No, the Rules set out the minimum information which should be included in contract notes, statements of account and receipts, but do not stipulate any particular format for the presentation of such information. Given that firms varying in sizes and systems, and offering different services and products will need the flexibility to adopt whatever format best suits their own circumstances, it is not considered appropriate or necessary for the SFC to prescribe proforma documents.
Q1 : Will SFC provide proforma contract notes, statements of account and receipts for intermediaries to use?
Q2 : Are unauthorized funds subject to the Rules (e.g. section 5)?
Interests in any collective investment scheme fall within the definition of “securities” under Section 1 of Part 1 of Schedule 1 to the SFO. There is also a definition of “collective investment scheme” in that Schedule which excludes certain types of arrangements. So long as an unauthorized fund is captured within the definition of securities, section 5 and other relevant provisions of the Rules will be applicable where an intermediary effects a dealing of such securities.
Q3 : We understand that an intermediary’s nominee company, which receives or holds in Hong Kong securities for clients of the intermediary, is an “associated entity”. But if the intermediary has already issued statements of account to the relevant clients according to the Rules, does the nominee company still need to issue again? Who should the statements of account issued by the nominee company be addressed to, the intermediary or the client?
The Rules require only intermediaries (and not associated entities) to prepare and provide to the client a statement of account in some specified circumstances (see section 8, 9, 11 and 12). For internal control purposes, an associated entity may also issue statements of account to the intermediary or the client of the intermediary (as the case may be). The manner in which such statements of account should be prepared and provided by the associated entity however falls outside the ambit of the Rules. One should instead refer to the relevant SFC's internal control guidelines for guidance in this matter.
B. Contract Notes
Q4 : Does the requirement to issue contract notes on T+2 apply to overseas securities executed by intermediaries for clients in HK?
Yes. Wherever an intermediary enters into a “relevant contract” (defined in section 2 of the Rules) with or on behalf a client, it shall prepare and provide a contract note to the client within two business days after entering into the contract. A “relevant contract” includes a contract for a dealing in securities, whether it is in local or overseas securities.
Section reference: 5(1)
Q5 : We note that contract notes are not required to be provided to clients on T+2 by asset management companies. But are asset management companies still required to provide contract notes under this section for subscription and redemption? Please advise.
Section 5 of the Rules does not apply to an intermediary licensed or registered for asset management in relation to the conduct by it of asset management, by virtue of section 3(1) of the Rules. However, if an asset management company also undertakes the distribution function or otherwise deals in securities, and enters into a “relevant contract” with or on behalf of a client, that intermediary will still need to comply with section 5.
Section reference: 5(1)
Q6 : Do the Rules apply to a transaction conducted in HK and booked to the intermediary’s overseas entity? For example, is the HK entity required to issue a contract note?
The determining factor is where the relevant contract is entered into, not where the trade is booked. If the “relevant contract” is entered into in HK, the Rules apply.
Section reference: 5(1)
Q7 : Are contract notes required to reach clients within 2 business days after entering into the relevant contract?
No, but for a contract note to be issued in time it must be created and, for example, posted to the client within that time, as required under section 400 of the SFO.
Section reference: 5(1)
Q8 : Intermediaries may have practical difficulty to issue contract notes to clients before the end of T+2 for trades executed with overseas brokers, since some information required for the contract notes under section 5(3) may not be promptly provided by the overseas brokers before the end of T+2. If an intermediary issues to a client a contract note with incomplete information before the end of T+2 and re-issues afterwards another contract note with the outstanding information, is the intermediary required to report non-compliance under section 18 of the Rules?
The overseas broker may be expected to provide, in accordance with best business practices, a trade confirmation containing the key trade details even before it issues any contract note under the local regulations it itself is subject to. Arrangements should be put in place for the overseas broker to provide all necessary information to the intermediary for the purpose of preparing a contract note within the T+2 timeframe, if the overseas broker normally takes longer to issue a contract note to the intermediary. In the case of genuine difficulty, the SFC will consider an application for modification under section 134 of the SFO on a case-by-case basis.
We would point out that section 5(3) provides that, to the extent applicable, certain information has to be provided in the contract note. Where the contract note does not contain all the required information, the intermediary is non-compliant and is therefore required to make a report under section 18 of the Rules.
Section reference: 5(1)
Q9 : Section 5(3) of the Rules provides that a contract note shall include certain information “to the extent applicable”. Is it correct that there is no need to put in "the name of the market or exchange on which the relevant contract has been executed" regarding trades in unlisted fixed income instruments, which are usually traded on a principal to principal basis?
It is our intention that wherever transactions are entered into through a market or exchange, the name of the market or exchange should be disclosed. The transactions may include fixed income products, instruments that are not listed but nevertheless traded on that exchange, etc and the transactions may or may not be cleared through a central counterparty.
Section 5(3) requires the inclusion in the contract note of all the information prescribed in paragraphs (a) – (i) in every case in which such information pertains to the “relevant contract”. The requirements under section 5(3)(c)(iii) apply to fixed income products that are executed on-exchange.
Section reference: 5(3)(c) (iii)
Q10 : In many cases, the subscription and redemption fees relating to interests in a collective investment scheme which is a Unit Trust are “priced in” and not separately shown. Given that the rates / basis of these charges are already stated in the explanatory memorandum, can an intermediary disclose the “priced in” price in the contract note as the price of the unit trust without segregating “charges” for the purpose of this section?
We take the view that the explanatory memorandum may only specify the maximum rate of the charges and not necessarily the rate that is being charged. Hence, the actual rate being charged should be included in the contract note.
Section reference: 5(3)(i)
Q11 : Currently, many brokers already provide contract notes & daily statements of account on a consolidated basis. Can you specify/illustrate the new changes? What’s the implication to those brokers which have already adopted such practice?
In this regard, section 6 of the Rules expressly allows the consolidation of documents issued in relation to one or more than one of the regulated activities carried on by an intermediary, in view of the single licensing regime. A dealer who enters into contracts for dealing in both securities and futures contracts for a client may issue a single contract note or statement of account to cover both types of transactions.
Section reference: 6
C. Statements Of Account
Q12 : In accordance with our credit facility letter, the terms and conditions offered by our company and accepted by the client will be automatically renewed upon the expiry date. Do we still need to follow the requirement under this section with respect to the expiry date of the financial accommodation?
Yes, even if the expiry date is the same as the next renewal date of the financial accommodation, that date should be disclosed in the statement of account for the information of the client.
Section reference: 8(2)(g)
Q13 : A client deals in securities transactions and futures transactions (i.e. margined transactions). In the daily statement of account issued for the margined transactions, do we need to include this client’s other assets kept with us, for example, shares under our safe custody?
Section 9 provides for the disclosure requirements only in relation to margin transactions. Among others, relevant details of security provided by the client in relation to the margin transactions should be shown. Other assets need to be included only if they are held for that same account. Moreover, care must be taken to ensure that where a client has more than one accounts with an intermediary, the statement of account clearly identifies which of these different types of account is used for securities transactions, futures transactions, etc respectively it relates to so as to avoid confusion.
Section reference: 9
Q14 : How to disclose in a statement of account charges levied on a transaction (which have already disclosed in the contract note under section 5(3)(h) of the Rules) and charges levied at the account level for the purpose of this section?
Where the charges levied on the transaction itself have already been disclosed in the contract note, the amount of the transaction inclusive of those charges could be shown as one entry in the movements of the balance of the account in the monthly statement of account. Charges levied at the account level would need to be shown by additional entries since they are not included in the respective transaction amounts.
Section reference: 11(3)(h)
Q15 : In the case where the monthly accounting period ends on the last day of the month, e.g. 31 October, if securities are first received from a client on 31 October but the receipt is actually prepared and provided on 2 November (which is in compliance with section 13(1)(d) of the Rules), is it an October or a November monthly statement of account that is required under this section?
The October monthly statement of account is required since the date when the requirement to provide a receipt is triggered (31 October) is the reference date.
Section reference: 11(6)(a) (iii)
Q16 : If a client has terminated his account relationship and withdrawn all assets from the intermediary in the middle of an accounting month, is it still required to issue the monthly statement of account at that month end?
Yes, since according to section 11(6)(e) of the Rules a statement of account is required to be provided to a client in respect of a monthly accounting period if there are client’s assets held for the account of the client at any time during that period.
Section reference: 11(6)(e)
Q17 : For receipt of a cheque, is the 2-day time limit for issue of a receipt counted from the time of receiving the cheque or from the day on which the cheque has been cleared?
As a matter of policy, we intend to require an intermediary to issue a receipt within 2 business days after receiving a cheque from a client. The intermediary should have proper controls in place to ensure that cheques are promptly deposited with banks. The time limit T+2 runs from the day on which the cheque is received rather than when it has been cleared.
Section reference: 13(1)
E. Provision of Document / Retention of Copies
Q18 : Can an intermediary serve the contract notes, statement of accounts and receipts by electronic means?
Yes. Section 400 of the SFO has laid down the requirements for documents to be considered to have been duly issued or served for the purposes of the SFO, including the Rules. Among others, “sent by electronic mail transmission” or “sent by facsimile transmission” are some of the options in section 400 open to the intermediary.
Section reference: 17
Q19 : Can an intermediary hold mail for a client if he designates in writing the intermediary as the person authorized to receive the contract notes, statements of account and receipts on his behalf?
It is our intention that hold mail arrangements are allowed so long as the applicable internal controls and risk disclosure requirements are adhered to. However, an intermediary may not direct the mail of the client to a third party who is an officer or employee (e.g. an account executive) of the intermediary whether or not the client so authorizes.
Section reference: 17(b)
Last update: 17 Mar 2003