Circular on licensing and registration of depositaries of SFC-authorised collective investment schemes and related transitional arrangements

Following the publication of a consultation response paper in March 2023 concerning registration or licensing requirements of depositories of SFC-authorized Collective Investment Schemes, CISs (please see EventID 20399 in this context for more information), the Securities and Futures Commission of Hong Kong, SFC, has now published a related circular. The circular is aimed at providing guidance in relation to these new requirements and outlines some transitional arrangements for depository staff which already provides services in Hong Kong prior to the coming into force of the new obligation.
Specifically, the circular covers the following key issues:
– Who needs to be licensed or registered?
– Highlights of the regulatory requirements for RA 13 depositories
– Timeline for applications and transitional arrangements
(1) Who needs to be licensed or registered?:
Schedule 5 to the Securities and Futures Ordinance (SFO) has been amended to include a new licensed activity, RA 13, which involves providing depository services for relevant CISs. This requirement applies to ANY depository at the top of the custodial chain for an SFC-authorized CIS in Hong Kong excluding delegates or sub-delegates, unless the CIS is a registered mandatory provident fund scheme or an approved pooled investment fund not offered to retail investors.
Depository services typically include the custody and safekeeping of CIS property and overseeing a CIS’s compliance with the constitutional document. Firms with an RA 13 license may also provide other services, such as the provision of trust services. However, if such other services are offered, the SFC expects firms to have adequate policies and procedures in place to „maintain confidentiality and manage actual or potential conflicts of interest“.
As far as the licensing of individual staff members is concerned, the SFC expects all persons involved in the above noted activities (safeguarding of funds, compliance oversight) to be registered under RA 13 as a representative of such depository. Such activities may include the monitoring of operational aspects such as custody of scheme property, adherence to investment and borrowing limits, fund accounting, valuation, cash flow, and handling transactions like issuance, redemption, repurchase, and cancellation of CIS units or shares. The requirements also apply to staff members which are authorized to approve instructions or transactions related to custody activities, such as validating payments, asset transfers, and cash reconciliations.
Registration requirements do NOT apply to staff members of depositories also offering fund administration or transfer agent services where the members are only involved in such administrative activities.
(2) Highlights of the regulatory requirements for RA 13 depositories:
The regulatory requirements for RA 13 depositories are aligned with the current framework under the SFO. This means that licensing and registration rules from Part V of the SFO apply to them, including fit and proper and competence requirements that must be met in order to become licensed and registered. Depositories must also demonstrate the ability to adhere to all relevant capital adequacy requirements which include the maintenance of a minimum paid-up share capital of $10,000,000 and sufficient liquid capital. Compliance with the Code of Conduct is also required, especially with new Schedule 11, outlining additional rules for RA 13 depositories. Furthermore, monthly financial and periodic statutory returns are mandatory. A draft of the monthly financial return form (FRR form) for depositories may be found here, with the final version set for use from October 2, 2024. This final form will be announced in the Government Gazette in due course.
(3) Timeline for applications and transitional arrangements:
The SFC is currently accepting applications for RA 13 licenses and registrations through its online platform WINGS. Depository firms for relevant CISs in Hong Kong must submit their corporate license or registration applications by November 30, 2023. Corporate applications should include proposed responsible officers or executive officers. Individual practitioners seeking to become licensed representatives of existing depositories should submit their applications via WINGS between June 1, 2024 and July 31, 2024. The SFC aims to process all applications before the new regime takes effect on October 2, 2024. If a depository can’t meet the submission timeframe, it should contact the SFC and, if applicable, the HKMA promptly.
##### Transitional arrangement
Individual persons currently engaged by existing depositories who provide depository services are exempt from taking the local regulatory framework paper (LRP) test for RA 13, provided their license applications, endorsed by the depository, are submitted to the SFC before October 2, 2024. Similarly, individuals seeking to become EOs or „relevant individuals“ must submit their applications and relevant documents to the HKMA before the same date.
Instead of the LRP test, such individuals must complete a minimum five-hour training course on the legal and regulatory framework for RA 13. This training, conducted by a continuous professional training (CPT) provider, should occur within a year of obtaining their license or registration. This additional training requirement is in addition to the standard CPT obligations outlined in the SFC’s Guidelines on Continuous Professional Training.
It’s important to note that there is no specific minimum work experience needed for this one-time LRP test exemption, which is open to all individual practitioners associated with existing depositories during the transition.