Surveillance of Hong Kong’s key facts statements

In our client alert of September 2011 entitled “KFS Update”, we noted that the Securities and Futures Commission (SFC) was undertaking a surveillance programme on product key facts statements (KFSs) and offering documents. The SFC has subsequently issued a circular on its findings. Links to these documents are provided below. The requirement for a product issuer to produce a KFS was introduced by the SFC’s Handbook for Unit Trusts and Mutual Funds, Investment-linked Assurance Schemes and Unlisted Structured Investment Products (Handbook) which came into effect on 25 June 2010.

During the surveillance exercise, the SFC reviewed a sample of KFSs against the product’s offering document, the requirements under the Handbook and other SFC guidelines. Where deficiencies were found, the SFC has imposed different remedial requirements, depending of the level of shortcomings and the issues involved. Where the SFC identified a material inconsistency between the KFS and the offering document, the issuer has been required to take immediate remedial action, including ceasing marketing efforts and ceasing to take subscriptions pending rectification of the deficiencies. Where the SFC identified less material issues, the issuer was required to rectify the inconsistencies on an expedited basis.

One issue which has provoked discussion in the industry is the treatment of financial derivative instruments (FDIs). The SFC requires that if the fund will invest in FDIs for investment purposes, then both the offering document and the KFS must disclose this information and outline whether or not such use is extensive. Any use of FDIs for non-hedging purposes will be considered as use for investment purposes. The SFC has not to date provided written guidance on what is considered “extensive” in this context, requiring issuers to rely on their own judgment and counsel.

The SFC may conduct further KFS surveillance as it deems fit.

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627