Following the regulatory workshop in Shenzhen on 5 June 2015 hosted by the SFC and CSRC/SAFE on mutual recognition of funds (MRF) between Hong Kong and the PRC, Hong Kong’s SFC has issued FAQs on the topics that were discussed.
In the FAQs, the SFC offered guidance on some of the requirements for authorisation in Hong Kong of PRC funds. In summary:
- One-year track record: Numerous Cayman unit trusts have re-domiciled to Hong Kong. The SFC clarified that the qualifying year will be counted from the day on which a fund was authorised by the SFC. As such, Cayman funds that have been approved by the SFC for more than one year, but only recently re-domiciled to Hong Kong, may be eligible for MRF.
- Investment objective of southbound funds: Funds must not primarily invest in Hong Kong. The SFC clarified that there is an 80/20 threshold: a southbound fund must not invest more than 20% of its assets in the Hong Kong market; 80% of the fund’s assets must be invested outside Hong Kong.
- Clean regulatory history: Southbound fund management companies should not be the subject of major regulatory actions by the CSRC in the past three years. Fund management companies are expected to provide full and frank disclosures to the SFC. The SFC will perform independent regulatory checks with the CSRC and also take into consideration all relevant factors including the nature of the breach, regulatory sanctions taken by the CSRC and the remedial actions taken by the fund management companies.
- Delegation: Whilst the MRF rules do not allow delegation outside of China, it is possible for a fund management company to delegate the asset management function to a sub-investment manager based in China. A fund management company is permitted to appoint a non-discretionary sub-advisor – there are no geographical restrictions on such an appointment.
- SFC-authorised Approved Pooled Investment Funds (APIFs): SFC-authorised APIFs (offered to the public in Hong Kong) currently invested by MPF schemes may be eligible for the MRF programme.
In addition to the eligibility requirements mentioned above, the SFC’s FAQs include sample risk factors that should be included in the Hong Kong offering documents for southbound funds. These cover such risks as: quota restrictions; eligibility requirements; PRC tax risk; different market practices; concentration risk; RMB currency risk and conversion risks; risks relating to A-shares; and mainland debt securities risks.
For further details, please see the SFC’s FAQs.