1 DD Month Year 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 proposes new guidelines to set out baseline cybersecurity requirements for internet brokers and proposes to expand the scope of the regulatory regime for electronic trading to cover the internet trading of unlisted securities such as authorised funds. The SFC engaged in a two-month public consultation process which ended on 7 July 2017. The SFC aims to finalise the revised Code of Conduct and new guidelines in September/October 2017 and proposes a six-month transitional period before implementation. Consultation Paper on Proposals to Reduce and Mitigate Hacking Risks Associated with Internet Trading (SFC, 8 May 2017) Publications by Deacons: SFC seeks to strengthen cybersecurity for internet trading (20 June 2017) Client Alert Financial Services 28 July 2017 2 Summary Status Next Steps Reference Materials PI Rules The SFC has proposed changes to the Securities and Futures (Professional Investor) Rules, such as allowing joint accounts with nonassociates and assets held in investment vehicles owned by individuals to be counted in ascertaining whether individuals meet the monetary threshold to qualify as professional investors. The SFC’s one-month public consultation ended on 3 April 2017. The consultation conclusions are pending. Consultation Paper on the Proposed Amendments to the Securities and Futures (Professional Investor) Rules (SFC, 1 March 2017) Publications by Deacons: Consultation on proposed amendments to Securities and Futures (Professional Investor) Rules (21 March 2017) MIC Regime The SFC has issued new accountability requirements for senior managers (Managers in Charge or MICs) of licensed corporations (LCs). The commencement date for the MIC regime was 18 April 2017. LCs were required to submit the MIC information and organisational charts on or before 17 July 2017. MICs of the Overall Management Oversight function and the Key Business Line function who are not already Responsible Officers will need to apply for the SFC’s approval as such on or before 16 October 2017. Circular to Licensed Corporations – Submission of information on Managers-inCharge of Core Functions (MIC) and organisational charts (SFC, 3 April 2017) Circular to Licensed Corporations Regarding 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) 3 Summary Status Next Steps Reference Materials FMCC Update The SFC has proposed changes to the Fund Manager Code of Conduct (FMCC) and Code of Conduct for Persons Licensed by or Registered with the SFC. The proposed FMCC changes will affect all Type 9 licensed managers. A consultation paper was issued on 23 November 2016. The consultation period ended on 22 February 2017. The SFC’s consultation conclusions are pending. Consultation Paper on Proposals to Enhance Asset Management Regulation and Point-of-sale Transparency (SFC, 23 November 2016) Publications by Deacons: SFC proposes significant changes to asset management regulation (24 February 2017) SFC consults on asset management regulation and point-of-sale transparency (9 December 2016) OTC Derivatives Regime In response to global efforts to enhance regulation of over-thecounter derivatives (OTCD) following the financial crisis in late 2008, the HKMA and the SFC jointly issued proposals for a regulatory regime for the OTCD market in Hong Kong, including reporting and licensing requirements. Under the new licensing regime, two new regulated activities (RAs) will be introduced, (i) Type 11 RA (dealing in OTCD products or advising on OTCD products); and (ii) Type 12 RA (providing client clearing services for OTCD transactions). The legislation also expands the scope of two existing RAs (Type 7 RA, providing automated trading services and Type 9 RA, asset management) to cover OTCD transactions or products. The Securities and Futures (Amendment) Ordinance 2014 was enacted on 26 March 2014. The legislation is being implemented in phases. The first phase of mandatory reporting, which requires the reporting of transactions in certain interest rate swaps and non-deliverable forwards, came into force on 10 July 2015; the first phase of mandatory clearing came into force on 1 September 2016. The second phase of mandatory reporting, which expands the mandatory reporting to cover all OTCD products in five key asset classes (interest rate, FX, equity, credit and commodity) came into effect on 1 July 2017. In response to a request from ISDA, on 27 April 2017 the HKMA and the SFC issued a joint onemonth consultation on the scope of the definition of “OTC derivative products”. Consultation conclusions were published on 27 June 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 SFC issued consultation conclusions on proposed changes to the financial resources rules for licensed corporations engaged in OTCD activity, and issued a further consultation on additional proposals. The consultation period ends on 23 August 2017. The timetable for the implementation of the new licensing regime is yet to be designated. An SFC consultation on risk management, client clearing and record keeping is expected in September 2017. Consultation Conclusions and Further Consultation on Proposed Changes to the Securities and Futures (Financial Resources) Rules (SFC, 24 July 2017) Securities and Futures (OTC Derivative Transactions - Reporting and Record Keeping Obligations) (Amendment) Rules 2016 came into effect on 1 July 2017 Joint consultation conclusions on the prescription of additional markets and clearing houses and the prescription of Delta One Warrants under the OTC derivatives regulatory regime (HKMA and SFC, 27 June 2017) Securities and Futures (OTC Derivative Transactions - Clearing and Record Keeping Obligations and Designation of 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 4 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 Government is introducing a new investment vehicle in the form of a mutual fund (to be known as an openended fund company The regime for the OFC, which was created by the Securities and Futures (Amendment) Ordinance 2016, is expected to become operational in 2018. On 28 June 2017, the SFC issued a twomonth consultation on detailed legal and regulatory requirements applicable to the OFC structure. The Consultation Paper on the Securities and Futures (Openended Fund Companies) Rules and Code on Open-ended Fund Companies (SFC, 28 June 2017) Inland Revenue (Amendment) 5 Summary Status Next Steps Reference Materials (OFC)). consultation ends on 28 August 2017. Implementation of the OFC regime is expected in 2018. The FSTB has introduced proposals to extend the profits tax exemption to privately offered OFCs – a tax amendment bill was published on 23 June 2017. (No. 4) Bill 2017 (23 June 2017) Legislative Council Paper on Proposed Extension of Profits Tax Exemption to Onshore Privately Offered Open-ended Fund Companies (FSTB, 8 March 2017) Securities and Futures (Amendment) Ordinance 2016 gazetted on 10 June 2016 Consultation conclusions (FSTB, January 2016) Consultation Paper on OpenEnded 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 Distribution and Advisory Platforms The SFC has proposed issuing guidelines which will “aim to provide more tailored guidance to the industry in complying with the applicable conduct and other regulatory requirements, including the suitability obligations”. The SFC issued a threemonth consultation in May 2017. The consultation ends on 4 August 2017. The SFC will issue a conclusions paper, together with the final form of the guidelines, once the respondents’ comments have been reviewed. The SFC proposes a 12-month transitional period before full implementation. Consultation Paper on the Proposed Guidelines on Online Distribution and Advisory Platforms (SFC, 5 May 2017) SFC issues further guidance on suitability obligations (SFC, 23 December 2016) Publications by Deacons: SFC consults on proposed guidelines on online distribution and advisory platforms (11 May 2017) AML Regime Enhancements The Government launched two consultation exercises on legislative proposals to enhance the regulatory regime for combating money laundering and terrorist financing: (i) on improving the transparency of beneficial ownership of HK companies; and (ii) on requiring nonfinancial businesses to conduct customer due Two consultation papers were issued on 6 January 2017. The consultation period ended on 5 March 2017. On 13 April 2017, the Government issued a combined consultation conclusions paper. The Government reported general support for the proposals and announced plans to introduce amendment bills into the Legislative Council by July 2017. Two amendment bills – the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 and the Companies (Amendment) Bill 2017 – were gazetted on 23 June 2017. Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 (23 June 2017) Companies (Amendment) Bill 2017 (23 June 2017) Consultations on Legislative Proposals to Enhance AntiMoney Laundering and CounterTerrorist Financing Regulation in Hong Kong – Consultation Conclusions (FSTB, 17 April 2017) Consultation on Enhancing AntiMoney Laundering Regulation of Designated Non-Financial Businesses and Professions 6 Summary Status Next Steps Reference Materials diligence. (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 “knowyour-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) 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. 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. The IA replaced the Office of the Commissioner of Insurance to regulate insurance companies from 26 June 2017. This represents the second phase of a three stage regulatory reform process. The IA is expected to implement the new statutory licensing regime for insurance intermediaries and to take over the supervision of insurance intermediaries from three self-regulatory organisations within two years of the handover. Insurance Companies (Amendment) Ordinance 2015 (Commencement) Notice 2017 (gazetted on 21 April 2017) Insurance Companies (Amendment) Ordinance 2015 (Commencement) Notice 2015 Insurance Companies (Amendment) Ordinance 2015 FAQs on the consultation (FSTB, May 2015) Consultation Conclusions on the Key Legislative Proposals for the Establishment of an Independent Insurance Authority (FSTB, 26 June 2013) Publications by Deacons: New regulator for Hong Kong insurance industry to commence operation (23 May 2017) New regulator for Hong Kong insurance industry (23 September 2015) 7 Section 2: Proposals implemented during January – July 2017 Summary Status Next Steps Reference Materials Disclosure of Interests The SFC proposed mandatory electronic filing of disclosure of interests notifications and reports under the Securities and Futures Ordinance. 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. From 3 July 2017, DI filers must make filings using an electronic system approved by the SFC. Revised filing forms were made available on the SFC’s website on 5 May 2017. Arrangements for electronic filing of disclosure of interests notifications (SFC, 5 May 2017) Gazette Notice 2832 – Notice specifying forms for use under Part XV of the Securities and 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 efiling 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) 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 The amendments relating to the professional investors regime came into effect on 25 March 2016. All intermediaries’ client agreements must comply with the new Code of Conduct requirements, including incorporation of the new clause and observance of the new paragraph 6.5 of the Code of Conduct on or before 9 June 2017. Gazette Notice 259 – Securities and Futures Ordinance (11 January 2017) FAQs on the application of paragraph 6.2(i) of the Code (SFC, 23 September 2016) Consultation Conclusions on the Client Agreement Requirements (SFC, 8 December 2015) 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) 8 Summary Status Next Steps Reference Materials agreement does not include anything inconsistent with the Code of Conduct or anything inaccurate or misleading in the description of services. 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) AEOI The Government proposed legislative amendments to expand of the list of reportable jurisdictions for automatic exchange of financial account information (AEOI) purposes. A bill to amend the Inland Revenue Ordinance was published on 24 March 2017. Proposals include expanding the list of reportable jurisdictions from two to 74. The amendment ordinance came into effect on 1 July 2017. Financial institutions are required to collect reportable information for the 72 new jurisdictions from 1 July 2017. Inland Revenue (Amendment) (No.2) Ordinance 2017 Position Limits The SFC consulted the market on expanding the scope of the position limit regime. Amended rules include a 300% cap on the excess position limit that may be authorised by the SFC, a statutory position of 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. The revised Securities and Futures (Contract Limits and Reportable Positions) Rules were gazetted on 24 March 2017 and came into effect on 1 June 2017. Consultation Conclusions on Proposed Enhancements to the Position Limit Regime and the Associated Amendments to the Securities and Futures (Contracts Limits and 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 9 Summary 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) MPF Default Investment Strategy The MPFA has introduced legislation to improve mandatory provident fund default investment – or core fund – arrangements. The Mandatory Provident Fund Schemes (Amendment) Ordinance 2016 was gazetted on 3 June 2016. The Mandatory Provident Fund Schemes (Amendment) Ordinance 2016 came into operation on 1 April 2017. The Mandatory Provident Fund Schemes (Amendment) Ordinance 2016 Publications by Deacons: 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) 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). The expanded reporting requirements came into effect on 15 March 2017. FAQs (SFC, 21 December 2016) 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) Suitability Both sets of FAQs were issued on 23 December Licensed or registered persons should review Circular on FAQs on Triggering of Suitability Obligations (SFC, 10 Summary Status Next Steps Reference Materials 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. 2016 with immediate effect. existing systems and practices and make enhancements where necessary. 23 December 2016) FAQs on Triggering of Suitability 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) 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 www.deacons.com.hk Jane McBride firstname.lastname@example.org +852 2825 9213 Su Cheen Chuah email@example.com +852 2825 9651 Jeremy Lam firstname.lastname@example.org +852 2825 9732 Taylor Hui email@example.com +852 2826 5368 Alwyn Li firstname.lastname@example.org +852 2825 9627 Rory Gallaher email@example.com +852 2825 9697 Susan Gordon firstname.lastname@example.org +852 2825 9788 Scott Carnachan email@example.com +852 2825 9265 Want to know more?