The Hong Kong Securities and Futures Commission (SFC) formally announced on 9 October 20151 the long-awaited overhaul of the retail fund authorization process, which comes into effect on 9 November 2015 for a six month trial period until 9 May 2016. The SFC also released a new information checklist2 to be used for new fund applications, as well as a set of FAQ3 on the revised procedures and transitional arrangements.
The key points of this welcome overhaul are as follows:
- The SFC will make its decision to accept or reject a new application for fund authorization processing within five business days of receiving the application.
- This initial vetting period will allow the SFC to categorize the applications into (i) Standard Applications; or (ii) Non-Standard Applications.
- A Standard Application is one where:
- the fund under application is a sub-fund of an existing SFC-authorized umbrella fund;
- the new sub-fund is (i) either a fund which complies with the investment restrictions set out in the SFC’s Code on Unit Trusts and Mutual Funds, or a UCITS fund which does not use financial derivative instruments extensively for investment purposes; or (ii) a physical ETF or unlisted index fund tracking an index which either is adopted by other existing SFC-authorized funds or is a plain vanilla index4;
- the new sub-fund is not seeking authorization as an approved pooled investment fund under the SFC Code on Mandatory Provident Fund Products;
- the new sub-fund is managed by a management company or delegated investment manager which has been previously approved by the SFC, has a good regulatory record and is managing other existing SFC-authorized funds;
- the trustee/custodian of the new sub-fund acts as the trustee/custodian of other existing SFC-authorized funds and has confirmed its continuous compliance with the requirements applicable to trustees/custodians of SFC-authorized funds;
- the application documentation is complete, in good order and of good quality; and
- there are no material issues and/or policy implications relating to the application as considered by the SFC.
Authorization (if granted) will be granted, on average, within two months from the date of receipt of the application.
- A Non-Standard Application is any application which is not a Standard Application. By definition, all applications for the authorization of a new fund or umbrella fund range will be classified as a Non-Standard Application. Authorization (if granted) will be granted, on average, within three months from the date of receipt of the application.
- In order for Non-Standard Applications to be authorized within three months, applicants will be given strict timelines within which to respond to SFC requisitions, and such timelines may not be extended. All requisitions and responses must be finalized within one month (in total).
- Authorizations may be granted subject to conditions which must be satisfied before the authorization of the fund is effective.
The SFC may determine to extend the pilot period beyond 9 May 2016.
The Guide on Practices and Procedures for Application for Authorization of Unit Trusts and Mutual Funds (the Guide)5 (also issued by the SFC on 9 October 2015) sets out minimum disclosure requirements for a fund’s/sub-fund’s offering documents, Product Key Facts Statements and constitutive documents. While these should go a long way towards simplifying and expediting the process for straightforward (Standard) Applications, and ensuring consistency of disclosure among similar categories of funds, they may also result, in the extreme, in homogenous disclosures in the fund offering documents as a result of tracking the minimum / sample language set out in the Guide.
At an industry briefing on 13 October 2015, the SFC’s very positive slant on the overhauled authorization process was that it was now technically possible for a Standard Application (albeit a very straightforward plain vanilla one) to be approved by the SFC within 14 business days of the date of acceptance of the application, without being subject to any requisitions at all.
Although teething issues are to be expected with such a drastic revision to the authorization process, the truncated timeline for requisitions (together with the sample minimum disclosure expectations set out in the Guide) should focus both the SFC on reducing the number of rounds of requisitions for any particular application, and applicants on delivering timely responses to such requisitions.
The revamped authorization process only affects new fund/sub-fund applications. There is no change to the existing process of applying to the SFC for approval of scheme changes to be made to an existing SFC-authorized fund, or of notifying the SFC of immaterial changes or other changes that do not require prior SFC approval.