The Securities and Futures Commission (SFC) has recently released its consultation conclusions on the proposed enhancements to the open-ended fund companies (OFC) regime. Highlights include:
- Removal of investment restrictions for private OFCs;
- Expansion of entities eligible to act as custodian of private OFCs; and
- Confirmation of the SFC’s intention to provide for a statutory mechanism to re-domicile overseas corporate funds to Hong Kong as OFCs.
It is noteworthy that the SFC has decided to remove all restrictions in relation to the types of assets in which a private OFC is permitted to invest, putting the OFC vehicle on a level playing field with overseas corporate fund vehicles and other private fund structures in Hong Kong. On the other hand, the Code on Open-ended Fund Companies (OFC Code) will be amended to require that the custodian shall have sufficient expertise and experience in safekeeping the asset classes, and the offering documents will be required to contain clear disclosures on material risks relating to the types and nature of assets, in which the OFC invests.
The SFC will expand the entities eligible to act as custodians of private OFCs to include intermediaries licensed or registered for Type 1 regulated activity (dealing in securities), as proposed in the consultation paper earlier. The SFC also confirmed the current regulatory framework does not preclude an OFC from appointing multiple custodians, so opens up the possibility that a private OFC could appoint both a cash custodian and one or more prime brokers (that are licensed or registered for Type 1 regulated activity) as the top-level custodians of the private OFC. In addition, new requirements will be imposed on safekeeping the scheme securities and monies of a private OFC, as set out in the new Appendix A to the OFC Code. Existing custodians and prospective custodians will need to conduct a review on their current operations to ensure that the substantive requirements on custody of assets will be complied with in practice. The proposals on the removal of investment restrictions and on custodian eligibility requirements will take immediate effect upon gazettal of the revised OFC Code.
The proposal to provide for a mechanism to re-domicile overseas corporate funds to Hong Kong as OFCs received favourable feedback during the consultation. In order to facilitate the re-domiciliation, the SFC has indicated that upon fulfilling the “key” requirements under the OFC regime, including appointment of eligible operators, other changes can be effected after re-domiciliation. The details on the re-domiciliation mechanism will be set out in detail in new provisions to be introduced into the Securities and Futures Ordinance.
The SFC will conduct a further consultation on the customer due diligence requirements to be imposed on OFCs, particularly its proposal to require an OFC to appoint a responsible person to perform anti-money laundering and counter-financing of terrorism functions. This proposal is intended to align OFCs with the requirements for the new limited partnership fund vehicle, which came into effect on 31 August 2020. Please contact us should you like a copy of our client memo on the limited partnership vehicle.
We have started to see growing interest in the OFC as a fund structure and Deacons has acted on the establishment of both public and private OFCs. The above enhancements are expected to make the OFC a more competitive option when fund managers decide the domicile of their funds. In particular, the decision to remove restrictions in relation to permissible asset classes for private OFCs is to be welcomed, as these restrictions have been a major concern for fund managers intending to use the OFC structure. Further, upon the relevant legislation taking effect, Hong Kong-based managers operating overseas fund vehicles may wish to take advantage of the re-domicile mechanism, which can potentially reduce costs for regulatory compliance in multiple jurisdictions.