The Securities and Futures Commission (SFC) has clarified that the scope of the type 13 regime in Hong Kong’s securities and futures industry is limited to top-level trustees or custodians. Delegates, including sub-custodians, are not subject to the type 13 regime, regardless of whether they operate within or outside of Hong Kong.
Proposed amendments to the Securities and Futures Ordinance (SFO) to implement Regulated Activity 13 (type 13) include adding a new Schedule 11 to the Code of Conduct for persons licensed or registered by the Securities and Futures Commission (SFC). Schedule 11 specifically addresses type 13, and outlines conduct requirements and internal control standards for firms implementing type 13. Additional amendments have been made to other SFC codes and guidelines, such as the Code on Unit Trusts and Mutual Funds. Consequential amendments have also been made to subsidiary legislation like the financial resources rules. The amendments to the SFO, along with the new Schedule 11 and changes to related codes and guidelines, aim to establish the regulatory framework for type 13 and ensure firms meet the required conduct and control standards.
Regulatory Oversight of Collective Investment Schemes (CIS) under Type 13 in Hong Kong
Regulated Activity 13 (Type 13) refers to the licensable activity of providing depositary services for SFC-authorised collective investment schemes (CIS) in Hong Kong. This involves:
- Custody and safekeeping of scheme property.
- Oversight of the scheme’s operations to ensure compliance with constitutive documents.
Entities must obtain Type 13 authorization from the SFC if they act as the top-level trustee, custodian or depository for one or more SFC-authorised CIS, except for:
- Mandatory provident fund schemes (MPFs) and their constituent funds.
- Approved pooled investment funds (APIFs) which are or are intended to be offered only to professional investors, employers, MPFs, occupational retirement schemes and pooling arrangements and other APIFs.
Limited Exemptions to type 13 regime
- However, Pooled Retirement Fund (PRF) trustees will require type 13 licensing as they fall outside the MPFA’s remit.
- Approved pooled investment funds (APIFs) authorized for retail offering also require type 13 licensing, distinguished from pure MPF products.
Licensing/Registration Requirements for Key Individuals
Individuals performing key regulated functions like custody, monitoring investment limits, fund accounting, and overseeing subscriptions/redemptions for in-scope CIS must be approved under type 13.
Staff monitoring a delegate’s custody and safekeeping of scheme property must be licensed/registered under type 13.
Staff empowered to approve custody-related instructions/transactions for a scheme or overseeing the custody function must be licensed/registered under type 13. Regular operations staff are generally exempt.
Staff responsible for overseeing a scheme’s operations to ensure compliance (e.g. monitoring investment limits and fund accounting/valuation) must be licensed/registered under type 13.
For depositaries also acting as fund admin, transfer agent or registrar:
- Staff providing those services are typically exempt unless overseeing scheme operations.
- Oversight responsibility based on business model/governance can require type 13 authorization.
Individuals solely conducting marketing activities are not subject to type 13 licensing obligations.
The requirements aim to ensure individuals in positions potentially compromising investor interests or assets meet minimum standards, while excluding more junior personnel and those without material responsibilities.
Important Dates and Actions to Prepare for the New Type 13 Licensing Regime
The SFC provided 18 months (March 2023 – Oct 2024) for in-scope entities to prepare type 13 licensing applications after gazetting amendments introducing the new regime. Existing trustees/custodians must submit applications within 4 months of SFC e-forms launching (expected Q3 2022).
• Substantial shareholders: Identify structure and compile info for SFC review/approval.
• Organization and supervision: Determine who needs type 13 licenses as reps, ROs, managers-in-charge. Prepare CVs assessing competence.
• Type 13 compliance: Gap analysis finding infrastructure needed (Codes of Conduct Schedule 11). Policies/procedures to ensure compliance.
• March 2023: SFC gazetted type 13 amendments to SFO.
• 18 months (March 2023 – Oct 2024): Transitional period for in-scope entities to prepare licensing applications.
• Q3 2023: SFC expects to launch e-forms for type 13 licensing applications.
• Within 4 months of e-forms launch: Existing trustees/custodians must submit Type 13 licensing applications.
As the regulatory deadline for type 13 licensing approaches, it is imperative for trustees and custodians to start preparing early. At Heinbro, we understand the importance of being well-prepared for any transition. And we would welcome the opportunity to assist your firm on all matters relating to the above
For the full set of requirements and specifications, please refer to the Consultation Conclusions published by the SFC.