Managed Account Setup in Hong Kong

[brianhclo]

Dear Traders,

I trade quantitatively. I am looking to setup a managed account business in Hong Kong. My clients will be friends and family and I am looking to use Interactive Brokers' friends and family adviser account.

From my understanding in order to setup an adviser account with IB. You do NOT need registration with any authority if the number of clients is less than 15.

Does anyone know what license (i) the company and (ii) the individual need to obtain in order to conduct such practices in Hong Kong?

Can someone recommend a good (quality and price) consultant who will be able to help setup such structure?

Thanks so much.

 

[Fritz]

I am wondering the same thing. Did you get an answer to your question?

 

[dunleggin]

Some while back I asked IB and was informed that IB's Friends and Family Advisor account is located/hosted in the USA, even if you're located in Hong Kong. As IB states:

YOU MUST RESEARCH THE SPECIFIC REGULATIONS IN YOUR STATE/COUNTRY AND DETERMINE WHETHER OR NOT YOU ARE REQUIRED TO REGISTER AS AN INVESTMENT ADVISOR.

Hong Kong law requires that anybody who deals in or advises on securities on behalf of others is licensed by the HK Securities and Futures Commission.

This requires establishing a corporation that is licensed for the desired activities - and that corporation must have at least 2 'Responsible Officers' - and the individual is also licensed either as a RO or 'Representative' (for which the requirements are considerably easier). For a corp that would trade/act on behalf of private individuals, there are not insignificant rules regarding minimum share capital, experience, qualifications etc.

http://www.sfc.hk/web/EN/regulatory...ence-application/a.-licensed-corporation.html

Therefore, unless there is a lot of profit potential that warrants jumping through all the hoops (takes 4-6 months, I recall), it's not cost-effective.

One option is to find a small brokerage that will take you on as an employee with 'Representative' status, and have some sort of arrangement that is fee/commission-based; in effect, you are an individual bringing in and maintaining your own clients, and paying a cut to the broking firm.

A workaround might be to set up a limited company (in HK or offshore) whose main purpose is investment (nothing unusual in this in HK). The friends and family become equity shareholders. The trader would be a director who trades the working capital of the company in financial markets. Any profits at year-end gets paid out as dividends to shareholders. I can't vouch for whether this is in compliance with HK securities ordinances, and usual disclaimer, none of the above should be taken as legal advice.

 

[brianhclo]

Thanks so much for your detailed reply.

1. Re IB's family and friends account I got the same info as you have, i.e. IB will happy issue an account to you but will rely on you to follow the requirements under your specific jurisdiction, in this case the SFC. Though I know a friend who has this account based in Hong Kong but does not have the required license. It looks IB is not very stringent on this.

I agree it is very expensive to apply for a license,legal fees alone will cost around 100k USD I heard. I am not looking at this route unless I have assets of 5m USD or more.

2. Finding a brokerage firm. Do you mean by joining a local brokerage firm, have YOUR clients open an account with them, and have YOUR CLIENT give you the power to trade their accounts? I think this is a viable method for others, for me I trade systematically so I have setup the infrastructure to trade with IB only.

3. Setting up a Limited Company. In fact I was exploring this route first as I knew cost of a license is expensive. However one issue is tax. Though there is no capital gains tax in HK. However if your company sole activity is trading stocks (and with very frequent transactions), the inland revenue will consider your trading operations as a business and that the profits are liable to HK profit tax. I believe you are still liable even if you are paying out profits as a dividend.

Another idea I had in mind was, I sign a loan agreement with the client (investor). Whereby the "interests" is a function of trading performance and can be negative. Do you guys think this can work?

Some while back I asked IB and was informed that IB's Friends and Family Advisor account is located/hosted in the USA, even if you're located in Hong Kong. As IB states:

YOU MUST RESEARCH THE SPECIFIC REGULATIONS IN YOUR STATE/COUNTRY AND DETERMINE WHETHER OR NOT YOU ARE REQUIRED TO REGISTER AS AN INVESTMENT ADVISOR.

Hong Kong law requires that anybody who deals in or advises on securities on behalf of others is licensed by the HK Securities and Futures Commission.

This requires establishing a corporation that is licensed for the desired activities - and that corporation must have at least 2 'Responsible Officers' - and the individual is also licensed either as a RO or 'Representative' (for which the requirements are considerably easier). For a corp that would trade/act on behalf of private individuals, there are not insignificant rules regarding minimum share capital, experience, qualifications etc.

http://www.sfc.hk/web/EN/regulatory...ence-application/a.-licensed-corporation.html

Therefore, unless there is a lot of profit potential that warrants jumping through all the hoops (takes 4-6 months, I recall), it's not cost-effective.

One option is to find a small brokerage that will take you on as an employee with 'Representative' status, and have some sort of arrangement that is fee/commission-based; in effect, you are an individual bringing in and maintaining your own clients, and paying a cut to the broking firm.

A workaround might be to set up a limited company (in HK or offshore) whose main purpose is investment (nothing unusual in this in HK). The friends and family become equity shareholders. The trader would be a director who trades the working capital of the company in financial markets. Any profits at year-end gets paid out as dividends to shareholders. I can't vouch for whether this is in compliance with HK securities ordinances, and usual disclaimer, none of the above should be taken as legal advice.

 

[dunleggin]

1. Not too surprised: US-based FCMs used to be quite relaxed about this. Some ten years ago I traded futures accounts on behalf of two clients (one resident in HK, the other in China) through Refco and subsequently Man Futures in the U.S. The account was opened in the client's name, and they signed off on a discretionary mandate. I wasn't required to show any professional quals / licences to the broker; essentially in their eyes I was an 'offshore' CTA. I recall, though, that I needed to set-up as something else if I wanted to extract a management/performance fee from the client account. I just billed the client outside the account.

2. Yes, this was the basic idea. I held SFC licences (Type 4 & Type 9) for some years, and used to move client portfolios from one advisory firm to another, where we would split the management fee and commissions. But given your needs, that's obviously a non-starter.

3. True, active trading would be deemed a business and subject to HK profits tax. I suppose you need to model the impact of that quite low tax rate on your expected returns, and no doubt you could find an accountant with some advice on how to to keep the liability low.

With your loan idea, that wouldn't - I suspect - exempt you from being deemed as giving investment advice or dealing in securities on behalf of a non-professional without being suitably licensed. It's worth the time to read through the key parts of the Securities Ordinance, which is accessible online or in the library, to see just how you might fall foul of it. It used to be that the SFC prosecutions for these sorts of misdemeanours resulted in a fine of around HK$10,000 in the magistrates courts. These days they seem to be trying to ape the US regulators and extracting more draconian fines.

 

[silveredge]

1. Re IB's family and friends account I got the same info as you have, i.e. IB will happy issue an account to you but will rely on you to follow the requirements under your specific jurisdiction, in this case the SFC. Though I know a friend who has this account based in Hong Kong but does not have the required license. It looks IB is not very stringent on this.


3. Setting up a Limited Company. In fact I was exploring this route first as I knew cost of a license is expensive. However one issue is tax. Though there is no capital gains tax in HK. However if your company sole activity is trading stocks (and with very frequent transactions), the inland revenue will consider your trading operations as a business and that the profits are liable to HK profit tax. I believe you are still liable even if you are paying out profits as a dividend.

Another idea I had in mind was, I sign a loan agreement with the client (investor). Whereby the "interests" is a function of trading performance and can be negative. Do you guys think this can work?

1. I think IBHK doesn't have friends/family account structure anymore as written on its website, so not an option anymore.

3. Operating a HK company requires maintenance (audit, tax) even as an investment shell, so probably should look elsewhere. I was thinking an offshore company and have HK residents invest as shareholders and open an IB account using that company. Issue seems then to be possibility to open IB and bank accounts using that offshore shell.

 

[GRULSTMRNN]

Re HK laws and regulations, you gotta choose what you want. You can't have it all. Either you are trading on your own and generate pnl for yourself in which case no capital gains tax accrue. Neither do capital gains taxes accrue if you trade as a limit liability company. But you should and will be taxed a corporate tax rate because you conducted corporate business when you manage and trade someone else's accounts as a corporate entity. So far this should be straight forward logic.

Your info Re licensing is wrong. The cost are negligibly low but you do need to be sponsored by a licensed firm if I remember correctly.

And under HK securities law you can manage funds for others without a dealing license but you have to meet strict standards to fall under this excemption.i would need to look up the specifics but I do remember that there certain thresholds such as max number investors, type of investors ..

Thanks so much for your detailed reply.

1. Re IB's family and friends account I got the same info as you have, i.e. IB will happy issue an account to you but will rely on you to follow the requirements under your specific jurisdiction, in this case the SFC. Though I know a friend who has this account based in Hong Kong but does not have the required license. It looks IB is not very stringent on this.

I agree it is very expensive to apply for a license,legal fees alone will cost around 100k USD I heard. I am not looking at this route unless I have assets of 5m USD or more.

2. Finding a brokerage firm. Do you mean by joining a local brokerage firm, have YOUR clients open an account with them, and have YOUR CLIENT give you the power to trade their accounts? I think this is a viable method for others, for me I trade systematically so I have setup the infrastructure to trade with IB only.

3. Setting up a Limited Company. In fact I was exploring this route first as I knew cost of a license is expensive. However one issue is tax. Though there is no capital gains tax in HK. However if your company sole activity is trading stocks (and with very frequent transactions), the inland revenue will consider your trading operations as a business and that the profits are liable to HK profit tax. I believe you are still liable even if you are paying out profits as a dividend.

Another idea I had in mind was, I sign a loan agreement with the client (investor). Whereby the "interests" is a function of trading performance and can be negative. Do you guys think this can work?

 

[GRULSTMRNN]

I have an advisor friends and family account registered at the HK entity. So, they definitely still exist but not sure whether new ones can still be opened.

1. I think IBHK doesn't have friends/family account structure anymore as written on its website, so not an option anymore.

3. Operating a HK company requires maintenance (audit, tax) even as an investment shell, so probably should look elsewhere. I was thinking an offshore company and have HK residents invest as shareholders and open an IB account using that company. Issue seems then to be possibility to open IB and bank accounts using that offshore shell.

 

[silveredge]

Re HK laws and regulations, you gotta choose what you want. You can't have it all. Either you are trading on your own and generate pnl for yourself in which case no capital gains tax accrue. Neither do capital gains taxes accrue if you trade as a limit liability company. But you should and will be taxed a corporate tax rate because you conducted corporate business when you manage and trade someone else's accounts as a corporate entity. So far this should be straight forward logic.

Since there is no tax-pass-thru structure in HK, trying to trade investors' money in a Limited/Corp and be taxed at corporate tax rate isn't fair/acceptable to them.

 

[GRULSTMRNN]

That's not what I stated. I was referring to the fact that any business activity in a corporate entity is taxed at corporate tax rates. It does not mean that the full trading pnl is taxed at corporate tax rates. If you personally trade your own account then no corporate tax rates are part of the equation. But if you conduct any sort of business then business income is taxed at corporate tax rates. How exactly you need to consult a specialist with.

Since there is no tax-pass-thru structure in HK, trying to trade investors' money in a Limited/Corp and be taxed at corporate tax rate isn't fair/acceptable to them.