Glossary

Securities And Futures Commission (SFC)

The Securities and Futures Commission (SFC) is an independent statutory body that regulates the securities and futures markets in Hong Kong. Its leading role is to protect the investing public by maintaining a fair, orderly, and transparent market. The SFC also promotes investor education and ensures continued market development.

The History of the Securities and Futures Commission

Hong Kong created the SFC in 1989 to regulate the local securities and futures markets. The government established the SFC in response to the global stock market crash in 1987. During that crash, the Hong Kong Stock Exchange suffered heavy losses. It highlighted the need for a dedicated regulator to oversee the securities and futures markets and protect investors. The SFC received further strengthening in 1997 after the Asian financial crisis.

A Chairman heads the SFC, and it has a 15-member Commission. It also has a 100-strong executive team responsible for carrying out its regulatory functions.  

What Does the Securities and Futures Commission Regulate? 

The SFC HK regulates the individuals and organizations that participate in Hong Kong’s securities and futures markets. Its oversight extends beyond the stock exchange itself to the brokers, advisers, fund managers, and other intermediaries that facilitate investment activity. 

Regulated Firms and Individuals  

The SFC regulates a broad range of market participants, including: 

  • Brokers and securities dealers 
  • Investment advisers and financial planners 
  • Fund managers and asset managers 
  • Intermediaries that arrange, execute, or advise on financial transactions 
  • Firms involved in corporate finance, underwriting, or margin financing 

Many of these entities carry out what the SFC defines as “regulated activities” under the Securities and Futures Ordinance. 

Regulated Activities  

The SFC supervises a wide variety of trading and advisory activities, including: 

  • Securities dealing and securities advisory services 
  • Futures contract trading and futures advisory activities 
  • Leveraged foreign exchange trading 
  • Asset management and fund management 
  • Corporate finance advisory services 
  • Automated trading services and securities margin financing  

For example, a company that manages investment portfolios for clients, advises investors on securities, or executes trades in Hong Kong markets will typically require authorization or licensing from the SFC HK. 

Licensing Requirements  

One of the SFC’s most important responsibilities is determining who may legally carry out regulated activities. Firms and individuals that wish to operate in these markets must first obtain the appropriate SFC license.  

The SFC assesses: 

  • The type of regulated activity being performed 
  • The experience and qualifications of the applicant 
  • The applicant’s financial soundness and internal controls 
  • Whether the applicant is suitable to work in a regulated financial environment  

Operating without the required license can result in disciplinary action, fines, or criminal prosecution.  

Ongoing Supervision 

Once authorized, firms remain subject to ongoing supervision, and the SFC regularly monitors: 

  • Financial resources and capital adequacy 
  • Risk management and internal controls 
  • Recordkeeping and communications retention 
  • Employee conduct and conflicts of interest 
  • Compliance with anti-money laundering and market conduct rules 

The SFC may conduct inspections, request information, review transaction records, and require firms to remediate weaknesses in their controls.  

Enforcement and Investigations 

Where the SFC suspects misconduct, it has broad investigatory and enforcement powers. It may investigate insider dealing, market manipulation, unlicensed activity, mis-selling, breaches of fiduciary duty, or failures to properly supervise employees.  

Depending on the severity of the issue, the SFC can: 

  • Issue warnings or reprimands 
  • Impose fines and disciplinary sanctions 
  • Suspend or revoke licenses 
  • Refer cases for criminal prosecution 
  • Seek civil remedies such as injunctions or asset freezes 

These powers allow the SFC HK to maintain confidence in Hong Kong’s financial markets and deter misconduct across the industry.     

The Role of the Securities and Futures Commission

The SFC focuses on protecting the best interests of consumers or investors. It also establishes guidelines that preserve the integrity of the market. These are some of the roles it undertakes to accomplish this:

  • Regulates and supervises listed or aspiring listed companies and intermediaries on the stock exchange that deal in securities. 
  • Licenses and regulates persons who carry out Type 1 (dealing in securities), Type 2 (advising on securities), and Type 3 (leveraged foreign exchange trading) regulated activities. 
  • Monitors compliance with the listing rules of the stock exchange and takes action if there are any breaches. 
  • Investigates suspected malpractice and takes disciplinary action where appropriate
  • Applies to the court for civil sanctions, such as asset freezes, and criminal prosecution where there is evidence of serious wrongdoing. 
  • Acts as a market development authority, promoting Hong Kong as an international financial center. 
  • Provides education and training to investors and industry participants. 

Who Needs to Be SFC Regulated (Licensing Requirements) 

Any person or business that carries out a regulated activity in Hong Kong generally must be licensed or registered with the SFC HK. The exact licensing requirement depends on the role the individual or organization plays.  

Licensed Corporations 

Most firms engaged in regulated activities must be licensed corporations. This includes brokerage firms, investment advisory firms, asset managers, and fund managers.  

To obtain a license, the corporation must: 

  • Specify which regulated activities it intends to perform 
  • Demonstrate that it has sufficient financial resources 
  • Establish appropriate governance, compliance, and risk management procedures 
  • Appoint qualified responsible officers to oversee its regulated activities 

A licensed corporation cannot begin operating until the SFC has approved its application. 

Responsible Officers  

Every licensed corporation must appoint at least two responsible officers for each regulated activity. 

Responsible officers are senior individuals accountable for ensuring the business complies with SFC rules and standards. They are expected to supervise staff, maintain adequate controls, and ensure that the firm operates honestly and competently. 

To become a responsible officer, an individual must demonstrate: 

  • Relevant industry experience 
  • Appropriate academic or professional qualifications 
  • Sufficient seniority and authority within the firm 
  • A strong understanding of the applicable regulatory requirements 

Representatives 

Employees who carry out regulated activities on behalf of a licensed corporation generally must be licensed as representatives. 

Examples include: 

  • Securities sales staff 
  • Investment advisers 
  • Traders 
  • Client relationship managers involved in regulated activities 

Representatives work under the supervision of the licensed corporation and its responsible officers, but they are still individually accountable for complying with SFC requirements.  

The “Fit and Proper” Requirement  

The SFC only grants licenses to applicants that it considers “fit and proper.” This is a central principle of the SFC licensing regime. When assessing whether a person or corporation is fit and proper, the SFC considers factors such as: 

  • Honesty, integrity, and reputation 
  • Competence, qualifications, and experience 
  • Financial soundness 
  • Past disciplinary or criminal history 
  • Ability to carry out regulated activities responsibly 

An applicant may be refused a license if the SFC believes there are concerns about integrity, financial stability, or past misconduct.  

Ongoing Obligations After Licensing 

Once licensed, firms and individuals must continue meeting a range of ongoing obligations, including: 

  • Maintaining minimum financial resources and capital levels 
  • Following conduct and disclosure standards 
  • Keeping accurate books, records, and communications 
  • Reporting significant changes to the SFC 
  • Providing ongoing staff training and supervision 
  • Complying with anti-money laundering, market conduct, and client asset protection rules 

Failure to meet these continuing obligations can result in investigations, disciplinary action, or the loss of an SFC license.   

The Consumer Focus of the Securities and Futures Commission

Some market regulators focus on protecting the market, the economy, and the businesses. Meanwhile, others focus on consumer protection. SFC is one of the regulatory bodies that prioritizes investors or consumers. This can often mean stricter requirements for businesses.

It’s easy to focus on the tradeoffs of stricter guidelines, but there are some benefits for all parties involved:

  • Maintains high standards of market conduct
  • Enhances the quality of intermediaries
  • Encourages best practices in corporate governance
  • Promotes good settlement practices
  • Fosters transparency of information
  • Provides education and training to investors and industry participants

The Enforcement Powers Granted to the Securities and Futures Commission

Examining the structure of the SFC makes it easier to understand the extent of the powers it is granted. While it does operate as an independent entity, it is also a branch of the Hong Kong government. This gives it far-reaching capabilities, especially after the bolstering it received following the 1997 financial crisis:

  • Investigatory powers: The SFC can investigate potential breaches of the law and, if necessary, take disciplinary action.
  • Prosecutorial powers – The SFC can prosecute criminal cases in the magistrates’ or district courts. It can also apply to the Market Misconduct Tribunal for civil penalties.
  • Civil litigation powers: The SFC can take civil action in court to recover assets or impose financial penalties.
  • Administrative actions – The SFC can issue warnings, reprimands, or fines. It can also suspend or revoke licenses and bar individuals from working in the industry. 

How the Securities and Futures Commission Is Funded

Despite being an arm of the government, the SFC receives no government funding. Instead, its budget comprises fees from the industry. Financial independence from the government improves impartiality and reduces government agents’ ability to interfere in the market.

These are some of the entities paying fees to the SFC:

  • Companies listed on the stock exchange
  • Intermediaries licensed by the SFC
  • Investors who trade in securities or futures contracts

How Message Capturing and Archiving Can Help With SFC Compliance

As a regulated financial institution, we are subject to strict requirements for maintaining and retaining communication records. The SFC has published guidance on this, including the following criteria:

  • Records must be secure, easily accessible, and searchable.
  • Covered entities must retain records for both local and overseas clients.
  • Different records have varying record retention periods, such as two years for order records.

At LeapXpert, our team has streamlined the message-capturing process, so you can focus on value-adding aspects of your business. The automated solution effortlessly adheres to your record retention requirements, whether you need to comply with guidelines from SFC, MAS, SEC, or all of the above. Book your demo to get started.

FAQ

What is the Securities and Futures Commission (SFC)? 

The Securities and Futures Commission (SFC) is Hong Kong’s independent regulator for the securities and futures industry. It oversees brokers, investment advisers, fund managers, and other financial intermediaries to help ensure that Hong Kong’s markets remain fair, transparent, and orderly. 

What is SFC regulation, and why is it important? 

SFC regulation refers to the rules, licensing requirements, supervision, and enforcement activities administered by the SFC. These requirements are important because they protect investors, reduce the risk of market abuse and misconduct, and help maintain confidence in Hong Kong’s financial system. 

Who needs to be SFC regulated? 

Businesses and individuals that carry out regulated activities in Hong Kong generally need to be regulated by the SFC. This includes licensed corporations such as brokerage firms, investment advisers, fund managers, asset managers, and corporate finance firms, as well as responsible officers and representatives who work for those organizations.  

What does it mean to be SFC licensed? 

Being SFC licensed means that a person or company has received authorization from the SFC to carry out specific regulated activities, such as dealing in securities, advising on investments, managing assets, or trading futures. To obtain a license, the applicant must satisfy the SFC that it is “fit and proper,” financially sound, and capable of meeting regulatory requirements.  

What is SFC compliance?  

SFC compliance is the ongoing process of adhering to the rules and standards set by the Securities and Futures Commission. This includes maintaining sufficient financial resources, following conduct and disclosure rules, keeping proper books and records, monitoring employee communications, protecting client assets, and complying with anti-money laundering requirements.   

What policies and procedures are required for SFC compliance?  

SFC-regulated firms typically must maintain written policies and procedures covering areas such as compliance monitoring, communications retention, recordkeeping, conflicts of interest, anti-money laundering, employee conduct, complaints handling, cybersecurity, and client asset protection. Firms are also generally expected to document supervisory procedures and internal controls to demonstrate compliance during an SFC inspection. 

How does the SFC monitor regulated firms? 

The SFC monitors regulated firms through ongoing supervision, routine inspections, requests for information, reviews of transaction and communication records, and investigations into suspected misconduct. It may also require firms to submit financial reports, notify the SFC of material changes, and remediate weaknesses identified during inspections.