Client Money Rules

Client Money Rules (CMR)

In these FAQs, terms that are defined under the SFO or subsidiary legislation (such as “depositary”, “relevant CIS”, “scheme documents”, “scheme assets”, “scheme money” and “scheme securities” etc.) have the same meanings as prescribed to these terms under the relevant legislation.

Q1 : Would activities that an RA 13 depositary performs in its capacity as a Transfer Agent (TA) (eg, processing payments in designated accounts) be subject to requirements under the CMR?

The CMR will apply to an RA 13 licensed corporation (LC) and its associated entity (AE) in respect of “scheme money” received or held in Hong Kong by the RA 13 LC or its AE in the course of conducting Type 13 regulated activity by the RA 13 LC, regardless of the role played by such LC.

That said, in the context of RA 13, handling of money which is not “scheme money” received or held in Hong Kong will not be subject to the CMR. In such cases, the depositary is expected to observe relevant requirements under Schedule 11 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Schedule 11), in particular paragraphs 9 (relating to how subscription and redemption proceeds should be held) and 11 (relating to distribution proceeds).

Q2 : When does the “three-day” requirement for paying scheme money into a segregated account or relevant CIS account begin?

A: Generally, the relevant period starts on the day when the receipt¹ by the RA 13 LC in Hong Kong becomes scheme money of any relevant CIS.

¹ Unless the money is classified as unknown receipt. LCs are expected to have adequate internal controls and procedures which enable them to take reasonable steps to track deposits and reconcile unknown receipts promptly. Please see FAQ 5 of the CMR dated 17 March 2003 which provides that “as a matter of policy, unknown receipts in bank account of the licensed corporation or associated entity would not normally be treated as receipts of client money except where there is evidence to the contrary”.

Q3 : With respect to real estate investment trusts (REITs), where both collection and operating accounts are opened and operated by the REIT management company in the name of the relevant special purpose vehicle (SPV) for the REIT, if the SPV is not considered to be in a controlling entity relationship with the RA 13 LC, should the CMR apply to the RA 13 LC with respect to monies in the collection accounts (for collection of rental income) and operating accounts (for payment of operating expenses) as these monies are not “scheme money” within the CMR definition?

In general, if a bank account is opened in the name of, and maintained by, the RA 13 LC, money forming part of the REIT’s property deposited in that account would be considered scheme money received or held by the RA 13 LC and the CMR requirements will apply. If monies in bank accounts opened in the name of the RA 13 LC do not form part of the REIT’s property (eg, distribution proceeds held on behalf of investors), the RA 13 LC should comply with relevant requirements in Schedule 11 to hold such monies on trust for the relevant parties.

Where REIT collection or operating accounts are opened in the name of SPVs and the RA 13 LC only operates those accounts in accordance with the management company’s instructions, the monies in those accounts are unlikely to be considered scheme money received or held by the RA 13 LC. The CMR will not apply in these cases, but the RA 13 LC should observe relevant requirements in Schedule 11 in respect of those monies, in particular paragraph 19(b) (which requires a REIT depositary to ensure the management company has put in place proper cash flow management policies and controls and to oversee the implementation of such policies to ensure compliance with all applicable legal and regulatory requirements and requirements under the constitutive documents of the REIT).

We do not intend to regulate SPVs as AEs of a REIT depositary for the purpose of the CMR.

Last update: 30 Sep 2024