INSIGHTS
I. Background:
Traditionally, due to the restrictions of the Companies Ordinance (the “CO”) of Hong Kong, an open-ended investment fund which proposes to be domiciled in Hong Kong is usually established in the form of a unit trust. However, launched in 2018, the open-ended fund companies (the “OFC”) regime in Hong Kong provides the option for Hong Kong-domiciled investment funds to be structured in a corporate form rather than as a unit trust.
This OFC regime provides an attractive alternative for funds domiciled in Hong Kong with its flexible features that are currently not available under the CO; thus, enhancing the market infrastructure to enable Hong Kong’s sustained growth as a full-service international asset management centre and a preferred fund domicile.
Besides, the recent legislative amendments in the Cayman Islands, the leading domicile for investment funds, have introduced important changes to the regulatory and supervisory framework, such as the reporting and economic substance requirement under the Economic Substance Law, therefore fund managers may consider opting for locally-domiciled fund structures, which includes the OFC in Hong Kong.
II. Regulatory Framework:
The regulatory framework governing the OFC regime consists of: (i) the Securities and Futures (Amendment) Ordinance 2016 (the “SFO”) (including Part IVA on OFCs); (ii) the Securities and Futures (OFC) Rules; (iii) the Securities and Futures (OFC) (Fees) Regulations (with application and registration fee HK$10,000 for the umbrella fund and HK$1,250 for each sub-fund); (iv) the Code on OFC; (v) the Cap. 32 Companies (Winding Up and Miscellaneous Provisions) Ordinance (for court winding-up of OFCs); and (vi) the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) (granting profits tax exemption).
Given that the OFC structure is designed to be used by both retail and private funds and retail funds in Hong Kong must be authorised by the Securities and Futures Commission (the “SFC”) for public sale under the SFO, publicly offered OFCs must also be in compliance with essentially the same requirements under the Code on Unit Trusts and Mutual Funds (the “UT Code”) and the Overarching Principles in the SFC Products Handbook.
Further, pursuant to the latest Inland Revenue Ordinance, profits tax exemption applies for onshore and offshore funds alike, so certainOFCs are eligible for enhanced profits tax exemption.
III. Key Features of OFCs:
· An OFC is established as a legal entity, either as a standalone investment fund or as an umbrella fund with different sub-funds with different strategies, and the assets and liabilities of an individual sub-fund would be legally segregated from other sub-funds;
· An OFC is able to vary its share capital in order to meet redemption requests of shareholders and may distribute out of share capital subject to solvency and disclosure requirements instead of being bound by restrictions on reduction of share capital and distribution out of share capital applicable to companies formed under the CO, which allow investors to come in and out of a fund more easily than fixed capital structures;
· An OFC may be used by both public and private funds; however, at least 90% of the gross assets value of a privately offered OFC must consist of (i) asset classes covered by Type 9 regulated activities (i.e. securities, futures contracts, OTC derivatives); and (ii) cash, bank deposits, certificates of deposits, foreign currencies and foreign exchange contracts, while a maximum of 10% of gross asset value may be invested in other asset classes; and
· An OFC may be used for both open-ended and close-ended funds, and for close-ended OFCs, redemption terms and conditions must be appropriately imposed and subject to clear disclosure.
IV. Comparison of Different Types of Funds:
|
Type of Fund |
Private Funds in Cayman |
Mutual Funds in Cayman |
Hong Kong OFC |
|
Regulatory Body |
CIMA and SFC (if engaged in any regulated activities in Hong Kong) |
CIMA and SFC (if engaged in any regulated activities in Hong Kong) |
SFC |
|
Governing Law |
Cayman Islands law and Hong Kong law (if engaged in any regulated activities in Hong Kong) |
Cayman Islands law and Hong Kong law (if engaged in any regulated activities in Hong Kong) |
Hong Kong law |
|
Establish-ment of Fund |
must register with CIMA |
must register with CIMA |
must register with SFC and be incorporated by the Companies Registry |
|
Filing Require-ment for Establish-ment |
N/A |
must file with CIMA the current offering document and/or prescribed details in respect of the current offering document (except 4(4) funds) |
must register with SFC the instrument of incorporation (offering document may also be filed with SFC as soon as practicable after the issuance) |
|
Material Changes |
must file with CIMA |
must file with CIMA |
material changes made to the instrument of incorporation will require shareholder’s approval for private OFCs |
|
Annual Fees |
must pay to CIMA |
must pay to CIMA |
N/A |
|
Annual Audit |
must file accounts audited by a CIMA-approved auditor in accordance with the IFRS within 6 months of the end of each financial year |
must file accounts audited by a CIMA-approved auditor within 6 months of the end of each financial year |
must appoint an auditor for each financial year, and the annual financial report must be prepared in accordance with the HKFRS or IFRS, and then published and filed with SFC within 4 months of the end of the financial year |
|
Valuation |
must be carried out at least once a year by an independent third party, or the administrator, the manager or operator of the fund |
may be carried out by the administrator of the fund |
valuation and pricing of the OFC’s property is the investment manager’s responsibility |
|
Safekeep-ing of Fund Assets |
must appoint a custodian, who should be an independent third party, but may also be the manager or operator of the fund if it is neither practical nor proportionate to appoint a custodian |
N/A |
must appoint a custodian who is approved by SFC and meets the eligibility requirements set out in the UT Code, even if it is a privately offered OFC |
|
Cash Monitoring |
must appoint a person to monitor the cash flow of the fund, who should be an independent third party, but may also be the manager or operator of the fund |
N/A |
N/A |
|
Identifica-tion of Securities |
must maintain a record of the identification codes of the securities and make such information available to CIMA upon request if regularly trading securities or holding them on a consistent basis |
no security identification code recording requirement, but retention of accounting records is required |
no security identification code recording requirement, but retention of accounting records is required |
|
Investment Manager |
Cayman fund manager (SIBL registered person) or Cayman operator or fund manager of other jurisdictions |
Cayman fund manager (SIBL registered person) or fund manager of other jurisdictions |
must appoint an investment manager which is licensed by or registered with SFC for Type 9 (asset management) regulated activity |
|
Fundrais-ing Require-ments in Hong Kong |
SFO Schedule |
SFO Schedule |
SFO Schedule |
|
Public Fundrais-ing in Hong Kong |
N/A |
require the SFC’s approval |
require the SFC’s approval |
|
Licence Require-ments for Fundrais-ing in Hong Kong |
Type 1 licence issued by the SFC is generally required or Type 9 licence may be relied on for an exemption |
Type 1 licence issued by the SFC is generally required or Type 9 licence may be relied on for an exemption |
Type 1 licence issued by the SFC is generally required or Type 9 licence may be relied on for an exemption |
website: www.siennacorpgroup.com
