The Securities and Futures Commission (SFC), in the course of its ongoing supervision of licensed corporations (LCs), has observed that some LCs carrying on asset management activities may have aided and abetted unlicensed affiliates or third parties to provide securities margin financing in the guise of investments.
“Deliberate use of an investment arrangement to conceal unlicensed margin financing activities is illegal,” said Ms Julia Leung, the SFC’s Deputy Chief Executive Officer and Executive Director of Intermediaries. “Anyone involved in these illicit arrangements may be liable to prosecution and should cease them immediately.”
The suspected margin financing arrangements involve unlicensed affiliates of the LCs or third parties who appear to fund the purchase of securities jointly with the LCs’ clients. These arrangements may operate through discretionary accounts or private funds and have features similar to margin calls and margin interest (Note 1). They are disguised in order to avoid regulatory requirements aimed at protecting investors and market integrity (Note 2).
The SFC issued today a circular warning asset managers that aiding and abetting such activities to fund securities purchases will have serious implications on their fitness and properness to remain licensed by the SFC.
Notes:
- Securities margin financing is Type 8 regulated activity as defined under Part 2 of Schedule 5 to the Securities and Futures Ordinance (SFO). Among others, section 114 of the SFO provides that no person shall carry on a business in a regulated activity unless it is licensed for such regulated activity. If the affiliates or third parties engaged in such regulated activity without a proper licence with the SFC, they may be in breach of the SFO.
- Persons conducting business activities which constitute securities margin financing are subject to other regulatory requirements, including the capital requirements under the Securities and Futures (Financial Resources) Rules and the risk management requirements governing margin lending under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
