A collection of housekeeping matters for regulated firms in Hong Kong
Cognitive GRC Limited (website) is a leading provider of Governance Risk and Compliance services to Hong Kong Firms. We focus on SFC requirements but also support international firms on their global needs through our network of service partners. The following should not be relied upon as regulatory advice but more a reminder of issues for your consideration. Please reach out to your relevant service provider/consultant to discuss your understanding of the relevant matters as required. There are links to third party websites included.
From a markets point of view, the year of the tiger was less roar and more meouch! But we are hoping (or hopping into the year of the rabbit) that we are in the bounce end of things rather than a false bottom.
Onwards and upwards, we fight together whatever is next in the infinite staircase of regulatory change. There is a lot of noise coming out of the US with respect to change. However, on deeper consideration that noise seems to be resonating a more harmonic note with what we have already seen here in Asia (e.g. Outsourcing, Cloud, Cyber reporting, BRMQ etc).
More on this and why this may be good news for Asia based firm's later this quarter.
Back from a short trip to Europe, reconnecting with some of our Hong Kong diaspora, and experiencing the first day of frictionless Hong Kong re-entry was a welcome yet surreal experience. Mask On/Mask Off will be the next sign of a return to the new normal, whatever that may be.
For your operational consideration there is not much of a change from what we included in last year's reminders so we will not repeat the analysis. Please find the headlines for your 2023 planning.
Priorities for most of our client types in the region (expand where relevant).
SFC Firms, Type 9 Semi-Annual FRR (in practice due a day earlier)
The FRR is due within 21 days of the period end and even though the 21st is on the Saturday before Chinese New Year, the SFC will expect the submission to be prior to the deadline, not after the bank holiday so bear in mind that the 20th is a Friday (office hours for Wings is Monday to Friday). As a reminder the SFC has implemented changes to the submission process as they can be submitted via WINGS (see Circular from last year). Please make sure that you have all the appropriate accounts set up to do so in advance of the deadline as it is likely to be a busy period when resources are likely to be stretched.
CFTC - Verification and Confirmation of CFTC De Minimus Exemption is expected to be complete within 60 days of the year end but check out the system
Time to verify your exemption status and confirm it on the NFA exemption system Deadline is 1st of March for exemption affirmations. We will be in touch with clients in February to ensure these are closed out but remember to consider if any bad actor issues have arisen since prior declaration and to confirm all exemption conditions are still met. See key exemption summary here.
Form 40 Filers (you should know who you are): If you have previously submitted Form 40, it is a good time to verify if you need to provide any updates regarding changes to structure ownership or control status.
Form PR or PQR for registered Commodity Pool Operators. Review applicability and frequency obligations for changes. Reach out to your US consultant or contact us if you have any questions.
Managers with US Investments - Check out your 13F, G and H status to determine if you have any updated obligations.
See summary of obligations from FundApps here. Contact your filing support team or reach out to us for support. See our detailed discussion on the 13's from last year.
SEC Registrants - ADV updates due by end of Quarter 1 (December Year Ends). Full Registrants to consider Form PF obligations and frequency as there are some changes being proposed for both Registered and Private Fund Managers (ERAs).
Proposal outstanding about updating content, see SEC Factsheet here or speak to your US consultant.
Annex IV Obligations - Firms with European Investors will have annual obligations.
Please remember that while there are pan-European reporting requirements, as with US state requirements, European country processes can be different, so don't forget to check if you have any new investor nationalities to deal with before the deadlines approach as different states have different reporting mechanisms.
SFC Survey Obligations - Joint Product Surveys 2022 - Type 1 and 4 Firms.
Dec 2022 (Mainly Type 1 and 4 Firms) - Reporting timeline
1. Reporting Intermediaries completing Part A only Did your company sell any reportable non-exchange traded investment products to individual PIs, corporate PIs with no suitability waiver and non-PI clients during the reporting period? This includes the sale of fund products that are managed by group entities (e.g. Type 1 activity). If yes, you will need to also complete part B. If no, then they thank you, you are done by 20 January 2023.
2. Reporting Intermediaries completing Part A and Part B only (Questions 1 to 11) mainly about products sold and fees earned will be due 24 February 2023
3. Reporting Intermediaries completing Part A, Part B and Part C mainly for intermediaries with impact on overall market. (Questions Q12 to Q22 and Q23) due by 10 March 2023.
Full details here (Source: SFC) but you cannot access survey unless you have WINGS credentials.
The survey focuses on selling activity for type 1 and 4 Licensed Intermediaries but if you are type 9 and also type 1 and/or 4, watch out for the survey questions as they can be tricky. You may need to include your type 9 data if you are also extracting a sales fee other than management or performance fees. Type 9 firms are not required to submit data as the survey focuses on Type 1 and 4 as transactions into your own (or group) managed funds are
generally excluded unless the acquisition involves a separate onboarding fee/commission (including cost plus fee allocation for sales services). See the instructions on form if this is not clear.
Please note that while it is called a survey, some firms experienced follow up where they do not complete it, so we are not sure how optional the survey may be, but cannot say that it is mandatory either.
See last years survey results here (Source: SFC).
SFC to launch investor identification regime in March 2023.
The SFC issued the relevant Consultation Conclusions Paper in August 2021 on proposals to implement the Hong Kong Investor Identification Regime (HKIDR) and asked market participants to start preparing for the implementation of the HKIDR. While significant progress has been made to prepare for the implementation, a survey result indicated that some Relevant Regulated Intermediaries (RRIs involved in sales of products) may need more time to update client identification information and obtain express consent from individual clients for the use of their personal data under the HKIDR. Taking account of the above, the SFC has decided to provide more time for the industry’s preparation and now announces to launch the HKIDR on 20 March 2023. Details here (Source: SFC)
CoSEC, Tax, Fund, FATCA, CRS, Accounting Deadlines
This is a good time to check in with your Company Secretary, Tax Counsel, Fund Counsel, FATCA Administrator (US FATCA), CRS Administrator and/or Accountants on your other deadlines for 2023 so that they can be aligned with your operational schedule.
World Economic Forum - Annual Global Risk Report 2023
Davos Week has kicked off earlier this year (16th -20th January), and offers an excellent opportunity to see what is currently being discussed on the global agenda for general and geopolitical risk landscape to incorporate into both investment and operational risk processes.
Every year, we look at this curated report to understand what regulators and peers are looking at in terms of potential icebergs. (Headline Risks: Cost Living Crisis, Economic Downturn, Economic Warfare, Climate Action Hiatus, Societal Polarisation). For a more detailed insight into how companies can face these risks please find resoures here (Source: Weforum.Org) and here in the Global Risk Report: (Source: Weforum.Org/MarshcLennan/Zurich Insurance Group)
Annual SFC Obligations
If not already done, firms should be focusing on finishing off 2022 governance documents (MLRO risk review, Valuation Reviews, Annual Risk and Governance Reviews, Manager in Charge reviews, Bad Actor/Disciplinary Questions, Policy updates/Sign Off etc) and if not already completed in the last 12 months, you may be considering an annual review of third-party service providers, business continuity and electronic data providers. Generally, we would recommend keeping these reviews out of this quarter but if they have not been completed in 2022, now would be the time to catch up and close out before your Business Risk Management Questionnaire (BRMQ) which will be due alongside Audit and Annual Disclosure documents (i.e. 4 months after your year end).
Please do note the pre-Christmas present of an updated BRMQ, (Source: SFC) continuing an SFC theme of stealth regulation by questionnaire (discussed in last year's reminder). There are definitely a number of subtle amendments that will require regulated firms to give some additional consideration about how they might approach things differently or perhaps give more weight to previous best practice suggestions. As with last year, we will prepare a BRMQ change analysis and add it to our data repository.
Initial BRMQ considerations: Our long standing MLRO report should cover the institutional risk assessment requirement and we have prepared a fairly easy to follow exit plan (Source: SFC) production process for those who have not yet so prepared. It does not need to be an industry of its own (unless you have nothing else to do) but please request access to our operational resilience paper if you are seeking to embarking on this process. Putting together an exit plan should not be that challenging as long you understand your risk universe and are able to navigate your expense schedule in a way that understands service provider notice periods, and your wind down cost horizon (see paper/request a copy of our wind down table). Anyone with FCA experience will recognise it as a standard control exercise. It is obvious from the March Circular and the new questions in the BRMQ that the SFC is now more concerned over the financial status of licensed firms and their financial backers. Having spent years denying European style prudential regulation is required for the non-systemically important firms, it would seem that the core prudential requirements are being re-introduced through the back door. We see no harm in that admission as all firms should consider their contingency funding to help with crisis management scenario reviews.
As we did for the 2022 update, we will prepare on a more in depth analysis of the subtle changes (AML, Background Checks, etc) and will help clients prepare for the changes to the BRMQ in advance of next years deadline "To allow sufficient preparation time for LCs and AEs, the revised BRMQ shall be used for financial years ending on or after 30 November 2023."
For those concerned about the myriad of changes to US requirements for both SEC registered firms and exempt reporting advisers (covered in our October update (Source CGRC)), we have also been looking at ways in which we believe it will actually make life easier for Asia based firms. Given our experience with each regime, it is evident that the proposed rules are aligning with the standards that are already in place elsewhere (FCA, SFC, MAS, etc). As some of the new requirements have yet to be implemented, we are keeping our powder dry but we expect the outcome to be a source of competitive advantage for those who can navigate multijurisdictional requirements most efficiently.
ACA clients may refer to recent updates (Source: ACA Global) in particular the update on SEC FAQs relating to marketing (Source: ACA Global). Otherwise please refer our to October update (Source CGRC) and/or contact your US regulatory adviser.
ESG - It is becoming more difficult to argue that climate data is not available as we have seen a phenomenal growth in both data and expertise in each of the developing avenues of environment, sustainability and governance fields. The aroma of knowledge based experience is pervading the market with the whiff of possibilities that will make it more difficult for smaller firms to stay hush on their climate position no matter their current views on the quality or practicality of the expectations. Our participation in the annual regtech awards with Regulation Asia provided significant insight into the developing data market (see complete award schedule here, Source: Regulation Asia). Knowing what is available in the solution set is key to staying strategically ready for the next phase of development as the pendulum has swung from a dearth to an abundance of information. Also please refer to Redlinks article on latest thinking for SFC regulated managers here (Source; Redlinks).
Finally, some Cognitive GRC updates; Early in 2022 Ms. Cara Cheng was promoted to Consultant in recognition of her developing experience, knowledge and client service delivery. Ms. Tani Tong has more recently been promoted to Senior Compliance Analyst, following her completion of the Henley Executive Hedge Fund Course Programme and her contribution to the team and her client service. We are so grateful for all the efforts of the team in 2022 in keeping both our technical knowledge and client support standards to the high levels that our clients expect and look forward to continuing to grow through 2023 as a result.
Please contact us for any of your training (direct or through Inflection Point Intelligence) or project consulting needs. Clients can refer to the quarterly enforcement and regulatory updates which have been already published via datasite. Our MLRO Resources update will be published after the FATF plenary in February.
We would be grateful if you could also follow us on LinkedIn, and share our updates where you believe relevant. Please reach out to your consultant for any client queries or to one of the team at info@cognitivegrc.com. Let us know if you have any issues to add to this annual reminder.
Happy New Year 2023, Derek McGibney/Beate Ly Managing Directors, Cognitive GRC Limited.