HONG KONG: SFC Consults on New OFC Rules and OFC Code

Friday August 18 2017

The Securities and Futures Commission (SFC) launched a two-month consultation on the detailed legal and regulatory requirements applicable to the new open-ended fund company (OFC) structure. The Securities and Futures (Amendment) Ordinance 2016, gazetted on 10 June 2016, provides a legal framework for OFCs in Hong Kong. Under this framework, all OFCs will be required to be registered with the SFC as the primary regulator.

The consultation sets out the SFC’s proposed Securities and Futures (Open-ended Fund Companies) Rules (OFC Rules) and Code on Open-ended Fund Companies (OFC Code), which include requirements relating to the OFC’s formation, its key operators, ongoing maintenance, termination and winding-up, and will be applicable to all OFCs.

The Securities and Futures (Amendment) Ordinance 2016 empowers the SFC to make subsidiary legislation and issue codes and guidelines in relation to the regulation of OFCs. OFCs which are intended to be offered to the public will have to obtain the SFC’s authorisation under Part IV of the Securities and Futures Ordinance unless an exemption applies. Accordingly, publicly-offered OFCs will also be subject to the authorisation and 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.

In preparing the proposed OFC Rules and OFC Code, the SFC took into account comments received during the Government’s public consultation on the OFC framework and the views of industry stakeholders, as well as international regulatory standards and local company laws. Implementation of the new OFC regime is envisaged in 2018 following the conclusion of the consultation and completion of the legislative process.

Legislative framework

The Amendment Ordinance empowers the SFC to make subsidiary legislation and to issue codes and guidelines in relation to the regulation of OFCs.

On this basis, the SFC proposes to make the Securities and Futures (Open-ended Fund Companies) Rules (OFC Rules) and to issue a Code on Open-ended Fund Companies (OFC Code) to set out the detailed legal and regulatory requirements for the new OFC vehicles.

All OFCs (whether publicly or privately offered) will be required to be registered by the SFC under the new Part IVA in the Amendment Ordinance and will be subject to the OFC Rules and OFC Code.

OFCs which are intended to be offered to the public will also have to obtain the SFC’s authorisation under Part IV of the Securities and Futures Ordinance (SFO) unless an exemption applies (such OFCs are referred to as “public OFCs” in this paper). Accordingly, public OFCs, like other publicly offered funds authorised by the SFC, will also be subject to the authorisation and ongoing post-authorisation requirements set out in the SFC Products Handbook.

Proposed OFC Rules

The OFC Rules are subsidiary legislation which will be made under the SFO following vetting by the Legislative Council.

The proposed OFC Rules will set out the more detailed statutory requirements concerning company formation and maintenance (for example, share capital, meetings and registers maintenance, auditors’ appointment and financial reports); the key operators of the OFC (i.e. the directors, investment manager and custodian); the functions of the Companies Registry (CR); the segregated liability feature for umbrella and sub-funds structures and cross-investments of sub-funds of OFCs; disqualification of directors; arrangements and compromises; winding-up; and offences.

As OFCs will be established and incorporated under the SFO, they will not be “companies” incorporated under the CO and will therefore not be subject to the CO unless otherwise provided in the new Part IVA introduced by the Amendment Ordinance. Those CO provisions which are relevant to an OFC’s operations are proposed to be directly set out in the OFC Rules.

As for winding-up and disqualification orders, C(WUMP)O provisions (including its subsidiary legislation) are proposed to be applied to OFCs on a wholesale basis (save for necessary modifications). This is in line with the approach taken in legislation for similar corporate fund vehicles in overseas jurisdictions such as the United Kingdom and Ireland.

Proposed OFC Code

The OFC Code will be issued by the SFC pursuant to its power to issue codes and guidelines under the SFO.

The proposed OFC Code contains a set of general principles which all OFCs and their key operators are expected to comply with in the management and operation of OFCs. The proposed OFC Code also elaborates on various requirements (such as naming guidance and the eligibility of key operators) applicable to all OFCs seeking the SFC’s registration as well as baseline requirements (such as duties of key operators, corporate administration matters and a streamlined termination process) applicable to all OFCs. The proposed OFC Code further sets out some basic investment restrictions, disclosure and operational requirements applicable to non-public OFCs (referred to as “private OFCs” in this paper) in line with the 2016 consultation conclusions as well as with IOSCO principles.

The SFC has adopted a principles-based rather than prescriptive approach in formulating the proposed OFC Code in line with other codes and guidelines issued by the SFC. All public OFCs will have to comply with the detailed requirements set out in the SFC Products Handbook, so there is no need to duplicate these in the OFC Code. Private OFCs should be allowed the flexibility to pursue their investment strategies as set out in their instrument of incorporation and offering documents, as long as they meet the basic principles in the OFC Code. Given that the investment management function of an OFC must be delegated to an investment manager who is licensed by or registered with the SFC to carry out Type 9 (asset management) regulated activity, the investment manager must also comply with all relevant conduct requirements, including those under the Fund Manager Code of Conduct, in carrying out their functions for the OFC.

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