The Hong Kong Securities & Futures Commission (SFC) has recently issued a series of circulars relating to the volatility in local and international markets related to the COVID-19 outbreak. On Friday 27 March, the SFC distributed two reminders to fund industry participants and intermediaries of their obligations to look after the interests of clients notwithstanding current circumstances.
1
Circular to Intermediaries - Reminder of important obligations to ensure suitability and timely dissemination of information to clients - Given the potential impact of the COVID-19 outbreak on market volatility and liquidity as well as credit quality, the SFC reminds the industry to continue to act in the best interests of clients and exercise extra care when making a solicitation or recommendation or managing investment portfolios for their clients. In particular the regulatory reminds licensed corporations on the application of suitability obligations. This includes performing due diligence on investment product’s liquidity and credit quality, as well as taking the client’s current circumstances into account. It also asks that notices and other communications about investment products are issued in a timely manner in instances where they are held directly or indirectly on behalf of your clients.
2
Circular to all management companies and trustees and custodians of SFC-authorized funds - In view of the volatility in local and international markets caused by the COVID-19 outbreak, Managers are also reminded to:
closely monitor the dealing and trading of the funds under their management;
keep investors informed at all times;
ensure that all assets of the funds are fairly and accurately valued in good faith and in the best interests of investors and in accordance with the constitutive and offering documents as well as applicable laws and regulations;
consider the need for any fair value adjustment (particularly in respect of less liquid or suspended securities such as high yield bonds or fixed income instruments and suspended stocks) and constantly review the fair value adjustment policies and procedures to ensure their continued appropriateness and effective implementation in light of the rapidly changing market conditions;
exercise due care, skill and diligence in managing liquidity of funds, in particular, ensuring that actions taken in meeting redemption obligations should not have any material adverse impact on the fund and its remaining investors; and
use appropriate liquidity risk management tools.
The SFC has also highlighted that it will continue to assess compliance with the regulatory requirements during its on-going monitoring of licensed corporations and that it will closely monitor the operational and financial resilience of industry participants and market infrastructure.
While the second circular applies to management companies of authorized funds, firms managing professional investor only funds and/or distributing such products should consider similar controls and keep a close eye on daily changes in market liquidity. While this should already be embedded in your processes, this is advance warning to remind participants that this is something that the SFC are likely to examine in the event of market issues materially impacting your ability to operate.
Then on Tuesday 31 March, the SFC posted frequently asked questions on licensing related matters on their website. These included some interesting updates regarding:
Exams/CPT hours - All licensed individuals due to sit post-licensing regulatory exams or accrue continuous professional training (CPT) hours by 30 September 2020 will be allowed an extension period of three calendar months (after the original due date) to meet the requirement.
CPT hours - The SFC will allow all licensed individuals who are unable to fulfill the annual CPT hours by 31 December 2020 to carry forward any unfulfilled hours for the calendar year of 2020 to 2021. It is, however, noteworthy that online courses (which are considered as self-study), are acceptable for the purpose of meeting the CPT requirement and should be signed off by your compliance officer.
Notification to SFC of evoking business continuity plans (BCP) - Licensed Corporations are required to notify the SFC when they exercise their BCP arrangement, including working from home (WFH) practices and split shifts. Before this recent update, it was not explicitly clear if working from home would be enough to be determined an evocation of the BCP. Full WFH and split shifts to address continuity now clearly result in an expectation from the SFC that a notification be made (either by mail, portal or call). Partial working from home is not going to result in a notification expectation unless it is considered an evocation event in your continuity plan. It would be a good idea to consider providing a notification that includes that you may be utilizing risk mitigation throughout the timing of the crisis and will specifically follow up with further notification if there is any threat to the ability to deliver your service to your clients.
In the same circular, the SFC also reminded firms that they can apply for an extension to their audit submission deadline through an application process.
The regulator also issued a circular confirming an approved delay to certain deadlines for compliance with recently implemented rule changes as follows:
Electronic Data Service Providers – The SFC is generally allowing an extension of the time allowed for full compliance with the circular from 30 June to 31 December 2020. This does not change the “without undue delay” notification requirement or the general requirement to be compliant with the cyber security requirements. As such the AIMA industry group is not slowing down on the work being done on this area. We continue to recommend that you provide notification relating to what you are doing with respect to compliance with the circular, recognizing that there is still time to address the practical issues of agreeing how your service provider can comply.
Client Asset Bank Acknowledgement Letters – The regulator has confirmed they are providing an extension of deadline to 31 January 2021.
Broker Order Life Cycle Data requirements – The regulator has confirmed they are providing an extension of deadline to 30 April 2021.
The SFC further highlighted in the same circular that in the event that brokers need to use alternative working from home arrangements that they should be reminded to ensure compliance with the current record keeping requirements, i.e. to ensure the order conversation is also recorded following previous guidance for taking orders while not in an environment where calls are recorded.
We recognize that firms are focused on handling current market issues and pandemic challenges but highlight the importance of recording actions taken. For example, recording weekly meetings focused on key operational and investment risk matters would be an example of good practice during these times.