Securities & Futures Commission of Hong Kong

Premises for business and record keeping

Q1:

If a licensed corporation outsources the administration functions such as data processing to a service provider, does it need to apply for approval under section 130 of the SFO in respect of the premises of that service provider for keeping records or documents?

A:

If the original documents are kept by the licensed corporation at its approved premises and only imaged records or data are sent to the service provider for processing and the processed data is also maintained by the licensed corporation, it is not necessary for the licensed corporation to seek approval from the SFC in respect of the premises of the service provider for keeping records or documents.

However, the licensed corporation is required to notify the SFC of such outsourcing arrangement in compliance with the Securities and Futures (Licensing and Registration)(Information) Rules.

Q2:

If a licensed corporation sets up new branches, does it need to apply for approval under section 130 of the SFO in respect of the premises of each branch?

A:

You will need to seek approval for the premises of each branch office. This is so even for those licensed corporations which transfer all their records from the branches to the head office because it is likely that at some points in time, there may be records kept by the branch but not in the head office.

Q3:

Certain records or documents of an intermediary are required to be kept at the premises approved by the SFC under section 130 of the SFO. Will the SFC approve overseas premises under section 130 of the SFO?

A:

It is not the SFC’s practice to approve overseas premises for the keeping of records or documents under section 130 of the SFO. 

The reason why the SFC will only approve premises that are located in Hong Kong is that section 130 of the SFO must be read in the light of the SFC’s related powers under Parts VI and VIII of the SFO and the related obligations of intermediaries in respect of the keeping of their records. The SFC, by way of example, has the power under Part VIII of the SFO to enter premises to inspect the records of an intermediary, but would be precluded from exercising this power in the event of the premises being located outside Hong Kong. By way of further example, the Securities and Futures (Keeping of Records) Rules stipulate the records that must be kept by intermediaries and that they must be kept in a manner that will enable an audit to be conveniently and properly carried out.

The SFC considers that, in the event of it approving overseas premises under section 130 of the SFO, these types of powers and obligations could be undermined. Accordingly, the SFC insists that all records and documents required to be kept by an intermediary under the SFO must be kept at approved premises in Hong Kong.

Q4:

My firm is considering outsourcing some of the back office functions to a third party. If some of the records or documents of my firm are kept outside Hong Kong by the service provider, would it be necessary for my firm to obtain the SFC’s approval for the overseas premises under section 130 of the SFO?

A:

The SFC recognises that outsourcing practices involving overseas third parties are sometimes adopted by intermediaries and that these practices might involve identical records or documents being contemporaneously kept both at the overseas premises of such a third party and at the Hong Kong premises of an intermediary which have been approved by the SFC under section 130 of the SFO. However, the SFC does not interpret section 130 as requiring such overseas premises to be approved under section 130. 

Intermediaries are reminded that these outsourcing practices do not in any manner alter the obligations of an intermediary at all times to keep all required records or documents at the premises in Hong Kong that have been approved by the SFC under section 130 of the SFO. 

If an intermediary enters into an outsourcing arrangement of the type mentioned above, it must ensure that all relevant records or documents, which are kept by an overseas third party, are also contemporaneously kept by the intermediary in an appropriate form (including electronic) at the Hong Kong premises that have been approved for this purpose by the SFC under section 130.

Q5:

My firm is applying for a licence to become an asset manager in Hong Kong. I heard that the SFC does not allow licensed firms to carry on their businesses in business centres or shared offices, or to move regularly from one office to another. Is this true?

A:

The SFO and its related rules do not prescribe the type of office from which a licensed corporation must operate. However, the business premises that a firm chooses must be suitable for the business activities that it has been licensed under the SFO to carry on.

Licensed corporations must ensure, at all times, that their office arrangements are suitable. This is a continuing obligation and any failure to comply with it will give rise to concerns on the part of the SFC and might well result in the SFC taking regulatory action.

As a matter of general principle, the SFC does not distinguish business centres or shared offices from other types of business accommodation. However, there will be some business centres or shared office arrangements which the SFC will not regard as suitable, particularly where self-contained and secure space is not available.

The SFC is not in favour of firms regularly moving from one temporary office to another and encourages licensed corporations to carry on business from a “fixed abode”.

As a matter of general principle, a licensed corporation should satisfy itself that the business premises occupied by it are appropriately secure and that confidential/non-public information (such as price sensitive information) and client privacy will be sufficiently safeguarded against unauthorized access or leakage.

In considering whether the location of a licensed corporation’s office in particular premises is appropriate, the following factors would suggest that premises are likely to be unsuitable for that purpose:-

  • Where there is no secured and properly segregated office area, which is able to be locked and which is designated for the firm’s own and exclusive use, and in which its business records, particularly those relating to clients, are able to be securely held;
  • Where essential office equipment and telecommunication systems are installed in such a way that they are not situated within an enclosed area that is secure and accessible only by the firm’s staff and authorized personnel;
  • Where no or insufficient measures are taken to prevent confusion to clients that might be caused by the existence of other business entities occupying the same premises;
  • Where the nature of the firm’s business demands frequent face-to-face dealings / meetings with clients at the firm’s premises, during which client information and instructions are likely to be exchanged, and practical difficulties exist in the firm being able to ensure confidentiality during such meetings;
  • Where the firm has not ensured that its office premises will always be accessible for all formal regulatory visits, including investigations and inspections.

Although the above factors are considered by the SFC to be of principal concern to it in respect of the appropriateness or otherwise of business premises occupied by licensed corporations, they should not be considered to constitute an exhaustive list because circumstances might exist in certain situations that give rise to particular accommodation needs or requirements. Licensed corporations have an ongoing obligation to anticipate such matters and to ensure that their business premises are, at all times, suitable for the purposes for which they are being used.

3.5241 s