The Hong Kong Securities and Futures Commission (SFC) has issued a consultation paper (Consultation) that proposes a new licensing regime for trustees and custodians (depositories) of SFC-authorized collective investment schemes (Relevant CIS). The Consultation is open for comment until 31 December 2019.
Existing trustees and custodians of Relevant CIS should read the Consultation and consider what the proposed licence and conduct requirements will mean for their business.
We have summarized the SFC’s proposals below.
Proposed regulatory framework
The SFC proposes to amend the Securities and Futures Ordinance (SFO) to introduce a new type 13 regulated activity (RA13), acting as a depositary of a collective investment scheme which is authorized by the SFC under section 104 of the SFO. A depository that is licensed for RA13 will be subject to the same requirements as other SFC-licensed corporations, including appointment of responsible officers and managers-in-charge and compliance with SFC codes, guidelines and circulars.
A new Schedule 11 to the Code of Conduct for Persons Licensed By or Registered with the Securities and Futures Commission (Code of Conduct) is proposed specifically for RA13. It is intended that Schedule 11 will incorporate the trustee and custodian requirements that exist under the Code on Unit Trusts and Mutual Funds, the Code on Real Estate Investment Trusts and other product-specific codes (the Product Codes), in addition to other conduct requirements.
Various subsidiary legislation under the SFO will also be changed to reflect new requirements for depositories, including the Securities and Futures (Financial Resources) Rules, the Securities and Futures (Accounts and Audit) Rules and the Securities and Futures (Keeping of Records) Rules.
The Product Codes will also be amended to reflect the introduction of RA13.
Entities that will need to be licensed
Entities (including banks) will need to be licensed or registered for RA13 if they carry on business in Hong Kong as the top-level trustee or custodian of one or more Relevant CIS. Delegates, nominees and agents of the top-level trustee or custodian will not need to be licensed for RA13.
Relevant CIS include SFC authorized unit trusts, mutual fund companies, real estate investment trusts, pooled retirement funds and open-ended fund companies. To minimize duplicate regulation by the SFC and the Mandatory Provident Fund Schemes Authority, the definition of Relevant CIS will exclude (i) mandatory provident fund schemes and their constituent funds; and (ii) approved pooled investment funds (APIFs) which are or are intended to be offered only to professional investors, employers, mandatory provident fund schemes, occupational retirement schemes and pooling arrangements (as defined in the Occupational Retirement Schemes Ordinance) and other APIFs. APIFs that may be offered directly to retail investors in Hong Kong will be Relevant CIS and so the trustees of such APIFs will need to be licensed for RA13.
Individuals performing regulated functions for licensed depositories will also need to be approved as executive officers, responsible officers or representatives for RA 13. Regulated functions in respect of RA13 include custody operations, monitoring of investment and borrowing restrictions, fund accounting and valuation, and monitoring of subscriptions and redemptions of Relevant CIS.
Minimum capital requirements
A depository licensed for RA13 will need to maintain a minimum amount of (i) paid-up capital of HK$10 million; and (ii) liquid capital of HK$3 million.
Conduct and internal controls
Appendix B of the Consultation contains a draft of the proposed new Schedule 11 of the Code of Conduct. The proposed new Schedule 11 includes requirements for:
- Communications with and oversight of the management company of a Relevant CIS
- Appointment and oversight of delegates
- Record-keeping
- Oversight of the subscription and redemption process
- Monitoring of valuation, prices and net asset value calculation, distribution payments, cash flows and investments
- Custody and safe-guarding of assets
- Connected party transactions entered into by or on behalf of the Relevant CIS
- Handling different classes of investors fairly
- Maintenance of professional indemnity insurance
Next steps and transitional arrangements
The Consultation is open for comment until 31 December 2019. The SFC will consider the submissions received and issue its conclusions in due course. Amendments to the SFO and its subsidiary legislation will then need to be prepared and will be subject to further public consultation before being enacted. The new licensing regime for RA13 will come into effect upon the gazettal of the amended SFO.
The SFC has indicated in the Consultation that the licensing / registration process for RA13 will commence 12 to 18 months before implementation of the new licensing regime. The SFC expects existing trustees and custodians of Relevant CIS to submit applications within two months of the gazettal of the amended SFO.
The SFC has indicated it will prioritize applications by existing trustees and custodians of Relevant CIS. Staff of existing trustees and custodians of Relevant CIS who apply to be executive officers, responsible officers or representatives for RA13 will be exempt from passing local regulatory framework papers but will need to complete a course of not less than five hours on the legal and regulatory framework for RA13 within 12 months after being granted licences for RA13, and will need to satisfy the same academic qualification, relevant industry experience and management experience tests as other licensed individuals.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
Scott Carnachan has considerable experience in the establishment of private and retail investment products, including hedge funds and insurance-based investment products, as well as the authorisation for public sale in HK of HK unit trusts and offshore mutual funds from a variety of jurisdictions. Scott also advises on all regulatory aspects of investment business, including licensing requirements, establishment and marketing of collective investment schemes, authorisation of automated trading systems and compliance issues.Scott combines many years of experience advising asset managers with five years as regional counsel for PIMCO where he was responsible for all legal, compliance and regulatory matters across offices in HK, Singapore and Australia.”
Isabella Wong, a lawyer qualified in Hong Kong, is a Senior Associate who joined Deacons in November 2013. Prior to joining Deacons she worked at the Securities & Futures Commission for close to five years where she gained hands-on licensing experience with hedge fund managers, PRC financial institutions, dark-pool operators, sponsors and brokers. She was involved in the policy work around the creation of the OTC derivatives regulatory regime. Isabella has also worked in private practice specialising in regulatory and corporate matters. She is now focusing her practice advising on SFC licensing, compliance and regulatory matters.
For more information, please visit www.deacons.com.
