On 28 June 2017, the Securities and Futures Commission (SFC) launched a consultation on the proposed rules and code for Hong Kong-incorporated open-ended fund companies (OFCs).
At present, Hong Kong investment funds can only be established in the form of a unit trust, and not in corporate form. This is due to the restrictions under the Companies Ordinance (Cap. 622) (CO) relating to capital reductions and distributions out of capital. These restrictions make establishing investment funds in Hong Kong inflexible, particularly when compared to other jurisdictions, such as the Cayman Islands or Delaware. Through the introduction of the OFC structure, the SFC hopes to create a more flexible business environment for investment funds and further develop Hong Kong as a full-service international asset management centre and a preferred jurisdiction for fund domicile.
The basic legal framework for the OFC regime was laid down in the Securities and Futures (Amendment) Ordinance 2016 (the Amendment Ordinance), which was gazetted in June 2016. Pursuant to the Amendment Ordinance, the SFC has the power to make subsidiary legislation and publish codes and guidelines in respect of the regulation of OFCs. Accordingly, the SFC proposes to introduce the Securities and Futures (Open-ended Fund Companies) Rules (the OFC Rules), which will be subsidiary legislation to the Securities and Futures Ordinance (Cap. 571) (SFO), and the Code on Open-ended Fund Companies (the OFC Code).
OFCs will be established and incorporated under the SFO. OFCs will not be the same as “companies” that are incorporated under the CO, and unless otherwise provided in the Amendment Ordinance, the CO is generally not applicable to OFCs.
OFCs can be offered publicly or privately in Hong Kong (referred to as “public OFCs” or “private OFCs”). However, regardless of whether they are publicly or privately offered, pursuant to the Amendment Ordinance, all OFCs need to be registered by the SFC and will be subject to the OFC Rules and the OFC Code.
The proposed OFC Rules deal with a wide range of matters, including company formation and maintenance, key operators of an OFC (i.e. directors, investment manager, custodian), functions of the Companies Registry, the segregated liability feature for umbrella and sub-funds structures and cross-investments of sub-funds of OFCs, arrangements and compromises, and offences applicable to OFCs and their key operators. It has been proposed by the SFC that the winding-up and directors’ disqualification regimes under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) would be applicable to OFCs with some modifications.
The proposed OFC Code would be non-statutory in nature and is divided into two main sections. The first section sets out the general principles and key structural and ongoing requirements applicable to all OFCs, while the second section deals with restrictions on investment and disclosure and operational requirements. The disclosure and operational requirements would be applicable only to private OFCs.
There are additional requirements for OFCs which are intended to be offered to the public of Hong Kong. Public OFCs will need to obtain the SFC’s authorisation under Part IV of the SFO, and in addition to the OFC Rules and OFC Code, they will also need to comply with the ongoing post-authorisation requirements set out in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (commonly known as the SFC Products Handbook). These requirements are consistent with the existing requirements imposed on products that are authorised by the SFC under Part IV of the SFO.
The introduction of the OFC structure is a welcome development and should provide greater flexibility for investments funds and encourage fund managers to choose Hong Kong as a preferred jurisdiction for fund domicile, particularly if they want the fund to qualify for retail distribution in Mainland China under the Mainland-Hong Kong Mutual Recognition of Funds initiative.
It is expected that the new OFC regime will be implemented in 2018, following the conclusion of this consultation and completion of the legislative process.
The consultation is now open until 28 August 2017. The public may submit their comments to the SFC before then. A copy of the consultation paper on the proposed regulations can be accessed here.