United States
Hong KongPart VI of the SFO: capital, client assets, records and audit
Part VI of the Securities and Futures Ordinance is the enabling framework for the SFC's rules on financial resources, client securities, client money, record keeping, contract notes and audit. The Part sets the architecture; the detail lives in subsidiary legislation made under it.
Part VI is unusual among the Parts of the Ordinance in that reading it tells you very little about what a firm must actually do. It is a framework Part. It authorises the SFC to make rules and it says what those rules may cover, and then the substance appears in subsidiary legislation with names like the financial resources rules and the client securities rules. Understand that relationship and a confusing corner of the syllabus becomes straightforward.
- Part
- VI of the Securities and Futures Ordinance
- Covers
- Capital, client assets, records, contract notes, audit
- Legal character
- Framework. The obligations sit in rules made under it
- Examined in
- Topic 3 as a Part, Topic 4 as the rules themselves
- Common error
- Treating the Part and the rules as the same document
The four families of rule made under Part VI
| Subject | What the rules address |
|---|---|
| Financial resources | Minimum paid-up share capital and minimum liquid capital for licensed corporations, varying by regulated activity and by whether client assets are held |
| Client securities | Segregation, safe custody, and the limits on depositing, pledging or lending client securities |
| Client money | Segregated accounts, the deadline for paying client money in, and permitted withdrawals |
| Records, contract notes and audit | What must be recorded, for how long, what must be sent to clients and when, and the annual audit and reporting obligation |
Capital minima, deposit deadlines and record retention periods are precise and they change. We describe the structure of each requirement and send you to the SFC for the current number, because a stale figure repeated confidently is worse than no figure at all.
Why segregation is the central idea
Everything in the client asset half of Part VI serves one purpose: if the firm fails, the client's property is not part of the firm's estate. Segregation is not an accounting convention. It is the mechanism by which a client's securities and money stay the client's when a liquidator arrives.
That framing answers most questions you will be asked. Can the firm use client money to fund its own position? No, because the money is not the firm's. Can it lend client securities? Only within the narrow permission the rules give, and only with the client's written standing authority. Why does a corporation that holds no client assets face a lower capital requirement? Because there is less to lose.
The standing authority, in structure
A licensed corporation may not simply deposit, pledge or lend a client's securities as it pleases. The rules require a written standing authority from the client, they cap how long that authority may run before it must be renewed, and they allow a form of deemed renewal where the firm gives written notice and the client does not object before expiry.
Three moving pieces there: the written authority, the fixed maximum life, and the deemed renewal mechanism. Exam items are usually built by breaking one of them, typically by describing a firm that acted on an oral instruction or on an authority that had lapsed. The specific maximum period is stated in the client securities rules and you should take it from the SFC's published text.
Records, notes and the audit cycle
The record-keeping obligation is broader than most candidates expect. It covers accounting records, records of transactions and client instructions, and the documents that evidence compliance, and each has a retention period specified in the relevant rules. Contract notes and statements of account are the client-facing end of the same idea: the client must be told what happened, in a specified form, within a specified time.
Audit closes the loop. A licensed corporation must appoint an auditor and submit audited accounts and the auditor's reports to the SFC after each financial year end, again within a period the rules specify. The auditor is not merely reporting to shareholders. Part of the point is that an independent professional is looking at whether the client asset rules were complied with.
How Part VI is examined
Two ways, and they feel different. In Topic 3 the question is structural: which Part governs client assets, or which of these subjects does Part VI cover. Easy marks. In Topic 4 the same material returns as the rules themselves, and there the questions are numeric and unforgiving. A candidate can score full marks on the Topic 3 version and lose every Topic 4 item on the same subject.
The opinion: this is the clearest example on the whole paper of why you should study by rule rather than by topic. Learn segregation once, properly, and you have covered a Topic 3 heading and three Topic 4 headings at the same time. Studying the syllabus in its printed order makes you learn it twice.
The concession: our refusal to print the numbers on this page will frustrate some readers, and it is a real cost. We think it is the right trade. Capital minima and retention periods are exactly the kind of figure that ends up in a study note, gets copied, and outlives the rule it came from. The SFC's codes and guidelines index is the place to get them, and it takes two minutes.
For the rules in detail as Topic 4 examines them, see client securities and client money rules and SFC capital requirements for licensed corporations.
Common questions
What does Part VI of the SFO cover?
Capital requirements, client securities, client money, keeping of records, contract notes and statements of account, and audit. It works as a framework, empowering the SFC to make rules on each subject, with the detailed obligations appearing in subsidiary legislation rather than in the Part itself.
Why are client assets required to be segregated?
So that if the firm fails, client property does not form part of the firm's estate and can be returned to clients. Segregation is a protective mechanism rather than an accounting formality, and it explains most of the specific prohibitions in the client money and client securities rules.
Can a broker lend out client securities?
Only within the narrow permission the client securities rules allow, and only where the client has given a written standing authority. That authority has a maximum life fixed by the rules and can be renewed, including by a deemed renewal where the firm gives notice and the client does not object before expiry.
Where do I find the actual capital and retention figures?
In the subsidiary legislation made under the Ordinance and on the SFC's own website, which publishes the current rules and guidance. We deliberately do not reproduce the figures, because thresholds change and a stale number repeated in a study note can persist for years after the rule has moved.
Is Part VI examined in Topic 3 or Topic 4?
Both, from different angles. Topic 3 examines it as a Part of the Ordinance, asking which subjects it governs. Topic 4 examines the subsidiary rules made under it, where the questions turn on specific thresholds and periods. Learning the subject once covers headings in both topics.