18 July 2018

CSRC published new rules regulating the use of Hong Kong investment advisory services for southbound trading under Stock Connect

This article was written by Richard Mazzochi, Minny Siu, Robert Chen, Angus Sip, David Mu and Wang Rong.

Investment advisors in the Hong Kong Special Administration Region ("Hong Kong”) are permitted under the Interim Rules on Engaging Hong Kong Institutions for Securities Investments Advisory Services by Mainland Securities and Fund Management Companies (the “CSRC Rules")[1] to offer investment advisory services in respect of stocks traded under the southbound Stock Connect to PRC investors in cooperation with mainland securities companies and fund management companies (the “onshore managers / advisors”).

The CSRC Rules for the first time explicitly recognise that onshore managers / advisors may engage their Hong Kong counterparts to provide Hong Kong investment advisory services in respect of stocks traded under southbound Stock Connect. This is a significant regulatory development since Stock Connect was launched in 2014 (as summarised in our KWM Connect: China Stock Connect and Mutual Recognition of Funds – Latest developments in cross-border investment).

This article examines the key regulatory requirements under the CSRC Rules.

Permissible scope of Hong Kong advisory services

Onshore managers / advisors may now engage investment advisors in Hong Kong for the following investment advisory services in respect of southbound trading under Stock Connect:

  • research report service: onshore securities companies may forward research reports issued by Hong Kong licensed entities over eligible stocks for southbound trading under Stock Connect to their clients in the PRC; and
  • investment advisory service: for onshore funds, their onshore fund managers may engage Hong Kong licensed entities to provide investment advisory services in relation to southbound trading under Stock Connect.

Hong Kong licensed entities proposing to offer Stock Connect investment advisory services to their onshore counterparts are subject to certain restrictions and requirements as set out in the CSRC Rules. The China Securities Regulatory Commission (“CSRC”) will coordinate with the Hong Kong Securities and Futures Commission (“SFC”) to investigate and take action against Hong Kong licensed entities which breach the CSRC Rules pursuant to the cross-border regulatory cooperation mechanism.

Key requirements and restrictions under the CSRC Rules

The table below summarises the key requirements/ restrictions under the CSRC Rules.

  Eligible Hong Kong licensed entities should Hong Kong licensed entities should NOT
Research report service
  • hold Type 4 (Advising on securities) licence granted by SFC
  • be liable to the Mainland securities companies for the content of research reports
  • ensure that their reports do not contain investment analysis relating to non-southbound Stock Connect stocks
  • ensure that the content of their reports do not jeopardise state security or public interest or bring the securities market into disorder
  • comply with applicable rules and regulations relating to the publication of research report in Hong Kong
  • communicate with the end investors in the Mainland without the coordination and presence of the Mainland securities company
Investment advisory service
  • hold Types 4 (Advising on securities) and 9 (Asset management) licences granted by SFC with asset management experience
  • file their basic information with the Asset Management Association of China
  • only provide investment advice to onshore managers / advisors
  • comply with the applicable rules and regulations relating to investment advisory services in both mainland and Hong Kong
  • execute instructions given by onshore managers / advisors

  Onshore managers / advisors should Onshore managers / advisors should NOT
Research report service
  • conduct due diligence on the Hong Kong licensed entity
  • complete the filing with the local office of the CSRC within five business days after execution of the advisory service agreement
  • put in place proper assessment mechanism to ensure that the research reports comply with the applicable regulatory requirements
  • take legal responsibility for the contents of the research report
  • be present in any communication between their clients and the Hong Kong licensed entities, and safe-keep the records for at least five years
  • ensure that the research report is converted into simplified Chinese, and contains the required disclosure such as the information relating to the Hong Kong licensed entity and the key difference between the original research report and the report as re-distributed
  • distribute the research reports that do not comply with the applicable regulatory requirements
Investment advisory service
  • conduct due diligence on the Hong Kong licensed entity
  • complete the filing with the local office of the CSRC within five business days after the execution of the investment advisory agreement
  • maintain their discretion in making investment decisions
  • disclose information relating to the Hong Kong licensed entity and its investment advisory service in the investment fund contract or prospectus
  • safe-keep the advisory records for at least five years
  • instruct the Hong Kong licensed entity to execute the investment instructions directly

Impact of the CSRC Rules on further cross-border cooperation

Since the launch of Stock Connect, it has been a grey area as to how Hong Kong investment advisors could participate in onshore securities investment advisory services without the offshore investment advisors being considered as “carrying on financial services business” in China.

The clarification and formal recognition of the cooperation model between offshore and onshore financial advisors under the CSRC Rules clarify the roles of offshore investment advisors and their cooperation models with the onshore advisors. This will further enhance the quality of financial advisory services accessible to onshore investors for their southbound trading under Stock Connect.

The CSRC Rules also contemplate the future launch of Chinese Depositary Receipts (“CDR”) in China[2]. In formulating investment advisory services over offshore underlying securities of CDRs, both offshore investment advisors and onshore managers / advisors are expected to comply with the general principles of the CSRC Rules.

KWM has been advising market participants on a wide range of issues on cross-border access programmes, such as Stock Connect, Bond Connect, MRF, QDII, QFII / RQFII and CDR. We anticipate growing business cooperation between onshore institutions and their Hong Kong counterparts in relation to the various connect programmes.

[1]《证券基金经营机构使用香港机构证券投资咨询服务暂行规定》, published by the CSRC on 27 June 2018 and effective as of 1 July 2018.

[2] CDR is a Chinese version of Depositary Receipts to be listed and traded on the onshore stock exchanges. CDRs are issued by an onshore depositary that represent a pool of offshore underlying securities held in the depositary’s offshore custodian account. CDRs allow onshore investors to gain access to securities listed offshore.

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