For the past two years, member economies of the Asia-Pacific Economic Cooperation (“APEC”) have been working towards developing an Asia Region Funds Passport (the “Passport”) with a view to facilitating cross-border offers of funds in the APEC region.
This is a significant initiative for the fund management industry as the Passport arrangement, when implemented, will allow fund managers of a Passport member economy the ability to market their funds in other Passport member economies under a streamlined regulatory process.
At the APEC meeting on 20 September 2013, finance ministers from Australia, New Zealand, Singapore and South Korea signed a statement of intent to conduct joint public consultations and establish the process for the eventual implementation of the Passport in 2016. The signatories also endorsed a Passport framework document (the “Framework Document”) which sets out the guiding principles and basic arrangements for the development and implementation of the Passport.
Initially, a limited number of APEC economies will form the pilot group of Passport member economies for its launch. Thereafter other APEC economies may subsequently participate in the Passport arrangement.
Highlights From The Framework Document
We set out below the highlights from the Framework Document.
What is the timeline for implementation of the Passport arrangement?
- January to June 2014 – public consultations to be conducted
- June to December 2014 – technical and procedural rules to be refined to take into account consultation feedback, finalized rules to be set out in an arrangement document
- February 2015 – economies intending to become members of the Passport arrangement when it is launched (the “Pilot Group”) to sign the arrangement document
- February to December 2015 – Pilot Group economies to implement legislation to give effect to arrangement document
- January 2016 – launch of Passport arrangement
What type of funds will be eligible to access the Passport arrangement?
An eligible Passport fund1 is a fund that:
i. is constituted and authorized and/or registered in a Passport member economy (the “home economy”);
ii. can take the form of any legal vehicle;
iii. meets the home economy’s regulatory requirements for offers to retail investors;
iv. is managed by a manager that is authorized and/or licensed, and having its principal place of business, in the home economy;
v. is well diversified in terms of the exposure to issuers of financial products;
vi. is liquid and does not have complex features that may increase risk; and
vii. is open-ended (i.e. with interests which are redeemable on request, except in specified circumstances).
Whose laws will apply?
There will be a stepped approach under which the laws of the home economy of the fund will apply generally, with some areas where the laws of the host economy2 will apply and others in which Passport rules3 will apply.
When will the laws of the home economy apply?
Generally, the laws of the home economy will apply to the authorization of the funds and the fund managers, for example:
- authorization and/or licensing of the fund managers;
- authorization and/or registration of the funds and their operation (other than when the operation is subject to the rules of the host economy);
- general duties of the fund managers and their directors and officers;
- outsourcing and service providers;
- risk management requirements; and
- meetings of holders.
When will the laws of the host economy apply?
Generally, the laws of the host economy will apply where they relate to the direct interaction between the investor and the Passport fund. For example:
- distribution of Passport funds to investors;
- disclosures that Passport funds are required to provide investors;
- the manner in which complaints by investors are dealt with; and
- other marketing or communications directed at investors.
A host economy may also impose rules on Passport funds which are in addition to the host economy’s rules for local funds where such rules are not unduly burdensome for the Passport fund in comparison to the local funds.
What is the scope of the Passport rules?
The Passport rules are intended to streamline the process for offer of funds in a host economy, and will incorporate any host economy requirement for the fund to be authorized and/or registered in the host economy. The longer-term aim is to move to a notification process for authorization in the host economy.
The Passport rules will also cover the following requirements:
i. Manager experience – the Passport fund managers to have capacity and a strong record of fund management experience in their home economy;
ii. Custody of assets – the assets of the Passport fund to be separated from the assets of the fund manager and other funds, except for permitted use of omnibus accounts;
iii. Valuation – Passport fund assets to be valued on an appropriate basis;
iv. Independent oversight – Passport funds to be subject to independent oversight;
v. Investment restrictions – only funds using a restricted range of issuer diversified and liquid investments can be offered under the Passport;
vi. Derivatives – use of derivatives by Passport funds to be limited;
vii. Lending – money lending, underwriting and the provision of guarantees by Passport funds to be prohibited, except in limited circumstances;
viii. Borrowing – borrowing by Passport funds to be permitted only in limited circumstances and limited amounts;
ix. Short-selling – short selling by Passport funds to be prohibited;
x. Redemption and suspension – Passport funds to provide reasonable redemption rights and to specify when redemptions may be suspended; and
xi. Audited accounts – audited accounts of Passport funds to be prepared in accordance with international standards or prevailing national standards that are substantially converged with international standards and made publicly available.
Who will oversee operations of the Passport?
A joint committee with representatives from all Passport member economies will oversee the operations of the Passport, including ensuring consistent application of the Passport rules and resolving differences in interpretation. The joint committee will also be responsible for assessing nominations from other economies that wish to participate in the Passport.