The Hong Kong Securities and Futures Commission has released a number of circulars relating to COVID-19, including March 31 guidance on licensing and ongoing compliance matters. This LawFlash provides an overview of the guidance and its implications for licensed corporations.
Under the Securities and Futures (Licensing and Registration) (Information) Rules (the Rules), a licensed corporation (LC) is required to notify the Securities and Futures Commission (SFC) on a number of matters, in particular, if there are significant changes in (1) the nature of the business carried on or to be carried on and the types of services provided or to be provided by an LC; or (2) the business plan of an LC covering its internal controls, organizational structure, contingency plans, and related matters.
However, the SFC has now clarified in its March 31 guidance (the Guidance) that in view of the substantial disruptions caused by the coronavirus (COVID-19) pandemic, an LC is expected to notify the SFC immediately (not within seven business days as is typical under the Rules for other events) of the following situations, which the SFC has stressed are not exhaustive:
Under the current Rules, it is not necessary to notify any of the above events to the SFC, except for closure of office premises. In light of the Guidance, LCs should immediately evaluate whether the above events are applicable to their circumstances and whether there are any events which in the LCs’ view would have—or potentially have—a material impact on business and support operations, and notify the SFC immediately.
Based on our experience, the SFC has been pragmatic and understanding, and the key is to ensure that
As noted above, during the beginning of the COVID-19 pandemic in Hong Kong, a number of employees moved overseas and may not be able to move back to Hong Kong in the near future for a combination of reasons. Whilst the SFC has stated that these contingency measures are acceptable as temporary arrangements, we have advised LCs—a point which is also reiterated in the Guidance—that it is critical to consider whether the activities of the employees outside Hong Kong could trigger local licensing, work visa, and tax issues.
The SFC has also emphasized that notwithstanding that the employees are working overseas, the LCs remain responsible for the regulated activities performed by these individuals for the LCs. LCs, therefore, should be able to demonstrate to the SFC that they are able to exercise adequate oversight over the employees’ conduct.
We have also encountered situations where an LC’s entire trading team decides to move temporarily overseas, and the LC decides to shut down the operations of its trading desk(s) in Hong Kong. This raises tricky issues as, amongst others, it represents a significant change in the LC’s business plan and also raises the question of whether the overseas trading desk can cover the Hong Kong trading desk and service the LC’s existing clients.
The Guidance clarifies that LCs are normally expected to maintain a backup office and have remote access to trading facilities so they can continue to provide trading services if the main dealing desk is shut down. However, if the backup facilities fail and orders need to be routed to LCs’ overseas affiliates for execution, these LCs must notify the SFC immediately and seek approvals from the SFC and the relevant overseas regulatory authorities for their offshore trading activities, if necessary under local laws. Again, the SFC has reiterated that it would be flexible and would provide assistance to ensure LCs’ services to their existing clients remain uninterrupted.
Section 130 of the Securities and Futures Ordinance (SFO) provides that all records LCs are required to keep under the SFO and subsidiary legislation made thereunder be kept in SFC’s approved premises. For policy reasons, the SFC would only approve premises that are in Hong Kong that meet certain criteria as recordkeeping premises. In addition to the recordkeeping obligations under the SFO, LCs must also comply with the recordkeeping requirements under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.
The SFC has emphasized in the Guidance that if some of LCs’ employees are working overseas, the LCs must ensure that these employees are able to remotely access the LCs’ trading or other systems, and that the activities conducted by the employees are captured in the records and documents generated by these systems. If certain records and documents need to be kept in unapproved premises on a temporary basis, LCs should send them back to the SFC’s approved recordkeeping premises as soon as practicable.
LCs are also required to keep order records as set out in Chapter 3.9 of the SFC’s Code of Conduct, which provides that a licensed person should (1) record and immediately time stamp records of the particulars of the instructions for agency orders and internally generated orders, and (2) use a telephone recording system, where order instructions are received from clients through the telephone, to record the instructions and maintain telephone recordings as part of its records for at least six months.
The SFC reminds LCs in its separate Circular to intermediaries - Extended deadlines for implementation of regulatory expectations and reminder of order recording requirements under COVID-19 pandemic, also dated March 31, that they must comply with Chapter 3.9 of the Code of Conduct, and if employees are taking orders outside their office premises, LCs’ employees should immediately call back to the intermediaries’ telephone system and record the time of receipt and the order details. The use of other formats (e.g., in writing by hand) to record details of clients’ order instructions and time of receipt can be used if the intermediaries’ telephone recording system cannot be accessed.
If LCs wish to receive client orders through instant messaging, LCs must put in place the requirements set out in the SFC’s Circular to intermediaries - Receiving client orders through instant messaging dated May 4, 2018, in relation to recordkeeping, security and reliability, and compliance monitoring. When considering order placing and recording alternatives, LCs must put in place appropriate internal control and compliance measures for ensuring that the alternatives are properly implemented in compliance with all regulatory requirements.
The Guidance also covers matters relating to temporary licensed representatives, deferral of licensing examinations, continuous professional training requirements, submission of audited accounts, and signature pages. Read the full Guidance.
We have advised a number of LCs on their notification requirements during the initial stage of the COVID-19 outbreak in Hong Kong when, for example, LCs decide to implement remote working arrangements, and where some of the LCs’ employees move overseas and work from their overseas homes and/or the offices of the LCs’ group companies. Given this is an initiation of the LCs’ business continuity plans—as opposed to any significant changes to their business continuity plans—the Rules do not impose any obligations upon the LCs to notify the SFC. That being said, we have also advised LCs to submit a courtesy notice to the SFC if the arrangements are going to take place for an extended period of time. We stand ready to help companies with these or any other issues in this area.
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Sin Teck Lim