Helping Asian Wealth Management Communities interact

Compliance & Regulation

SFC publishes Circular on licensing obligations of Family Offices, Convicts unlicensed fund manager

The Securities and Futures Commission has released a circular detailing general guidance for family offices intending to carry out asset management or other services in Hong Kong.

The Securities and Futures Commission (SFC) has also announced the conviction of Yau Ka Fai, who was convicted of carrying on a business in asset management without a licence from the Securities and Futures Commission, carrying out activities between September 2011 and November 2015.

Yau pleaded guilty to the charge, with the case adjourned until January 16th, 2020 for sentencing. Yau stated that he was the manager of a fund known as Tai Chi Hedge Fund and received commission for his service.

According to the press release, it is an offence to hold oneself out as carrying on a business in a regulated activity without a licence from the SFC, with the guidelines and responsibilities of firms who are, or wish to be licensed being outlined in circulars.

Such a circular was released by the SFC on the licensing obligations of family offices intending to carry out asset management or other services in Hong Kong.

The circular highlights that while there is no specific licensing regime for family offices, the licensing regime under the Securities and Futures Ordinance (SFO) is activity-based, thus a company or family office set up as a business to manage assets which include securities or futures contracts may be required to hold a licence for Type 9 regulated activity (asset management).

The way in which a single-family office operates can lead to different consequences under the licensing regime. For example, in cases where a family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets, the family office will not need a licence because it will not be providing asset management services to a third party.

Similarly, if the family office is established as a separate legal entity which is wholly owned by a trustee or a company that holds the assets of the family, it will not need a licence as it will qualify for the intra-group carve-out3 as full discretionary investment manager of the securities or futures contracts portfolio. The family office is not required to be licensed for Type 9 regulated activity if it provides asset management services solely to related entities, which are defined as its wholly-owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly-owned subsidiaries.

A multi-family office by definition serves more than one high net worth family. The type of SFC licence required depends on the services to be provided in Hong Kong. If a multi-family office provides services to clients who are not related entities as defined in Part B above, it will not be able to make use of the intra-group carve-out.

Where a multi-family office is granted full discretionary investment authority, its asset management activity would generally be similar to that of a licensed asset management company and therefore it would likely need to be licensed for Type 9 regulated activity. If it has not been delegated full discretionary investment authority and only provides securities investment advice and executes securities transactions, it may need to be licensed for other types of regulated activities, i.e., Type 1 regulated activity and Type 4 regulated activity (advising on securities). Where the assets include futures contracts, it may also need to be licensed for Type 2 regulated activity (dealing in futures contacts) and Type 5 regulated activity (advising on futures contracts).