Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code”)
This FAQ aims to provide guidance on the application of paragraph 8.3 and 10.2 of the Code. For further guidance on these paragraphs, please also refer to the FAQ issued on 15 June 2018.
Would the required disclosure of monetary benefits under paragraph 8.3(b)(ii) of the Code of Conduct cover investment products other than funds and the selling of which is regulated by the SFC, such as equity-linked instruments or bonds, and offered by an intermediary on principal basis?
Paragraph 8.3(b)(ii) of the Code of Conduct does not cover the case where a distributor sources an investment product from its own inventory.
Also, this provision does not cover the following cases:
where the distributor or any of its associates receives monetary benefits which are quantifiable prior to or at the point of entering into a transaction, in which case the distributor should comply with paragraph 8.3(a) accordingly;
where the distributor receives non-explicit monetary benefits for distributing an investment product issued by itself or any of its associates, in which case the distributor should comply with paragraph 8.3(b)(i) accordingly.
Is generic disclosure covering a range of funds sufficient to satisfy the required disclosure of monetary benefits under paragraph 8.3(b)(ii) of the Code of Conduct?
The disclosure under paragraph 8.3(b)(ii) of the Code of Conduct should be made on a transaction basis, ie, on a per fund basis. If the same maximum percentage applies to a range of funds, then the same disclosure can apply to all such funds.
Apart from the information required to be disclosed under paragraph 8.3(b)(ii) of the Code of Conduct, can intermediaries provide additional information about the monetary benefits received or receivable by them that are not quantifiable prior to or at the point of entering into a transaction?
For example, can intermediaries provide information on the actual amount of monetary benefits it has received in the past 12 months?
Or where an intermediary is a local distributor of an investment product and the maximum percentage disclosed is the maximum percentage receivable by the regional distributor which is its associate, can the intermediary disclose such fact and that it is based on the aggregate amount of products distributed by the regional distributor and the local distributors, including the intermediary?
The minimum requirement under paragraph 8.3(b)(ii) of the Code of Conduct is to disclose the existence, nature and the maximum percentage of monetary benefits receivable that are not quantifiable prior to or at the point of entering into a transaction. Intermediaries can choose to provide other information in addition to the required information under paragraph 8.3(b)(ii).
Intermediaries can disclose additional information (such as the actual amount of monetary benefits it has received in the past 12 months, or the fact that the maximum percentage disclosed is the percentage receivable by the regional distributor). Where additional information is provided, the intermediary should ensure the information provided to the client is accurate and not misleading.
In the case of funds, can intermediaries disclose the range of trailer fees receivable or disclose trailer fees receivable in dollar amounts instead of disclosing the maximum percentage of a fund’s management fees that is receivable?
Intermediaries may disclose the range of trailer fees receivable on an annualized basis as long as the maximum percentage receivable is disclosed in each case. In other words, the minimum requirement is to disclose the maximum percentage receivable.
Intermediaries may choose to provide trailer fees receivable in dollar amounts as additional information. If they choose to do so, the maximum dollar amount receivable per year disclosed should be based on the assumptions that the investor remains invested in the fund for a 12-month period and that there is no change in the net asset value per unit of the fund. The maximum dollar amount should be expressed as HK$x for every HK$10,000 invested in the fund. This is to ensure disclosure is fair and comparable for investors.
Paragraph 10.2 of the Code of Conduct restricts when a licensed or registered person can represent itself as being independent or as providing advice on investment products on an independent basis when distributing an investment product, or when it can use any other term(s) with similar inference. Can some examples be provided on term(s) with an inference similar to independent?
The purpose of paragraph 10.2 of the Code of Conduct is to set out the principle of the circumstances in which the representation of independence by a licensed or registered person is restricted when it distributes investment products. As such, terms with inference similar to “independent” are not allowed and these may include, without limitation, “independent financial advisers” / “IFA”, “independent financial planners”, “impartial”, “neutral”, “objective” and “unbiased”.
Can licensed or registered persons who are also intermediaries working in other financial sectors (eg, the insurance sector) represent themselves as independent on business cards applicable to all its business activities?
All SFC licensees are required to comply with the SFC’s requirements when carrying on regulated activities under the SFO. They should therefore ensure that they accurately represent their independence or non-independence in their dealings with clients (eg, clients of their securities businesses) regardless of any other business being carried on.
The restriction on the usage of the term “independent” or other term(s) with similar inference covers the use of such terms in the description or title under which the person carries on regulated activities. Where the representation of independence is made to clients of all its business activities (eg, by way of one business card which applies to all businesses), the licensed or registered person should ensure that it is in compliance with the SFC’s requirements when serving its clients of its securities business.
Paragraph 10.2(b) of the Code of Conduct restricts when a licensed or registered person can represent itself as being independent if it has any close links or other legal or economic relationships with product issuers, or receives any non-monetary benefits from any party, which are likely to impair its independence in respect of favouring a particular investment product, a class of investment products or a product issuer.
Can a licensed or registered person who distributes a related party’s product represent itself as “independent” if it acts independently from the product issuer who is a related party?
The assessment of independence is principles-based and is dependent on the facts and circumstances of the close links or other legal or economic relationships.
Under paragraph 10.2(b) of the Code of Conduct, “close links” which may impair independence include where a licensed or registered person has a parent company and subsidiary relationship with a product issuer, or is in a controlling entity relationship (as defined in the SFO) with the product issuer.
Another example of “close links or other legal or economic relationships” that are likely to impair a licensed or registered person’s independence is where a contractual agreement exists between a licensed or registered person and a product provider whereby the licensed or registered person is confined to distributing that product provider’s investment products only.
Last update: 16 Nov 2017