

? Participantship of the Stock Exchange of Hong Kong Limited (“SEHK”) and Hong Kong Securities Clearing Company Limited (“HKSCC”)

? Options Exchange Participantship of SEHK and Clearing Participantship of the SEHK Options Clearing House Limited (“SEOCH”)

? FETR – Participantship

? Participantship of Hong Kong Futures Exchange Limited (“HKFE”) and HKFE Clearing Corporation Limited (“HKCC”)

Application Procedure

1. Prior to applying to become an Exchange Participant, any broker-dealers intending to offer brokerage for securities products (including stock options) or derivatives products available on HKEx has to be licensed by the Securities and Futures Commission (“SFC”) as a Licensed Corporation, enabling it to carry out Type 1 (dealing in securities) or Type 2 (dealing in futures contracts) Regulated Activities. Please refer to the SFC website at www.sfc.hk for details.
2. Submission of completed application forms to HKEx and please refer to the HKEx website for further information.

Together with:-

1. i) certified true copy of the latest Financial Return submitted to the SFC (applicable to Licensed Corporation) or HKEx Form 1E (Financial Statement) together with the latest management accounts which should be made up to a date within one month from the date of application;
2. ii) an Operation and Risk Control Plan – applicable to Direct Clearing Participant and General Clearing Participant;

iii) other required documents such as group structure chart, certified true copy of the SFC licence certificate, specific Participantship Agreement subject to the type of Trading Right of the respective Exchanges, etc.

3. Applicable deposits and payment, or contribution to the reserve fund by crossed cheque made payable to “Hong Kong Exchanges and Clearing Limited”.
4. Trading infrastructure set-up including a selection of the market access type, hardware order, system tests, etc, needs to be in place for the Application.
5. Clearing arrangement to obtain clearing facilities by either (i) becoming a clearing participant of the respective clearinghouse or (ii) maintaining an approved clearing arrangement with a General Clearing Participant.
6. Trading can only commence after the relevant Participantship and completion of the set-up of trading and clearing arrangement.

Please note that, in processing the Applications, HKEx may ask questions and details about the operation and risk control details to ensure compliance with related requirements.

This may include, for example, those who frequently call on Hong Kong investors and market their services (including offering products); running a mass media programme targeting the investing public in Hong Kong, and Internet activities that target Hong Kong investors. In determining whether or not a person “actively market” its services to the public, the SFC will consider the nature of the business activities as a whole and have regard to a number of factors, including (without limitation) the following:

• whether there is a detailed marketing plan to promote the services;
• whether the services are extensively advertised via marketing means such as direct mailing, advertisements in local newspapers, broadcasting or other “push” technology over the Internet (as opposed to where the services are passively available e.g. on a “take it or leave it” basis);
• whether the related marketing is conducted in a concerted manner and executed in accordance with a plan or a schedule which indicates a continuing service rather than a one-off exercise;
• whether the services are packaged to target the public of Hong Kong, e.g. written in Chinese and denominated in Hong Kong dollars; and
• whether the services are sought out by the customers on their own initiative.

The SFC is unlikely to be satisfied that an individual 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 (the “Company”), where such directorship or engagement will likely prejudice the interests of investors due to conflicts of interest, confidentiality concerns or other factors. 

Engagement in the business of a company not only refers to directorship or employment but may also include, for example, providing consultancy services or having ownership or beneficial interest in the company. 

Conflicts of interest may arise as a result of competing business interests, objectives, or obligations of the individual, his principal, and the Company.  Confidentiality concerns may arise as a result of the individual’s possible access to non-public or sensitive information in light of his roles with his principal and/or the Company.  

As set out in section 129(1) of the SFO, in considering whether a person is fit and proper, the SFC shall have regard to a number of factors, including the person’s ability to carry on the regulated activity competently, honestly, and fairly.  Therefore, in considering whether an individual’s involvement in the Company will affect his fitness and properness to be licensed or to remain licensed, the SFC will take into account factors such as:

• the business natures (e.g. scope of services and clientele) of his principal and of the Company (the “Firms”);
• his roles and duties, as well as reporting lines, in the Firms;
• his time allocation in performing his roles and duties in the Firms, and whether he can properly manage his time in carrying on (and, where applicable, supervising) the regulated activity for his principal;
• any measures imposed by the Firms to effectively manage and monitor on an on-going basis any potential and actual conflicts of interest arising from his dual capacities in the Firms;
• any measures imposed by the Firms to effectively address confidentiality concerns arising from his possible access to non-public or sensitive information in light of his roles and duties in the Firms;
• whether and on what basis the Firms take the view that there will not be conflicts of interest arising from his dual capacities; and/or
• whether the Firms consent to his dual capacities.

By way of example, the SFC will likely have a concern if a licensed individual is also an executive director of a listed company that is not of the same group of companies as his principal.  The SFC will likely have less concern if the Company is in the same group of companies as the individual’s principal, the individual plays a non-executive role with limited involvement in the business or daily operation of the Company, or the individual owns the Company which is purely used for holding his own property investments.

As the circumstances of each case vary, the above factors are not necessarily exhaustive.  Each case will be considered having regard to its particular circumstances.

You will need to seek approval for the premises of each business office (including branch) in Hong Kong if records or documents are being kept at, or can be accessed from, such premises. The business and record-keeping premise should be located in Hong Kong. However, in the case where a licensed corporation intends to keep regulatory records exclusively with an electronic data storage provider, data centre(s) used by the electronic data storage provider at which the regulatory records of the licensed corporation are kept, regardless of whether it is located in Hong Kong or elsewhere, is required to be approved by the SFC under section 130 of the SFO. For details, please refer to the circular on the Use of external electronic data storage dated 31 October 2019. https://www.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=19EC59

In the case of shared offices or business centers, please refer to Q55.

As a matter of principle, a licensed corporation should satisfy itself that the business premises occupied by it are appropriately secured and that confidential or non-public information (such as price-sensitive information) and client privacy will be sufficiently safeguarded against unauthorised access or leakage.

The SFC does not distinguish business centres or shared offices from other types of business accommodation. However, the following factors would suggest that the premises are likely to be unsuitable:

• where there is no secured and properly segregated office area, which is able to be locked and which is designated for the corporation’s own and exclusive use, and in which its business records, particularly those relating to clients, are able to be securely held;
• where essential office equipment and telecommunication systems are installed in such a way that they are not situated within an enclosed area that is secure and accessible only by the corporation’s staff and authorized personnel;
• where no or insufficient measures are taken to prevent confusion to clients that might be caused by the existence of other business entities occupying the same premises;
• where the nature of the corporation’s business demands frequent face-to-face dealings or meetings with clients at the corporation’s premises, during which client information and instructions are likely to be exchanged, and practical difficulties exist in the corporation being able to ensure confidentiality during such meetings; or
• where the corporation has not ensured that its office premises will always be accessible for all formal regulatory visits, including investigations and inspections.

Although the above factors are considered by the SFC to be of principal concern to it in respect of the appropriateness or otherwise of business premises occupied by licensed corporations, they should not be considered to constitute an exhaustive list because circumstances might exist in certain situations that give rise to particular accommodation needs or requirements.

Licensed corporations have an ongoing obligation to anticipate such matters and to ensure that their business premises are, at all times, suitable for the purposes for which they are being used.