On 22 May 2015, the Securities and Futures Commission (SFC) together with the China Securities and Regulatory Commission (CSRC) jointly announced the details of the Mutual Recognition of Funds (MRF) between the Mainland and Hong Kong. In summary, a fund that is authorised by the home jurisdiction, (i.e. by the SFC in Hong Kong, or the CSRC in China), can apply for authorisation for retail distribution in the other host jurisdiction provided that certain requirements can be satisfied.
In general, the relevant fund must be: (a) authorised by the home regulator for sale to the public, (b) managed in accordance with the laws and regulations in the home jurisdiction and its constitutive documents. After obtaining authorisation in the host jurisdiction, the relevant fund must be offered and marketed in accordance with the local laws and regulations in the host jurisdiction. The host jurisdiction will publish rules and regulations concerning the authorisation, post-authorisation and on-going compliance of the fund under MRF, as well as sales and distribution in the host jurisdiction. Both the CSRC and the SFC expect investors in the home jurisdiction and the host jurisdiction to be treated in the same manner.
Hong Kong domiciled unit trusts that are authorised by the SFC and seeking authorisation in China would need to comply with the Code on Unit Trusts and Mutual Funds (UT Code) (which forms part of the SFC’s Handbook). Funds from China seeking to be authorised by the SFC for sale to the public in Hong Kong will need to comply with the relevant laws and regulations in China and they are deemed to have substantially complied with the relevant SFC requirements.
Recognised Mainland Funds Coming to Hong Kong
In addition to the joint announcement by the CSRC and the SFC, the latter issued a circular which sets out the requirements for mainland funds to come to Hong Kong.
What type of mainland funds would be eligible for SFC authorisation?
At the outset, only plain vanilla equity funds, bond funds, mixed funds, unlisted index funds and physical ETFs from China would be eligible to apply for SFC authorisation under MRF.
What are the requirements for mainland funds seeking SFC authorisation?
Mainland funds seeking SFC authorisation –
- must be established, managed and operated in accordance with their constitutive documents and the laws and regulations in China;
- need to be registered with the CSRC under the Securities Investment Fund Law and publicly offered in China;
- must have a minimum track record of 1 year;
- a minimum fund size of RMB200 million;
- are not allowed to invest primarily in the Hong Kong market; and
- cannot have the value of its shares / units sold to Hong Kong investors exceeding 50% of its total net assets.
What are the eligibility requirements for manager of mainland funds seeking SFC authorisation?
Managers of eligible mainland funds must –
- be registered and operate in mainland China in accordance with local laws and regulations and licensed by the CSRC to manage public funds;
- have a clean regulatory history in the past 3 years or since its establishment (if established for less than 3 years).
Delegation would not be allowed at least at the initial launch.
What are the eligibility requirements for custodian of mainland funds seeking SFC authorisation?
The custodian of mainland funds must be qualified to act as such in accordance with the laws and regulations in China.
Any other requirements? Mainland funds under MRF will need to appoint a Hong Kong representative as required under Chapter 9 of the UT Code. Other operational and on-going compliance requirements under the UT Code (e.g. suspension in dealing, pricing errors, the inspection of the fund’s constitutive documents, and not to include provisions which seek to exclude the jurisdiction of Hong Kong courts) would also apply to eligible mainland funds.
Scheme changes for mainland funds under MRF will follow the requirements in the home jurisdiction and required to be filed with the SFC and notified to Hong Kong investors. When issuing advertisements for mainland funds under MRF, the SFC’s Advertising Guidelines will apply. The SFC’s MRF circular also sets out various Hong Kong disclosure which the SFC would expect. The Chinese version of the offering documents of mainland funds to be sold to the public in Hong Kong should be prepared in traditional Chinese. As with all other SFC authorised funds, mainland issuers will need to prepare Key Fact Statements.