Recent updates of SFC publications for authorised funds

The SFC has issued a number of new/revised circulars and FAQs in respect of retail funds. The key ones are as follows:

a. Formal adoption of the revamped fund authorisation process: upon the expiry of the six-month pilot period, the revamped process for fund authorisation will be formally adopted with effect from 9 May 2016. The revamped process will be extended to applications of mainland funds under the mutual recognition arrangement. The SFC’s Guide on Practices and Procedures (the Guide) for fund authorisation, the information checklist and the relevant FAQs have been revised accordingly. Applicants must use the revised information checklist from 9 May 2016.  One of the major amendments to the information checklist is a new confirmation that the fund will not invest 30% or more of its NAV in any particular type of asset classes or investments or markets save as otherwise disclosed in the Key Facts Statement (KFS) in compliance with the requirements of the Guide.

b. Green light for simple leveraged and inverse ETFs: the SFC has issued a new circular and new FAQs to provide guidance on the factors the SFC would consider in authorising leveraged and inverse exchange traded funds (L&I Products). There are additional requirements covering product names, structure, disclosure in offering documents and market making arrangements. Both swap-based and futures-based structures are allowed for L&I Products. There are caps on the permitted leverage factor: two times for leveraged products and one time for inverse products.  Initially, the underlying indices of L&I Products must be broadly based non-Hong Kong, non-Mainland foreign equity indices. 

c. A new FAQ regarding the SFC’s acceptability criteria for managers of futures and options funds authorised under Chapter 8.4 of the Code on Unit Trusts and Mutual Funds has been added to clarify the SFC’s requirements on the experience of the managers / delegates (Q8A).

d. Updates to FAQs on post authorisation compliance issues of authorised funds:

1. A reminder that in the event that the offering document is pending an update to reflect any scheme changes, the offering document must be distributed together with the notice to investors regarding the changes (Q2A).
2. Guidance on market suspension, which covers issues to consider if there is a suspension of trading on the securities market(s) on which all or a substantial part of the investments of the fund are traded and such suspension continues until the close of such market(s) (Q3B).
3. Guidance on disclosures relating to the implementation of any policies to address potential impact of market suspension (Q3C).

e. Updates to FAQs on Mainland-Hong Kong mutual recognition of funds (MRF):

1. Clarification that setting up a new share class for a Hong Kong fund solely for offering to Mainland investors does not require prior approval from the SFC (QA(5A)).
2. Clarification that categorisation of MRFs (e.g. equity/bond fund) should in general be based on the relevant laws and regulations of the home jurisdiction.
3.  New FAQs regarding taxation for MRFs and Hong Kong / Mainland investors (QI(1) – (4)).
4. Updated risk disclosures expected in the KFS / Hong Kong covering document of a recognised mainland fund (QC(3)).
5.  A new FAQ to clarify disclosure requirements applicable to quarterly financial reports of a recognised mainland fund (QC(9)).
6. Clarification of the MRF eligibility requirement for re-domiciled funds, in that the one-year track record requirement is calculated from the day on which the fund is re-domiciled in Hong Kong (QA(1)).
7. Guidance to managers of recognised mainland funds relating to market suspension (QE(5)).

f. Revised Guidance on Internal Product Approval Process – a footnote has been added to clarify that issues related to “expected tenor” under “Target market identification” are only relevant to funds with specific tenor such as guaranteed funds and structured funds which have pre-determined rules-based pay-outs.

g. MRF-related forms for scheme changes / revised offering documents have been issued and updated – these are applicable to recognised mainland funds which have post-authorisation changes.

Key Contacts

Alwyn Li

Partner | Financial Services

Email or call +852 2825 9627