Client Alert

Financial Services 28 July 2017

Hong Kong legal and regulatory agenda for the fund

management industry
Mary Nieto

In January 2017 we published a Hong Kong legal and regulatory agenda for the fund management industry,
which provided a summary of key legislative and regulatory initiatives affecting the investment funds
industry. Now that Hong Kong’s Legislative Council has paused for Summer recess, we have updated the
agenda to reflect the proposals that have been implemented so far in 2017 and those that we anticipate will
be given some focus in the coming months.

The chart below sets out selected proposals, summarises the next steps and offers links to reference
materials including previous publications by Deacons. We trust you will find it useful.

Key:
 FSTB = Financial Services and the Treasury Bureau, The Government of the Hong Kong SAR
 HKMA = Hong Kong Monetary Authority
 MPFA = Mandatory Provident Fund Schemes Authority
 SFC = Securities and Futures Commission

Section 1: Proposals in the pipeline

Summary Status Next Steps Reference Materials

Cybersecurity The SFC engaged in a The SFC aims to finalise Consultation Paper on
two-month public the revised Code of Proposals to Reduce and
The SFC proposes new consultation process which Conduct and new Mitigate Hacking Risks
guidelines to set out ended on 7 July 2017. guidelines in Associated with Internet
baseline cybersecurity September/October Trading (SFC, 8 May 2017)
requirements for 2017 and proposes a
internet brokers and six-month transitional Publications by Deacons:
proposes to expand the period before
scope of the regulatory SFC seeks to strengthen
implementation.
regime for electronic cybersecurity for internet
trading to cover the trading (20 June 2017)
internet trading of
unlisted securities such
as authorised funds.

1
 Summary Status Next Steps Reference Materials

PI Rules The SFC’s one-month The consultation Consultation Paper on the

public consultation ended conclusions are Proposed Amendments to the
The SFC has proposed on 3 April 2017. pending. Securities and Futures
changes to the (Professional Investor) Rules
Securities and Futures (SFC, 1 March 2017)
(Professional Investor)
Rules, such as allowing Publications by Deacons:
joint accounts with non-
associates and assets Consultation on proposed
held in investment amendments to Securities and
vehicles owned by Futures (Professional Investor)
individuals to be counted Rules (21 March 2017)
in ascertaining whether
individuals meet the
monetary threshold to
qualify as professional
investors.

MIC Regime The commencement date MICs of the Overall Circular to Licensed
for the MIC regime was 18 Management Oversight Corporations – Submission of
The SFC has issued April 2017. function and the Key information on Managers-in-
new accountability Business Line function Charge of Core Functions (MIC)
requirements for senior LCs were required to who are not already and organisational charts (SFC,
managers (Managers in submit the MIC information Responsible Officers 3 April 2017)
Charge or MICs) of and organisational charts will need to apply for
licensed corporations on or before 17 July 2017. the SFC’s approval as Circular to Licensed
(LCs). such on or before 16 Corporations Regarding
October 2017. Measures for Augmenting the
Accountability of Senior
Management (SFC, 16
December 2016) and FAQs on
Measures for Augmenting
Senior Management
Accountability in Licensed
Corporations (SFC, 16
December 2016)

Publications by Deacons:

MIC Checklist: What needs to

be done post-submission? (12
May 2017)

Checklist for MIC regime:

What’s next after identifying the
MICs for the 8+ core functions?
(31 March 2017)

Manager-In-Charge regime:
What licensed corporations
need to do (26 January 2017)

New senior management

accountability regime for SFC
licensed corporations (22
December 2016)

2
 Summary Status Next Steps Reference Materials

FMCC Update A consultation paper was The SFC’s consultation Consultation Paper on
issued on 23 November conclusions are Proposals to Enhance Asset
The SFC has proposed 2016. The consultation pending. Management Regulation and
changes to the Fund period ended on 22 Point-of-sale Transparency
Manager Code of February 2017. (SFC, 23 November 2016)
Conduct (FMCC) and
Code of Conduct for Publications by Deacons:
Persons Licensed by or
Registered with the SFC proposes significant
SFC. The proposed changes to asset management
FMCC changes will regulation (24 February 2017)
affect all Type 9 licensed
SFC consults on asset
managers.
management regulation and
point-of-sale transparency (9
December 2016)

OTC Derivatives The Securities and Futures
Regime (Amendment) Ordinance
2014 was enacted on 26
In response to global March 2014. The
efforts to enhance legislation is being
regulation of over-the- implemented in phases.
counter derivatives
(OTCD) following the The first phase of
financial crisis in late mandatory reporting,
2008, the HKMA and the which requires the
SFC jointly issued reporting of transactions in
proposals for a certain interest rate swaps
regulatory regime for the and non-deliverable
OTCD market in Hong forwards, came into force
Kong, including reporting on 10 July 2015; the first
and licensing phase of mandatory
requirements. clearing came into force on
1 September 2016. The
Under the new licensing second phase of
regime, two new mandatory reporting,
regulated activities which expands the
(RAs) will be introduced, mandatory reporting to
(i) Type 11 RA (dealing
cover all OTCD products in
in OTCD products or
five key asset classes
advising on OTCD
(interest rate, FX, equity,
products); and (ii) Type
credit and commodity)
12 RA (providing client
came into effect on 1 July
clearing services for
2017.
OTCD transactions).
In response to a request
The legislation also from ISDA, on 27 April
expands the scope of 2017 the HKMA and the
two existing RAs (Type 7 SFC issued a joint one-
RA, providing automated month consultation on the
trading services and scope of the definition of
Type 9 RA, asset “OTC derivative products”.
management) to cover
Consultation conclusions
OTCD transactions or
were published on 27 June
products.
2017. The HKMA and the
SFC will work with the
Department of Justice on
drafting necessary
legislative amendments to
implement the changes.
On 24 July 2017, the Consultation Conclusions and
SFC issued Further Consultation on
consultation Proposed Changes to the
conclusions on Securities and Futures
proposed changes to (Financial Resources) Rules
the financial resources (SFC, 24 July 2017)
rules for licensed
corporations engaged Securities and Futures (OTC
in OTCD activity, and Derivative Transactions -
issued a further Reporting and Record Keeping
consultation on Obligations) (Amendment)
additional proposals. Rules 2016 came into effect on
The consultation period 1 July 2017
ends on 23 August
Joint consultation conclusions
2017.
on the prescription of additional
The timetable for the markets and clearing houses
implementation of the and the prescription of Delta
new licensing regime is One Warrants under the OTC
yet to be designated. derivatives regulatory regime
An SFC consultation (HKMA and SFC, 27 June 2017)
on risk management,
Securities and Futures (OTC
client clearing and
Derivative Transactions -
record keeping is
Clearing and Record Keeping
expected in September
Obligations and Designation of
2017.
Central Counterparties) Rules
came into effect on 1 September
2016, together with FAQs on the
operation and implementation of
the mandatory clearing regime
(last updated on 11 November
2016), and the Securities and
Futures (Fees) (Amendment)
Rules 2016.
Securities and Futures (OTC
Derivative Transactions -
Reporting and Record Keeping
Obligations) Rules came into
effect on 10 July 2015 (with the
exception of Rule 15), together
with FAQs. Rule 15 came into
effect on 1 September 2016.
Securities and Futures (OTC
Derivative Transactions

3
 Summary Status Next Steps Reference Materials

Reporting Obligations - Fees)

Rules came into effect on 1 May
2016.

Securities and Futures

(Amendment) Ordinance 2014

Publications by Deacons:

SFC designates central

counterparties for Hong Kong
OTC derivative mandatory
clearing requirements (20
September 2016)

Will a Type 1 asset manager

need a Type 11 licence under
the new OTC derivatives
regime? (11 August 2016)

OTC derivatives - recent SFC

circulars and consultations (29
October 2015)

Hong Kong OTC derivatives

regulation – Reporting rules set
to take effect (15 June 2015)

Hong Kong OTC derivatives

regulation - phased
implementation of reporting
obligations (1 December 2014)

OTC derivatives reporting and

licensing in Hong Kong - what
asset managers can do now to
prepare (15 September 2014)

Hong Kong OTC derivatives

regulation – Amending
legislation passed (29 April
2014)

Hong Kong OTC derivatives

regulation – Amending
legislation introduced (18
September 2013)

Hong Kong's OTC derivatives

proposals – What do they mean
for asset managers? (16 August
2012)

Regulation of OTC derivatives

markets coming to Hong Kong
(27 October 2011)

OFC Vehicle The regime for the OFC, On 28 June 2017, the Consultation Paper on the
which was created by the SFC issued a two- Securities and Futures (Open-
The Government is Securities and Futures month consultation on ended Fund Companies) Rules
introducing a new (Amendment) Ordinance detailed legal and and Code on Open-ended Fund
investment vehicle in the 2016, is expected to regulatory Companies (SFC, 28 June
form of a mutual fund (to become operational in requirements 2017)
be known as an open- 2018. applicable to the OFC
ended fund company structure. The Inland Revenue (Amendment)

4
 Summary Status Next Steps Reference Materials

(OFC)). consultation ends on (No. 4) Bill 2017 (23 June 2017)

28 August 2017.
Legislative Council Paper on
Implementation of the Proposed Extension of Profits
OFC regime is Tax Exemption to Onshore
expected in 2018. The Privately Offered Open-ended
FSTB has introduced Fund Companies (FSTB, 8
proposals to extend the March 2017)
profits tax exemption to
privately offered OFCs Securities and Futures
– a tax amendment bill (Amendment) Ordinance 2016
was published on 23 gazetted on 10 June 2016
June 2017.
Consultation conclusions
(FSTB, January 2016)

Consultation Paper on Open-

Ended Fund Companies (FSTB,
20 March 2014)

Publications by Deacons:

Legislation passed for new fund

vehicle (21 June 2016)

New HK fund vehicle takes

shape (1 February 2016)

Guidance on Online The SFC issued a three- The consultation ends Consultation Paper on the
Distribution and month consultation in May on 4 August 2017. The Proposed Guidelines on Online
Advisory Platforms 2017. SFC will issue a Distribution and Advisory
conclusions paper, Platforms (SFC, 5 May 2017)
The SFC has proposed together with the final
issuing guidelines which form of the guidelines, SFC issues further guidance on
will “aim to provide more once the respondents’ suitability obligations (SFC, 23
tailored guidance to the comments have been December 2016)
industry in complying reviewed. The SFC
with the applicable Publications by Deacons:
proposes a 12-month
conduct and other transitional period SFC consults on proposed
regulatory requirements, before full guidelines on online distribution
including the suitability implementation. and advisory platforms (11 May
obligations”.
2017)

AML Regime Two consultation papers Two amendment bills – Anti-Money Laundering and
Enhancements were issued on 6 January the Anti-Money Counter-Terrorist Financing
2017. The consultation Laundering and (Financial Institutions)
The Government period ended on 5 March Counter-Terrorist (Amendment) Bill 2017 (23 June
launched two 2017. On 13 April 2017, Financing (Financial 2017)
consultation exercises the Government issued a Institutions)
on legislative proposals combined consultation (Amendment) Bill 2017 Companies (Amendment) Bill
to enhance the conclusions paper. The and the Companies 2017 (23 June 2017)
regulatory regime for Government reported (Amendment) Bill 2017
combating money Consultations on Legislative
general support for the – were gazetted on 23
laundering and terrorist Proposals to Enhance Anti-
proposals and announced June 2017.
financing: (i) on Money Laundering and Counter-
plans to introduce
improving the Terrorist Financing Regulation in
amendment bills into the
transparency of Hong Kong – Consultation
Legislative Council by July
beneficial ownership of Conclusions (FSTB, 17 April
2017.
HK companies; and (ii) 2017)
on requiring non-
Consultation on Enhancing Anti-
financial businesses to
Money Laundering Regulation of
conduct customer due
Designated Non-Financial
Businesses and Professions

5
 Summary
diligence.
Independent Insurance
Authority
The Government
proposed to establish an
independent insurance
authority (IA) to
modernise the insurance
industry regulatory
infrastructure. The IA will
take over the duties of
the existing Office of the
Commissioner of
Insurance and the three
self-regulatory
organisations and
exercise new statutory
powers to licence and
regulate insurance
intermediaries.
Status
The Government first
consulted the public on the
broad framework for the
establishment of the IA in
2010. The conclusions of
the first consultation and
detailed proposals were
published in 2011,
followed by a further
consultation on the key
legislative proposals from
October 2012 to January
2013.
The Insurance Companies
(Amendment) Ordinance
2015 was passed on 10
July 2015 and will
commence in three stages.
The first phase of
provisions came into force
on 7 December 2015.
Next Steps Reference Materials
(FSTB, 6 January 2017)
Consultation on Enhancing
Transparency of Beneficial
Ownership of Hong Kong
Companies (FSTB, 6 January
2017)
Publications by Deacons:
Companies (Amendment) Bill
2017 (10 July 2017)
New developments in “know-
your-customers” requirements
(5 July 2017)
Proposed beneficial ownership
register for HK companies not to
be public (23 May 2017)
Recent proposals for HK’s AML
regime – impact on SFC
regulated entities (24 January
2017)
The IA replaced the Insurance Companies
Office of the (Amendment) Ordinance 2015
Commissioner of (Commencement) Notice 2017
Insurance to regulate (gazetted on 21 April 2017)
insurance companies
from 26 June 2017. Insurance Companies
This represents the (Amendment) Ordinance 2015
second phase of a (Commencement) Notice 2015
three stage regulatory
Insurance Companies
reform process. The IA
(Amendment) Ordinance 2015
is expected to
implement the new FAQs on the consultation
statutory licensing (FSTB, May 2015)
regime for insurance
intermediaries and to Consultation Conclusions on the
take over the Key Legislative Proposals for
supervision of the Establishment of an
insurance Independent Insurance Authority
intermediaries from (FSTB, 26 June 2013)
three self-regulatory
Publications by Deacons:
organisations within
two years of the
New regulator for Hong Kong
handover.
insurance industry to commence
operation (23 May 2017)
New regulator for Hong Kong
insurance industry (23
September 2015)
6
Section 2: Proposals implemented during January – July 2017
Summary
Disclosure of
Interests
The SFC proposed
mandatory electronic
filing of disclosure of
interests notifications
and reports under the
Securities and Futures
Ordinance.
Amendments to the PI
Regime and Client
Agreement
Requirements
Changes to the
professional investor
(PI) regime include: (i)
intermediaries need to
comply with the Code of
Conduct in full when
dealing with individual
PIs; (ii) intermediaries
may only disapply
investor protection
provisions for corporate
PIs if the entity is willing
and has passed a CPI
assessment.
Changes to the client
agreement
requirements include
the insertion of a new
clause on suitability and
non-derogation and the
requirement that the
Status
The SFC published a
consultation paper in 2007,
and conclusions in 2008.
The Securities and Futures
(Amendment) Ordinance
2014 was gazetted in April
2014. Part 4 of the
Amendment Ordinance,
which makes it mandatory
for corporate insiders and
substantial shareholders of
listed corporations (DI
filers) to file disclosure of
interest notifications and
reports electronically, will
come into effect on 3 July
2017. DI filers will no
longer be required to
submit disclosure notices
to the relevant listed
corporations.
The amendments relating
to the professional
investors regime came into
effect on 25 March 2016.
Next Steps Reference Materials
From 3 July 2017, DI Arrangements for electronic
filers must make filings filing of disclosure of interests
using an electronic notifications (SFC, 5 May 2017)
system approved by
the SFC. Revised filing Gazette Notice 2832 – Notice
forms were made specifying forms for use under
available on the SFC’s Part XV of the Securities and
website on 5 May 2017. Futures Ordinance (27 April
2017)
Securities and Futures
(Amendment) Ordinance 2014
(Commencement) Notice 2017
(16 March 2017)
Securities and Futures
(Amendment) Ordinance 2014
Publications by Deacons:
Getting familiar with the
Disclosure of Interests Online
(DION) System effective from 3
July 2017 (7 July 2017)
Getting ready for mandatory e-
filing of disclosure of interests in
July 2017 – New prescribed
forms are published (9 May
2017)
Mandatory e-filing of disclosure
of interests will come into effect
in July 2017 (28 March 2017)
All intermediaries’ client Gazette Notice 259 – Securities
agreements must and Futures Ordinance (11
comply with the new January 2017)
Code of Conduct
requirements, including FAQs on the application of
incorporation of the paragraph 6.2(i) of the Code
new clause and (SFC, 23 September 2016)
observance of the new
Consultation Conclusions on the
paragraph 6.5 of the
Client Agreement Requirements
Code of Conduct on or
(SFC, 8 December 2015)
before 9 June 2017.
Circular and FAQs on Corporate
Professional Investor
Assessment and Description of
Client Services in Client
Agreements (SFC, 22 January
2015)
FAQ on the assessment of
Corporate Professional
Investors (SFC, 22 January
2015)
FAQ on the description of
services in client agreements
(SFC, 22 January 2015)
7
 Summary Status
agreement does not
include anything
inconsistent with the
Code of Conduct or
anything inaccurate or
misleading in the
description of services.
AEOI A bill to amend the Inland
Revenue Ordinance was
The Government published on 24 March
proposed legislative 2017. Proposals include
amendments to expand expanding the list of
of the list of reportable reportable jurisdictions
jurisdictions for from two to 74. The
automatic exchange of amendment ordinance
financial account came into effect on 1 July
information (AEOI) 2017.
purposes.
Position Limits Amended rules include a
300% cap on the excess
The SFC consulted the position limit that may be
market on expanding authorised by the SFC, a
the scope of the statutory position of
position limit regime. 150,000 contracts for stock
options as well as new
excess position limits for
index arbitrage activities,
asset managers and
market makers of ETFs.
The minimum AUM
requirement for asset
managers will be lowered
to $80 billion.
Next Steps Reference Materials
Consultation Conclusions on the
Proposed Amendments to the
Professional Investor Regime
and Further Consultation on the
Client Agreement Requirements
(SFC, 25 September 2014)
Consultation on Proposed
Amendments to the Professional
Investor Regime and the Client
Agreement Requirements (SFC,
15 May 2013)
Publications by Deacons:
SFC FAQs on inclusion of the
new suitability clause in
discretionary investment
management agreements (20
October 2016)
Important Change to Client
Agreements (10 December
2015)
Developments in Hong Kong’s
professional investor regime and
client agreement requirements
(7 October 2014)
SFC consults on changes to the
professional investor regime (27
June 2013)
Financial institutions Inland Revenue (Amendment)
are required to collect (No.2) Ordinance 2017
reportable information
for the 72 new
jurisdictions from 1 July
2017.
The revised Securities Consultation Conclusions on
and Futures (Contract Proposed Enhancements to the
Limits and Reportable Position Limit Regime and the
Positions) Rules were Associated Amendments to the
gazetted on 24 March Securities and Futures
2017 and came into (Contracts Limits and
effect on 1 June 2017. Reportable Positions) Rules and
the Guidance Note on Position
Limits and Large Open Position
Reporting Requirements (SFC,
21 March 2017)
Consultation on Proposed
Enhancements to the Position
Limit Regime and the
Associated Amendments to the
Securities and Futures
(Contracts Limits and
8
 Summary
MPF Default
Investment Strategy
The MPFA has
introduced legislation to
improve mandatory
provident fund default
investment – or core
fund – arrangements.
Short Position
Reporting
Amendments
The scope of short
position reporting has
been expanded to
include all securities
that are determined by
The Stock Exchange of
Hong Kong Limited
(SEHK) to be
“Designated Securities”
(i.e. listed securities that
can be short sold under
the rules of SEHK).
Suitability
Status Next Steps Reference Materials
Reportable Positions) Rules and
the Guidance Note on Position
Limits and Large Open Position
Reporting Requirements (SFC,
20 September 2016)
Publications by Deacons:
SFC concludes consultation on
position limits (25 April 2017)
The Mandatory Provident The Mandatory The Mandatory Provident Fund
Fund Schemes Provident Fund Schemes (Amendment)
(Amendment) Ordinance Schemes (Amendment) Ordinance 2016
2016 was gazetted on 3 Ordinance 2016 came
June 2016. into operation on 1 April Publications by Deacons:
2017.
MPF Default Investment
Strategy launched on 1 April
2017 (7 April 2017)
One step closer – MPF default
investment strategy
commencement date (20
October 2016)
Default investment strategy for
HK’s mandatory retirement
schemes (21 June 2016)
Draft legislation for MPF core
funds (15 December 2015)
The expanded FAQs (SFC, 21 December
reporting requirements 2016)
came into effect on 15
March 2017. Securities and Futures (Short
Position Reporting)
(Amendment) Rules 2016
published 26 February 2016
Consultation conclusions (SFC,
24 February 2016)
Consultation to expand the
scope of short position reporting
and on the corresponding
amendments to the Securities
and Futures (Short Position
Reporting) Rules (SFC, 27
November 2015)
Publications by Deacons:
SFC reaches conclusion on
expanding short position
reporting, effective March 2017
(26 February, 2016)
Consultation on expanded short
position reporting in Hong Kong
(15 December 2015)
Both sets of FAQs were Licensed or registered Circular on FAQs on Triggering
issued on 23 December persons should review of Suitability Obligations (SFC,
9
 Summary
SFC licensed or
registered persons are
required to observe
suitability obligations
under paragraph 5.2 of
the Code of Conduct.
The SFC has issued
guidance (in the form of
new FAQs) on when the
suitability obligation is
triggered and revised its
FAQs on compliance
with suitability
obligations.
Want to know more?
Jeremy Lam
jeremy.lam@deacons.com.hk
+852 2825 9732
Alwyn Li
alwyn.li@deacons.com.hk
+852 2825 9627
Susan Gordon
susan.gordon@deacons.com.hk
+852 2825 9788
Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute
for specific advice. If you would like advice on any of the issues raised, please speak to any of the contacts listed.
0717 © Deacons 2017
Status Next Steps Reference Materials
2016 with immediate effect. existing systems and 23 December 2016)
practices and make
enhancements where FAQs on Triggering of Suitability
necessary. Obligations (SFC, 23 December
2016)
Circular on FAQs on
Compliance with Suitability
Obligations (SFC, 23 December
2016)
FAQs on Compliance with
Suitability Obligations (SFC, 23
December 2016)
Publications by Deacons:
SFC issues guidance on what
triggers suitability obligations
and updates suitability
compliance FAQs (24 February
2017)
Taylor Hui Jane McBride
taylor.hui@deacons.com.hk jane.mcbride@deacons.com.hk
+852 2826 5368 +852 2825 9213
Su Cheen Chuah Scott Carnachan
sucheen.chuah@deacons.com.hk scott.carnachan@deacons.com.hk
+852 2825 9651 +852 2825 9265
Rory Gallaher
rory.gallaher@deacons.com.hk
+852 2825 9697
www.deacons.com.hk
10