The following updates are examinable from 9 June 2021
TOPIC 1 – REGULATORY OVERVIEW OF THE HONG KONG FINANCIAL INDUSTRY
- No updates
TOPIC 2 – PRINCIPLES OF RELEVANT HONG KONG LAW AND THE COMPANIES ORDINANCE
- No updates
TOPIC 3 – SECURITIES AND FUTURES ORDINANCE
Material added relating to Open-ended Fund Companies:
- It is intended that the OFC regime will allow an overseas corporate fund to re-domicile to Hong Kong, enabling the legal entity of the OFC to remain unchanged and all its existing contractual arrangements, resolutions and liabilities not being affected
TOPIC 4 – LICENSING AND REGISTRATION, AND SUBSIDIARY LEGISLATION
- No updates
TOPIC 5 – BUSINESS CONDUCT AND CLIENT RELATIONS
Material added relating to the Code on Open-ended Fund Companies:
- OFCs allow investment funds in Hong Kong to be established as incorporated companies with limited liability and variable capital as an alternative to the unit trust structure
- The OFC Code applies to both public and private OFCs and their key operators
- A public OFC is authorised by the SFC and a private OFC is not a public OFC
REQUIREMENTS APPLICABLE TO ALL OPEN-ENDED FUND COMPANIES (OFCs)
- Code requirements applicable to all open-ended fund companies cover:
- General principles
- Registration and naming
- Directors
- Investment manager
- Custody of OFC assets
- Administration of the OFC
- Audit and annual accounts
- Termination and cancellation of registration
General Principles
- The OFC Code contains the following seven general principles:
- Key operators of an OFC shall act honestly, fairly and professionally
- Key operators shall act with due skill, care and diligence
- Scheme property of an OFC shall be held by a custodian and properly protected
- Key operators shall avoid conflicts of interests and where they cannot, there should be disclosure to investors
- Disclosures should be timely, clear and concise
- Key operators shall comply with regulatory requirements, co-operate with regulators and promptly inform the SFC of any material breach of the OFC Code
- Key operators shall ensure compliance with the OFC instrument of incorporation and offering documents
Registration and Naming
- An OFC registration application must be made to the SFC on the specified form
- An OFC’s name must not be misleading and must end with “Open-ended Fund company” or “OFC”
Directors
- OFC appointed directors must be of good repute, appropriately qualified, experienced and proper for the purpose of carrying out OFC
- An OFC’s name must not be misleading and must end with “Open-ended Fund company” or “OFC”
- There must be at least one independent director, who is not a director or an employee of the custodian
- The independent director does not need to be independent of the investment manager
- Directors must oversee the activities of the investment manager and the custodian
Investment Manager
- The appointed investment manager must be licensed or registered with the SFC for Type 9 (asset management) regulated activity
- An OFC may appoint more than one investment manager
- The investment manager must comply with relevant SFC codes and guidelines:
- Fund Manager code of Conduct
- Code of conduct
- Internal Control Guidelines
- Guideline on Anti-Money Laundering
- Sufficient trading, accounting and other records should be kept to reflect financial position and operation
- Records should be kept in SFC approved premises for at least 7 years
- The investment manager must act in the best interests of the OFC and investors
Custody of OFC’s Assets
- An OFC must appoint a custodian to hold in custody the OFC scheme property
- Eligibility requirements are the same as those of trustees/custodians in Topic 8
- Custodians of private OFCs may be Type 1 licensed or registered
- The custodian must keep OFC assets segregated from assets belonging to others
- Scheme assets may be kept in an omnibus account, subject to adequate safeguards
Administration of the OFC
- An OFC’s instrument of incorporation must provide for: Procedures for shareholder and director meetings; Share capital structure; and Rights attaching to shares
- OFC offering documents should indicate how shareholders can obtain information about the OFC
Audit and Annual Accounts
- An auditor must be appointed that is independent of the investment manager, the custodian and the OFC directors
- Audited accounts must be disclosed on an annual basis within 4 months of the financial year-end
Termination and Cancellation of Registration
- When an OFC is voluntarily terminated, its SFC registration will be cancelled, ensuring fair treatment of shareholders
- OFC liabilities will need to be cleared before proceeds are distributed to shareholders
REQUIREMENTS APPLICABLE ONLY PRIVATE OFCs
There are additional Code requirements for private OFCs covering:
Investment Scope
- Private OFCs are designed to operate as investment vehicles and so should not operate as corporate entities for general commercial business or trade
Changes to the scheme
- Any change to the instrument of incorporation must have shareholder approval
Fund operations and Disclosure
- The instrument of incorporation should clearly set out details of: pricing, dealing, issue and redemption of shares, valuation, distribution policy, use of leverage, fees and charges
- An OFC must file its offering document with the SFC as soon as practicable
- Any changes to the offering document must be filed within 7 days of issuing the revised document
Custody Arrangements
- The custodian may be licenced or registered for Type 1 (Dealing in Securities) regulated activities
- A Type 1 regulated custodian must comply with the following laws and regulations:
- SFC Client Securities Rules
- SFC Client Money Rules
- SFC Keeping of Records rules
- SFC Code of conduct
- SFC Internal Control Guidelines
- Guidelines on Anti-Money Laundering
TOPIC 6 –BUSINESS OPERATIONS AND PRACTICES
Material added relating to Information Management under the SFC Internal Control Guidelines:
- Licensed corporations using external electronic data storage providers (EDSPs) must obtain prior SFC approval
- License corporations using EDSPs should:
- Conduct proper due diligence on the EDSP’s controls
- Ensure the EDSP maintains a proper information security policy
- Ensure there are well-defined responsibilities between the licensed corporation and the EDSP
- Be aware of concentration risk where an EDSP provides data services to a large number of financial firms
TOPIC 7 –PARTICIPATING IN THE HONG KONG EXCHANGES
Material updated relating to stamp duty on stock transactions:
- 1% on each purchase/sale (increased to 0.13% in the 2012-22 budget)
TOPIC 8 –ACCESSING PUBLIC CAPITAL
Material added relating to risks associated with investing in virtual assets:
- Different levels of regulatory safeguards – not all virtual assets admitted to trade on a licensed platform are subject to the same level of statutory protection
TOPIC 9 –MARKET MISCONDUCT AND IMPROPER TRADINGPRACTICES
- No updates
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