Reform of open-ended fund companies regime in Hong Kong
Introduction
The Securities and Futures Commission (the “SFC”) has recently released its consultation conclusions on proposed
enhancements to the Open-ended Fund Companies (“OFC”) regime, and gazetted the revised Code on Open-ended Fund
Companies incorporating the proposed enhancements under the said consultation
conclusions (“Revised OFC Code”) on 11 September 2020.
The three major changes made to the OFC regime
include (1) removal of all investment restrictions for private OFCs, (2)
allowing intermediaries licensed or registered for Type 1 regulated activity to
act as custodians for private OFCs, and (3) introducing a statutory mechanism
for the re-domiciliation of overseas corporate funds to Hong Kong. We shall
walk you through the details of the said major changes and their implications
to market players in this article.
Major changes made to the prior OFC Regime
(I) Removal of all investment
restrictions for private OFCs
Under the prior OFC regime, at least 90% of the
gross asset value of a private OFC must consist of (1) those types of assets
the management of which would constitute a Type 9 regulated activity (asset
management), and/or (2) cash, bank deposits, certificates of deposit, foreign
currencies and foreign exchange contracts. A private OFC may not invest more
than 10% of its gross asset value in other asset classes (“10% de minimis limit”).
Having regard to the wide scope of regulatory
powers available to the SFC in the regulation of OFCs which cover activities
that may not amount to regulated activities, the SFC relaxed the investment
scope of private OFCs by removing the 10% de minimis limit. This significant
move renders Hong Kong OFC regime more appealing to the market players as all
investment restrictions on private OFCs are removed. Hong Kong OFCs can now
manage a portfolio of assets at their own discretion, ranging from securities
and futures contracts to real estates and shares of private companies, etc.
(II) Allowing intermediaries licensed to carry on Type 1
Activity to act as custodians for private OFCs
For private OFCs, under the prior OFC regime,
only those who met the eligibility requirements as set out under the Code on
Unit Trusts and Mutual Funds (the “UT Code”) (including a licensed bank and a trust company of a
registered scheme under the Mandatory Provident Fund Schemes Ordinance, Cap.
485) can be a custodian. Alongside with the changes made under the Revised OFC
Code, an intermediary licensed or registered for Type 1 regulated activity
(dealing in securities) (“RA1”) will now be allowed to act as a custodian of a private OFC
provided that it meet certain requirements, including (i) its SFC licence is
not subject to the condition that it shall not hold client assets, (ii) it
shall maintain paid-up share capital of not less than HKD10 million and liquid
capital of not less than HKD3 million, (iii) the private OFC is, and remains at
all times, a client of such licensed corporation or registered institution in
respect of its business in RA1, (iv) it has at least one responsible officer or
executive officer responsible for overall management and supervision of its
custodian function, and (v) be independent of the investment manager.
Moreover, the SFC has also clarified that more
than one custodian may be appointed by an OFC and custodians can delegate their
custody tasks to one or more sub-custodians.
The Revised OFC Code further requires the
custodians to have sufficient expertise and experience in safekeeping the asset
classes in which such OFC invests. There are also enhanced risk disclosure
requirement in offering documents and record keeping requirement imposed on the
OFC and the custodian. A better quality of asset safekeeping will thus be
achieved.
(III) Introducing a statutory mechanism for the re-domiciliation
of overseas corporate funds to Hong Kong
A re-domiciliation mechanism which enables an
overseas corporate fund to re-domicile to Hong Kong is proposed by SFC and will
take effect upon completion of the relevant legislative process of adding new
provisions to Part IVA of the Securities and Futures Ordinance, Cap 571 (the “SFO”) and making ancillary amendments to the Securities and
Futures (Open-ended Fund Companies) Rules, Cap 571AQ (the “OFC Rules”).
Under the proposed re-domiciliation mechanism,
an overseas corporate fund can generally be re-domiciled to Hong Kong as an OFC
if it satisfies the basic requirements for the registration of an OFC currently
applicable to newly established OFCs under the SFO and the OFC Rules, including
without limitation the appointment of investment managers, custodians and
directors who fulfil the eligibility requirements under the SFO, OFC Rules and
Revised OFC Code. For any changes to an overseas fund’s structure which would
not affect its ability to meet the aforesaid basic requirements, the changes
can be effected after re-domiciliation.
One of the major incentives for overseas
corporate funds to re-domicile to Hong Kong is tax benefit. As there will be no
change in the legal personality of the corporate fund (i.e. based on the
assumption that a statutory re-domiciliation mechanism is in place which allows
the continuity of the legal personality of the corporate fund), there will be
no transfer of assets from one legal person to another when the fund migrates
to Hong Kong using the new OFC regime, no stamp duty will arise. In addition,
an OFC may enjoy tax exemption on its profits derived from transactions in
certain assets as prescribed by the Inland Revenue Ordinance, Cap. 112.
Other changes
To protect the investors, additional minimum
requirements which all custodians should comply with for safekeeping of the
private OFC scheme property are set out under Appendix A of the Revised OFC
Code. In response to the market players’ concern, there will be a six-month
transition period for existing private OFC custodians to comply with the new
safekeeping requirements.
Conclusion
With the expansion of investment scope and
eligibility requirements of custodian for private OFCs and the introduction of
re-domiciliation mechanism, we expect that setting up of a private OFC in Hong
Kong will become more attractive to the market players in the world. With
the recent series of reform to both limited partnership fund and private OFCs
in Hong Kong, we believe that the competitiveness of Hong Kong as an asset
management hub will be greatly enhanced. To explore the opportunities brought
by the recent reform to Hong Kong private fund, please do not hesitate to
contact us!
For enquiries,
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2020 |