Introduction

The Securities and Futures Commission (“SFC”) from Hong Kong and the Commission de Surveillance du Secteur Financier (“CSSF”) from Luxembourg have entered into a Memorandum of Understanding (“MoU”) on Mutual Recognition of Funds (“MRF”) on 15 January 2019, which will allow eligible Hong Kong public funds and Luxembourg UCITS fund (a collective investment scheme which is authorised with the laws of Luxembourg or any other state which is contracting party to the Agreement on the European Economic Area) to be distributed in each other’s market through a streamlined process. The MRF brings numerous business opportunities to Hong Kong by recognizing cross-border offering to retail investors in Luxembourg and Hong Kong.

Opportunities for Luxembourg Covered Fund  – entering Hong Kong market

Eligibility requirements

To be eligible for SFC’s authorisation under MRF (a “Luxembourg Covered Fund”), the Luxembourg fund has to meet the following requirements:

• the fund must be established, domiciled and managed in accordance with Luxembourg laws and regulations and its constitutive documents;
• the fund must be a UCITS fund which is formally authorised by CSSF;
• the fund must be one of the following fund types under SFC’s Code on Unit Trusts and Mutual Funds (“UT Code”):
  • a general equity fund, bond fund or mixed fund; or
  • a feeder fund, where the underlying fund falls within one of the fund types in a. and complies with the requirements in SFC Circular issued on 15 January 2019 in respect of the MoU;
• the fund must not use leverage (arising from derivatives) exceeding 100% of the fund’s net asset value;
• the fund must not invest in
  • physical commodities including precious metals or commodity based investments or real estate,
  • crypto-assets or crypto-currencies, or
  • certificates representing the assets referred to under a. or b.;
• the fund must not have share classes with hedging arrangements other than currency hedging;
• the fund must have at least one dealing day for redemption every two weeks;
• the fund must have a depositary that qualifies to act as a depositary for Luxembourg UCITS;
• the fund must be managed by a Luxembourg management company (the “Luxembourg Covered Management Company”) which has a minimum paid-up share capital and non-distributable capital reserves of HK$10 million or its equivalent in Euro; and
• the members of the management body and its conducting officers of the Luxembourg Covered Management Company must not have been the subject of any of the following disciplinary actions taken by CSSF in the past three years or, if it has been established for less than three years, since the date of its establishment:
  • with respect to the Luxembourg Covered Management Company:
    • a withdrawal of its license by CSSF;
    • a temporary ban on providing some or all of the services previously provided;
  • with respect to the members of the management body and the conducting officer(s):
    • a temporary or permanent ban on conducting some or all of their business activities.

Ongoing requirements

The Luxembourg Covered Fund and Luxembourg Covered Management Company also have to meet certain ongoing requirements as requested by SFC, including without limitation:

• the Luxembourg Covered Fund must appoint a Hong Kong licensed trust company complying with certain requirements in the UT Code as its representative;
• the Luxembourg Covered Fund must remain authorised by the CSSF for offering to the public in Luxembourg;
• the Luxembourg Covered Management Company must remain authorised by CSSF to manage UCITS fund;
• changes made to the Luxembourg Covered Fund require prior approval by SFC or filing with SFC, depending on the nature of the change, and investors in Luxembourg and Hong Kong must be notified of the changes at the same time;
• if the Luxembourg Covered Management Company committed any breaches , it must endeavour to notify CSSF and SFC at the same time and rectify the breach promptly;
• sale or distribution of the Luxembourg Covered Fund must be conducted by intermediaries properly licensed by or registered with SFC; and
• ongoing disclosure of information to investors in Luxembourg and in Hong Kong at the same time.

Application process

Application documents include:

• duly signed and completed application form;
• duly signed and completed information checklist and prepare documents required in the information checklist;
• advanced draft of the offering document in English;
• constitutive documents of the Luxembourg Covered Fund in English or Chinese;
• cheque payable to SFC for application fee; and
• certificate directly provided by the CSSF to SFC confirming all the eligibility requirements are met.

Upon receipt of the said application documents, SFC will take 5 working days to assess whether all the documents are properly submitted. If affirmative, it will take 1 to 2 months to authorise a standard application (application from a fund which is a sub-fund under an existing SFC-authorised umbrella fund with certain requirements fulfilled) or 2 to 3 months to authorise a non-standard application. Once the application is authorised, SFC will notify CSSF promptly. Any application not being authorised will be lapsed after 6 months, subject to SFC’s right to grant an extension at its sole discretion.

Opportunities for Hong Kong Covered Fund  – entering Luxembourg market

Eligibility requirements

The public fund in Hong Kong also needs to meet similar eligible requirements as that of the Luxembourg Covered Fund to enter the Luxembourg market. The major differences include:

• Hong Kong Covered Fund must be authorised by SFC and managed by a management company (“Hong Kong Covered Management Company”) licensed with SFC for type 9 regulated activity (asset management); and
• depositary and UCITS-related requirements and minimum paid-up share capital and reserve requirements are not relevant in Hong Kong.

Ongoing Requirements

The Hong Kong Covered Fund and Hong Kong Covered Management Company also have to meet certain ongoing requirements as requested by CSSF and SFC. These requirements are very similar to that of the Luxembourg Covered Fund and Luxembourg Covered Management Company. The major differences include:

• a trustee/custodian which is a licensed bank, a subsidiary of such bank, or a trust company approved by the Mandatory Provident Fund Schemes Authority must be appointed;
• a credit institution in Luxembourg must be appointed as a paying agent;
• changes made to the Hong Kong Covered Funds require prior approval from SFC except that changes in offering documents require CSSF’s approval, and any changes approved by SFC shall be notified by SFC to CSSF within one week from the date of approval; and
• ongoing disclosure of information should be filed with CSSF within one week after SFC’s authorisation is received or filing with SFC is done.

Application Process

Application documents include:

• constitutive documents of the Hong Kong Covered Fund;
• prospectus / issuing documents;
• specific marketing information;
• latest annual report of the Hong Kong Covered Fund;
• key information document for investors as required by the European Regulation;
• draft agreement to be entered between the Hong Kong Covered Fund and the Luxembourg paying agent;
• if the fund is a feeder fund, information on the master fund; and
• certificate directly provided by SFC to CSSF confirming that all the eligibility requirements are met.

Upon receipt of the said application documents, CSSF will take 5 working days to assess whether all the documents are properly submitted. If affirmative, it will take 1 month to authorise the application.

Conclusion

Retail funds in Hong Kong and Luxembourg can now easily access each other’s market in view of the streamlined authorisation process. Such new cooperation framework expands Hong Kong’s MRF network following Mainland China, Switzerland, France and United Kingdom. It facilitates the retail offering of the funds in Luxembourg and Hong Kong and further enhances Hong Kong as one of the asset management hubs in the world.

For enquiries, please contact our Corporate & Commercial Department:

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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.