Securities & Futures Commission of Hong Kong

Measures for augmenting senior management accountability in licensed corporations

A. Purpose and scope

Q1:

The SFC issued a circular to all licensed corporations on 16 December 2016, setting out specific measures for augmenting the accountability of senior management (Circular).  What does the SFC aim to achieve?

A:

This initiative, including the introduction of the “Managers-In-Charge of Core Functions” (MICs) concept, aims to:-

(a)   add clarity as to which individuals should be regarded as members of the
       senior management of a licensed corporation, and heighten awareness of
       their accountability, regulatory obligations and potential liabilities;

(b)   standardize the format for submission of information by licensed corporations
        and corporate licence applicants in respect of their management structures;

(c)   better align senior management with the existing regime governing
       responsible officers (ROs); and

(d)   help further strengthen the corporate governance of licensed corporations.

The measures set out in the Circular are consistent with the existing provisions of the Securities and Futures Ordinance (SFO), subsidiary legislation made by the SFC and codes and guidelines published by it under the SFO. 

Q2:

Does the MIC regime apply to temporary licensed corporations?

A:

The MIC regime set out in the Circular is not applicable to corporations licensed under section 117(1) of the SFO.  This is because (a) all of these corporations are already regulated by other authorities or regulatory bodies in their home jurisdictions, and (b) their temporary licence lasts for only a short period of time (not exceeding three months).

Q3:

When will the new measures relating to MICs set out in the Circular take effect?

A:

After issuing the Circular on 16 December 2016, the SFC intends to commence the collection of up-to-date management structure information (including MIC information and organisational charts) from licensed corporations and corporate licence applicants on 18 April 2017 (commencement date). To facilitate collection of the information, the SFC will gazette new forms under section 402 of the SFO.

Existing licensed corporations are expected to submit their management structure information to the SFC via the SFC Online Portal on or before 17 July 2017.  The SFC will organize industry workshops to introduce new portal features in the first quarter of 2017. 

The SFC generally expects that on or before 16 October 2017 (i.e. within six months from the commencement date), MICs of the Overall Management Oversight function and the Key Business Line function, who are not already ROs, will have applied for approval to become ROs (please refer to Part F of the Circular).

B. Meaning of “senior management”

Q4:

Which individuals are members of the senior management of a licensed corporation?

A:

The SFC is of the view that the senior management of a licensed corporation includes, among others, its (a) directors, (b) ROs, and (c) Managers-In-Charge of Core Functions (MICs).  These categories are not mutually exclusive.  For instance, an individual can simultaneously be a director, RO and MIC of the corporation.

The term “director” is defined in Schedule 1 to the SFO to include “a shadow director and any person occupying the position of director by whatever name called”.

Q5:

Why does the SFC regard non-executive directors as senior management of a licensed corporation?

A:

The board of directors of a licensed corporation is the ultimate decision-making body within the corporation.  Accordingly, the SFC is of the view that all members of the board play an essential role in managing the licensed corporation’s business and should therefore be regarded as part of senior management.

C. Managers-In-Charge of Core Functions

Q6:

Which individuals should be regarded as MICs of a licensed corporation?

A:

In determining whether an individual is an MIC for a particular Core Function, the licensed corporation should take into account the individual’s seniority and authority within the corporation.  An MIC should hold a senior position with sufficient authority to make decisions and manage the Core Function on a day-to-day basis.  Also, he or she should report directly, and be accountable, to the corporation’s board of directors or its MIC of the Overall Management Oversight function (see paragraphs 9 and 10 of the Circular).

Q7:

Can a licensed corporation appoint more than one individual to act as MIC of one particular Core Function?

A:

A licensed corporation may appoint one or more individuals to head a Core Function.  Having said that, the key attributes expected of individual MICs in terms of seniority and authority (see paragraphs 9 and 10 of the Circular) should be observed.  It is the responsibility of a licensed corporation’s board of directors to determine the proper delegation of powers.  In this regard, the SFC expects that a licensed corporation should adopt a formal document, approved by its board, clearly setting out the management structure of the corporation, including the roles, responsibilities, accountability and reporting lines of its senior management personnel.  Where a licensed corporation designates more than one individual to be the MICs of a particular Core Function, the board should ensure that the aforesaid document contains sufficient details regarding the specific responsibilities of each MIC concerned (see paragraph 28 of the Circular). 

Q8:

If a licensed corporation is governed by an internal management committee, who will be regarded as the MIC of the Overall Management Oversight function?

A:

A licensed corporation which is governed by an internal management committee is still required to designate an individual, such as the committee chairperson, to be the MIC of the Overall Management Oversight function of the corporation.  Where a licensed corporation designate more than one MIC to head the same Core Function, its board of directors should clearly set out the specific responsibilities of each MIC concerned in a formal document approved by the board, detailing as to how the responsibilities in that function are to be shared (see Q7).

Q9:

Can an MIC report to the licensed corporation’s parent company or other group companies?

A:

In addition to reporting to and being accountable to the licensed corporation’s board of directors or its MIC of the Overall Management Oversight function, an MIC may also report directly to the parent company and/or to senior management personnel of the group in accordance with established policies and procedures of the group. 

Q10:

Can an MIC be located outside Hong Kong?

A:

An MIC can be located in Hong Kong or outside Hong Kong.  In either case, he or she should be properly accountable to the licensed corporation.  It is the responsibility of the corporation’s board of directors to determine the proper delegation of authority and responsibilities among its senior management (including MICs).

Q11:

Does an MIC need to be an employee of the licensed corporation?

A:

MICs will not necessarily be employees of the licensed corporation.  However, an MIC should hold a position of authority within the licensed corporation and should be properly accountable to it.  Therefore it is not appropriate to designate as an MIC an external party who does not hold a position of authority within the licensed corporation and who merely provides outsourced services to it.

Q12:

If the day-to-day responsibility for overseeing an outsourced Core Function is assigned to a relatively junior person, can that person be an MIC of that function?

A:

In determining whether an individual is an MIC for a particular Core Function, one should take into account the individual’s seniority within the organisation and whether he or she has sufficient authority to make decisions and is accountable for the performance of the outsourced function (see paragraphs 9 and 10 of the Circular).

Q13:

Can an individual act as an MIC for more than one licensed corporation?

A:

An individual may be designated as an MIC by multiple licensed corporations, provided there are no conflict of interest concerns.  An MIC could serve multiple licensed corporations that are within the same corporate group or owned by the same controlling shareholders.

Q14:

One of the Core Functions is “Key Business Line”.  Is there any financial threshold to determine whether a particular business line is “key” to a licensed corporation? 

A:

For the purpose of this initiative, the Key Business Line function comprises business activities constituting one or more types of regulated activity (see Annex 1 of the Circular).  A Key Business Line, especially when it is newly developed or still in its developing stage, may not necessarily generate any revenue.  The combined business areas covered by all MIC(s) of the Key Business Line(s) should encompass all regulated activities conducted by the licensed corporation.

Q15:

If a licensed corporation is engaged in other business in addition to regulated activity, should it appoint an MIC for that other business?

A:

A licensed corporation is not required to appoint an MIC for business activity which does not constitute any regulated activity.  Having said that, it should include all business lines (including those not amounting to regulated activity) in its organisational chart filed with the SFC.

Q16:

If the internal legal counsel function and compliance function of a licensed corporation are headed by two different individuals, are both individuals regarded as MICs?

A:

For the purpose of this initiative, only the compliance function falls within the scope of Core Functions (see Annex 1 of the Circular), while the internal legal counsel function does not.  Therefore, the compliance head will be regarded as an MIC but the legal head will not.  Where an in-house legal counsel also serves as an MIC of the Compliance function, the focus of this initiative is placed on his or her role in Compliance (instead of legal counsel).

Q17:

Do MICs of Core Functions that do not constitute regulated activity (e.g. Finance and Accounting, Information Technology) need to be approved by the SFC?  What are the criteria for determining whether an MIC, who is not a licensed person or a licence applicant, is a fit and proper person?

A:

The SFC does not intend to impose any regulatory approval requirement to assess the fitness and properness of an individual MIC who is not a licensed person or a licence applicant.  However, as set out in paragraph 6.1.2(a) of the Fit and Proper Guidelines, the SFC is not likely to be satisfied that a corporation is fit and proper to be licensed if the corporation has non-executive directors, key personnel (such as manager, officer, director, chief executive), substantial shareholders or other controllers who fail to meet the Fit and Proper Guidelines other than that on competence to perform regulated activities (unless such requirements are otherwise applicable). 

Q18:

Are the training requirements under the Guidelines on Continuous Professional Training applicable to MICs who are not licensed?

A:

While the Guidelines on Continuous Professional Training are not applicable to MICs who are not licensed, Section III of the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC (Internal Control Guidelines) sets out guidance in relation to personnel and training expected of licensed corporations and their management.  Among other things, management should ensure that adequate training suitable for the specific duties which staff member(s) perform is provided both initially and on an ongoing basis.  A firm’s training programme should ensure that staff possess or acquire appropriate and practical experience through “on-the-job” training and where appropriate, structured courses.

D. Standard of conduct expected of senior management

Q19:

What are the conduct expectations applicable to senior management (including MICs)?

A:

Various codes and guidelines issued by the SFC serve as a useful reference regarding the conduct expected of senior management (including MICs), irrespective of whether they are licensed.  Some examples of the conduct expectations applicable to a licensed corporation’s senior management are as follows:-

(a)   General Principle 9 of the Code of Conduct for Persons Licensed by
        or Registered with the Securities and Futures Commission (Code of
        Conduct) states that the senior management of a licensed corporation
        should bear primary responsibility for ensuring the maintenance of 
        appropriate standards of conduct and adherence to proper procedures
        by the corporation.

(b)   Paragraph 14.1 of the Code of Conduct further specifies that senior
       management of a licensed corporation should:-

       (i)    properly manage the risks associated with the business of the
              corporation, including performing periodic evaluation of its risk
              management processes;

       (ii)   understand the nature of the business of the corporation, its
              internal control procedures and its policies on the assumption of risk; and

       (iii)  understand the extent of their own authority and responsibilities.

(c)    The Internal Control Guidelines state that members of a licensed
        corporation’s senior management, including its directors, chief
        executive officer, managing director or other senior operating
        management personnel (as the case may be), are ultimately
        responsible for the adequacy and effectiveness of the corporation’s
        internal control systems.  The Internal Control Guidelines also contain
        specific control guidelines for certain important areas, including 
        information management, compliance, audit or related review,
        operational controls, and risk management.  For example, MICs
        responsible for managing the Information Technology function
        may find it useful to refer to Section IV of the Internal Control
        Guidelines (under the topic “Information Management”), which
        sets out specific control guidelines regarding the establishment
        of policies and procedures to ensure the integrity, security,
        availability, reliability and thoroughness of all information, including
        documentation and electronically stored data, relevant to a licensed
        corporation’s business operations.

(d)   The Guideline on Anti-Money Laundering and Counter-Terrorist
        Financing sets out detailed expectations regarding compliance
        and control functions that will be particularly relevant to MICs
        responsible for managing the Anti-Money Laundering and
        Counter-Terrorist Financing function.

E. Legal liabilities of senior management

Q20:

What are the legal liabilities on the senior management of a licensed corporation?

A:

Under Part IX of the SFO, the SFC may exercise its disciplinary powers to sanction a regulated person if the person is, or was at any time, guilty of misconduct or is considered not fit and proper to be or to remain the same type of regulated person.  The term “regulated person” means a person who is or at the relevant time was any of the following types of person:-

(a)   a licensed person;

(b)   an RO of a licensed corporation; or

(c)   a person involved in the management of the business
       of a licensed corporation (regardless of whether he or she is licensed). 

All members of the senior management of a licensed corporation (even if they are not licensed) are regulated persons because of their involvement in the management of the business of a licensed corporation. 

Where a licensed corporation is (or was) guilty of misconduct as a result of the commission of any conduct occurring with the consent or connivance of, or attributable to any neglect on the part of a person involved in the management of the business of the licensed corporation, then that person is also guilty of misconduct (see section 193(2) of the SFO).

Furthermore, in determining whether a regulated person, including a person involved in the management of a licensed corporation, is a fit and proper person for the purpose of considering taking disciplinary action, the SFC may, among other matters, take into account the past or present conduct of the person (see section 194(3) and section 129 of the SFO).  For instance, if an MIC fails to ensure a licensed corporation’s compliance with the codes or guidelines published by the SFC, it may call into question the MIC’s fitness and properness.

Q21:

Are there any circumstances that may lead to a criminal prosecution against senior management?

A:

The disciplinary sanctions that the SFC may impose on a regulated person under Part IX of the SFO are civil rather than criminal in nature.  However, where a corporation (which may or may not be a licensed corporation) has been found guilty of an offence under the SFO, the SFC may seek to extend criminal liability to any of the corporation’s officers where the offence is committed with their consent, connivance or otherwise attributable to their recklessness (see section 390 of the SFO).  The term “officer” includes a director, manager or secretary of, or any other person involved in the management of, the corporation (see Schedule 1 to the SFO).

Q22:

Will the SFC refer to its Disciplinary Fining Guidelines as its standards for disciplining MICs?  Will the SFC provide any additional guidance on how it will use its disciplinary powers when disciplining MICs?

A:

The Disciplinary Fining Guidelines published by the SFC apply to all regulated persons (including MICs), regardless of whether they are licensed.  The guidelines indicate the manner in which the SFC will perform its function in imposing a fine on a regulated person.  Other sanctions that the SFC is empowered to impose on a regulated person are revocation or suspension of licence (where the regulated person is a licensed person), revocation or suspension of approval to be an RO (where the regulated person is an RO), prohibition of a regulated person from applying for licence or registration, becoming an RO, executive officer or relevant individual, and reprimand.

Q23:

How does the SFC determine a particular individual’s degree of responsibility when considering disciplinary action?

A:

In determining where responsibility lies, and the degree of responsibility of a particular member of senior management, regard shall be had to the individual’s apparent or actual authority in relation to the particular business and operations, his or her level of responsibility within the licensed corporation, any supervisory duties he or she may perform, and the levels of control or knowledge he or she may have concerning any failure by the corporation or persons under his or her supervision to follow the Code of Conduct (see paragraph 1.3 of the Code of Conduct).

Q24:

Will the SFC discipline individuals who are located outside Hong Kong?

A:

The disciplinary powers under Part IX of the SFO apply to all regulated persons as defined.  Such powers do not differentiate between regulated persons located in Hong Kong and those outside Hong Kong.

Q25:

In the event of an investigation, will the secrecy obligation under section 378 of the SFO prevent any communication/notification to be made to the relevant MICs, regardless of the entity that they sit within?

A:

The secrecy obligations remain unchanged after the implementation of the MIC regime. The relevant persons should continue to observe the secrecy obligations applicable to them under section 378 of the SFO. Please refer to the information available on the SFC website at http://www.sfc.hk/web/EN/regulatory-functions/enforcement/secrecy-provision.html.  As noted on the SFC website, in the case of a corporation, the SFC’s consent to notification to its board of directors and holding company can be presumed.  Disclosure in other circumstances is subject to the SFC’s consent. 

Q26:

Does the MIC regime create any additional liability for senior management?

A:

The MIC regime is consistent with the existing provisions of the SFO, subsidiary legislation made by the SFC and codes and guidelines published by it under the SFO.  It does not impose any additional liability on the senior management of licensed corporations (including MICs).

F. Alignment with the RO regime

Q27:

Are all MICs required to be approved as ROs?

A:

The SFC generally expects that MICs of (a) the Overall Management Oversight function and (b) the Key Business Line function should seek the SFC’s approval to become ROs.  That is because in most cases the MICs of these two functions actively participate in or directly supervise regulated activities of the licensed corporations. 

In the rare situation that a licensed corporation’s MIC of the Overall Management Oversight function neither actively participates in nor directly supervises regulated activity, he or she will not be expected to become an RO.  This may be the situation of some licensed credit rating agencies where there is a clear segregation of duties between the business functions performed by the CEOs and the rating functions performed by the rating analysts.  In that case, the SFC anticipates that this MIC may be responsible for the Overall Management Oversight function working together with one or more other MICs who are in charge of supervising the licensed corporation’s regulated activity.  More than one individual may be designated as MIC of the Overall Management Oversight function (see Q7).

Q28:

Does a new CEO of a licensed corporation, who will assume the Overall Management Oversight function, need to be approved as an RO before taking up the post?

A:

The new CEO does not need to become an RO before his appointment as CEO.  However, the licensed corporation should clearly indicate to the SFC its intention for the CEO to apply to become RO.

Q29:

If a CEO has no direct experience conducting regulated activities, can he or she become an RO?

A:

In considering whether an RO applicant, who is or will be an MIC of the Overall Management Oversight function, meets the industry experience tests set out in the Guidelines on Competence, the SFC takes into account, among other things, the applicant’s overall career history accumulated within the industry, as well as his or her proposed activities and the resources (including system and expertise) available to the licensed corporation in totality.

An applicant who has held a senior position to manage a control or operational function (e.g. risk management, compliance, financial or operational control) for a long time may be approved as RO subject to appropriate licensing conditions, even if he or she has not had any experience in conducting or directly supervising regulated activity.  Typically in this situation, a licensing condition may be imposed to the effect that he or she should work together with another RO who is fully competent.  After accumulating sufficient experience in regulated activity, he or she may apply for waiving the licensing condition under section 134(1) of the SFO.

The SFC will consider every RO application or waiver application based on the specific facts of each case.

Q30:

Does an MIC of the Overall Management Oversight function need to be approved as an RO of all regulated activities that the licensed corporation is licensed for?

A:

It depends on whether the MIC of the Overall Management Oversight function actually oversees the operations of all or certain regulated activities of the licensed corporation.  In general, the SFC expects an MIC of the Overall Management Oversight function to become an RO in respect of the regulated activities he or she oversees.

Q31:

Does the SFC allow an offshore MIC of the Overall Management Oversight function or the Key Business Line function to become an RO?

A:

MICs may be located in Hong Kong or outside Hong Kong.  Like other ROs based outside Hong Kong, the SFC will consider imposing appropriate conditions on the licence of these individuals, such as a condition requiring him or her to act together with another RO who is fully competent and is based in Hong Kong.

Q32:

Will there be any grace period regarding the SFC’s expectation that certain MICs should be ROs?

A:

The SFC understands that some licensed corporations may need time to review their existing management structures and seek RO status for some of their management personnel as a result of this initiative. 

The SFC generally expects that on or before 16 October 2017 (i.e. within six months from the commencement date), MICs of the Overall Management Oversight function and the Key Business Line function, who are not already ROs, will have applied for approval to become ROs.  Please also refer to Q3.

Q33:

What exemptions are available from the requirement to pass local regulatory framework papers?

A:

As detailed in the Guidelines on Competence, the SFC may exempt an individual applicant from the requirement to pass the local regulatory framework papers under Paragraph 6, Part II, Appendix E of the Guidelines if he or she:- 

(a)   has sufficient industry experience;
(b)   is assuming a very senior management position; and
(c)   has regulatory support from other personnel, and there are appropriate
       control systems in place.

Q34:

If both the regional CEO and the local CEO of a financial group are located in Hong Kong, who should be appointed as an MIC of the Overall Management Oversight function?

A:

It depends on the roles and responsibilities of the two individuals.  If either of them is responsible for overseeing the overall operations of any licensed corporation within the group on a day-to-day basis, he or she will be regarded as an MIC of the Overall Management Oversight function and expected to become an RO.  If both of them are responsible for that function, both of them should be regarded as MICs.

Q35:

Does the SFC expect a licensed corporation to downgrade the status of existing ROs, who are not MICs of the Overall Management Oversight function or the Key Business Line function, to licensed representatives?

A:

In addition to the MICs of the Overall Management Oversight function and the Key Business Line function, a licensed corporation may propose to appoint any other individuals, who possess sufficient authority, to be ROs to supervise its regulated activities.  A licensed corporation must have at least two ROs to supervise each regulated activity for which it is licensed.

G. Submission of information

Q36:

Who should submit the MIC information to the SFC?

A:

The licensed corporation (rather than the MIC) is responsible for submitting the MIC information to the SFC.  All MIC appointments should be approved by the board of directors of the corporation, and the board should ensure that each of the corporation’s MICs has acknowledged his or her appointment as MIC and the particular Core Function(s) for which he or she is principally responsible.

Q37:

Does a licensed corporation need to submit information regarding the temporary acting appointment of an MIC (e.g. to provide cover for another MIC who is precluded by illness or absence from carrying out his or her functions, or to fill a position temporarily pending a permanent appointee)?

A:

A licensed corporation is not required to notify the SFC of its temporary acting appointment of an MIC, provided that such appointment is expected to last for a period no more than a few months and is not expected to continue on a permanent basis.  However, if a temporary appointment becomes a permanent appointment, the licensed corporation should notify the SFC of the change within 7 business days.

Q38:

What should be included in the organisational chart submitted by a licensed corporation? 

A:

The organisational chart submitted to the SFC should depict:-

(a)   a licensed corporation’s corporate hierarchy and its business and operational 
       units;

(b)   the positions of all MICs of the licensed corporation, the job titles of the
       persons to whom the MICs report and the job titles of the persons
       reporting directly to the MICs in relation to the operations of the corporation.

Q39:

Should a licensed corporation submit an updated organisational chart every time there is a change of personnel?

A:

A licensed corporation should submit an updated organisational chart when there is a change in the identity of any of the MICs it has engaged or in the job title of the person to whom an MIC reports.  It is not necessary to submit an updated organisational chart when there is only a change in the personnel reporting to the MICs.

Q40:

Will the MIC information be displayed in the Public Register of Licensed Persons and Registered Institutions?

A:

There will be no change to the type of information displayed in the Public Register.  The Public Register includes names of licensed representatives and ROs as set out in Schedule 4 to the Securities and Futures (Licensing and Registration)(Information) Rules. Organisational charts and MIC information of licensed corporations will not be displayed in the Public Register.

Q41:

Do the requirements for submitting annual returns to the SFC or notifying the SFC regarding his or her outside directorship or other business interests apply to all MICs?

A:

Only MICs who are licensed persons are subject to these requirements.

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