On 20 March 2014, the Financial Services and the Treasury Bureau (FSTB) issued the Open-Ended Fund Companies Consultation Paper (Consultation Paper) to seek comments from the public on the introduction of a new open-ended fund company (OFC) structure. The OFC structure aims to complement the existing unit trust structure that is typically used for investment funds established in Hong Kong, and provide greater flexibility for investment fund vehicles in Hong Kong.
An OFC is an open-ended collective investment scheme which is structured as a limited liability company with variable share capital. It can be set up as a public or a private fund. Due to its open-ended nature, an OFC is not subject to the requirements relating to restrictions on capital reduction and maintenance of capital, which are applicable to conventional limited liability companies established under the Companies Ordinance, giving it greater flexibility in meeting shareholders' creation and redemption requests.
As the OFC is proposed to be a purely legal vehicle for investment, it will not need to be licensed as a licensed corporation under the Securities and Futures Ordinance (SFO). However it will be required to be registered with the Securities and Futures Commission (SFC) under the proposed subsidiary legislation, and, in the case of publicly offered OFCs, further subject to authorisation by the SFC under Part IV of the SFO
It is proposed that the day-to-day management and investment functions of OFCs will be delegated to an investment manager licensed to carry out Type 9 (asset management) regulated activity under Part V of the SFO, while the assets of an OFC would need to be segregated from those of the investment manager and entrusted to a separate independent custodian for safekeeping. As an OFC is not designed to operate as a corporate entity for the purposes of general commercial business or trade, it is proposed that the investment scope of an OFC would be limited to securities and futures (and OTC derivatives once the relevant proposed legislative amendments to the SFO have become effective).
It is proposed that the SFC will be the primary regulator of OFCs. Enabling provisions will be included in the SFO to facilitate the creation of separate OFC subsidiary legislation which will govern the creation, and provide the detailed regulations, of the new vehicles. The applicable operational requirements (such as corporate governance, investment scope and restrictions and termination, etc.) will be set out in a separate OFC code issued under SFO, which will be the subject of further consultation.
It is expected that the availability of more options for fund managers in the way that investment funds are legally structured in Hong Kong will be conducive to Hong Kong’s further development as an international asset management centre.
A copy of the consultation paper can be accessed here.