News & Insights

Consultation reveals details of HK’s corporate funds vehicle

It is now hoped that the open-ended fund company (OFC) will be available in 2018 as an alternative to the unit trust for those looking to set up Hong Kong-domiciled investment funds. The introduction of a corporate funds vehicle is designed to boost Hong Kong’s development as a fund manufacturing hub.

Further to the Securities and Futures (Amendment) Ordinance 2016 (Amendment Ordinance), which established the legal framework for the incorporation of OFCs, in June 2017 the Securities and Futures Commission (SFC) published a consultation on the proposed terms of the Securities and Futures (Open-ended Fund Companies) Rules (Rules) and the non-statutory Code on Open-ended Fund Companies (Code), with responses due by 28 August. The Rules and the Code set out the more detailed requirements in relation to establishment and operation of OFCs. Also in June, the Inland Revenue (Amendment) (No. 4) Bill 2017 (Bill) which aims to provide a profits tax exemption in respect of privately offered OFCs, was published.

The OFC structure is designed to be used by both public and private funds so whilst an OFC authorised for public sale will be tax exempt like other authorised funds, to enable the OFC to compete with offshore funds being privately-marketed in Hong Kong, at least equivalent treatment to that offered by the current offshore funds profits tax exemption will be vital. The Bill aims to provide a profits tax exemption for privately offered OFCs which meet the tests of engaging in qualifying transactions and not being closely-held.

As OFCs are collective investment schemes, the OFC regime will be established under the Securities and Futures Ordinance (SFO) and primarily operated by the SFC rather than the Registrar of Companies (CR). The SFC seeks to ensure that OFC set-up involves a one-stop process whereby the SFC will handle a registration application and liaise with the CR who will issue the incorporation certificate. A similar process will apply to business registration with the Inland Revenue. The fact that an applicant will only have to deal with the one authority for all registration purposes is to be welcomed. Similarly the process is intended to be streamlined for ongoing filings, with those which require SFC approval being submitted only to the SFC (the SFC will then pass the documents to the CR after approval) and certain filings which do not require SFC approval being submitted only to the CR.

An OFC needs a Hong Kong registered office and in making a registration application the instrument of incorporation and profiles of the key operators will be key. It will not be necessary to file the draft offering document of a private OFC for review by the SFC but contents requirements are proposed in the draft Code. Following registration of an OFC the offering document must be filed (along with any updates on an ongoing basis). A template instrument of incorporation for an OFC will be made available. This must include a statement that the object of the OFC is the operation of a collective investment scheme. Amendments to the instrument of incorporation can be made where shareholders’ approval has been obtained or where the custodian has certified the immateriality of the change or that it is necessary to comply with statutory or regulatory requirements, but any material change will require SFC approval.

The consultation proposals have addressed certain comments raised previously that flexibility typically seen in fund structures will be needed, so different classes of shares can be created, umbrella funds are permitted and there are provisions to ensure segregated liability of sub-funds and to permit cross-investment between sub-funds of the same OFC.

In terms of key operators, an OFC must have a board of directors comprising at least two directors who are natural persons aged 18 or above, one of whom is independent (not a director or employee) of the custodian. Director appointments are subject to SFC approval and directors are subject to statutory duties of care.  There is a requirement that the experience and expertise of OFC directors, taken together, should be appropriate. Directors do not need to be Hong Kong residents but an overseas director must appoint a process agent to facilitate the service of process.

The board must delegate the investment management of the OFC to an investment manager licensed by or registered with the SFC to carry out Type 9 (asset management) regulated activity, which will be subject to all relevant SFC conduct requirements, including those under the Fund Manager Code of Conduct. Changes in investment manager require SFC approval.

An OFC must also have a custodian to whom all the scheme property is entrusted for safe-keeping. The eligibility requirements for the custodian follow those for custodians of SFC-authorised funds (mainly banks and trust companies). Appointment of a custodian will be subject to SFC approval. The custodian is required to take reasonable care, skill and diligence to ensure the safe-keeping of the scheme property. In terms of sub-custody, the custodian must exercise due care in the selection, appointment and monitoring of its delegates, including sub-custodians and the Rules require a sub-custodian to take reasonable care, skill and diligence to ensure the safe-keeping of scheme property entrusted to it. Eligible overseas custodians are permitted but need to appoint a local process agent.

An auditor must be appointed and an annual report prepared. An OFC may apply Hong Kong Financial Reporting Standards or International Financial Reporting Standards (or such other accounting standards may be considered acceptable by the SFC).

As the OFC structure is designed to be used by both public and private funds there are requirements in the Rules applicable to the vehicle generally such as those concerning share capital, shareholder meetings, auditors’ appointment and financial reports; requirements for the key operators (i.e. the directors, investment manager and custodian); provisions on segregated liability; winding-up and criminal offences. The Code sets out general principles (derived from IOSCO standards) with which all OFCs and their key operators are expected to comply when managing and operating an OFC and covers other matters such as naming guidelines; and investment restrictions applicable only to private OFCs (as publicly offered OFCs will be subject to the investment restrictions and other requirements of the SFC Products Handbook).

The proposed investment restrictions for OFCs that are not authorised for sale to the public are:

  1. at least 90% of the OFC’s gross asset value should consist of (1) those asset types the management of which would constitute a Type 9 regulated activity (securities, futures and OTC derivatives (once the new regime comes into effect)), and (2) cash, bank deposits, certificates of deposit, foreign currencies and foreign exchange contracts;
  2. the OFC may invest in other asset classes of a value not exceeding a maximum of 10% of the gross asset value of the OFC (10% de minimis limit);
  3. in the case of an umbrella OFC, the 10% de minimis limit is applicable to each sub-fund as well as to the umbrella OFC as a whole.

A number of offences are created and under the Amendment Ordinance the SFC has investigatory, supervisory and intervention powers to act where there is a breach of the SFO, the OFC Rules or the OFC Code. The SFC will be able to exercise disciplinary powers under Part IX of the SFO.


The introduction of a corporate vehicle for establishment of Hong Kong-domiciled funds is welcomed. For sponsors of authorised funds the corporate vehicle may prove attractive and the additional process involved in registering an OFC versus establishing a unit trust should not add a significant regulatory burden.

However, as compared to offshore jurisdiction structures commonly used to establish private funds, the OFC is a highly regulated vehicle and this, together with the concerns as to practical application of the proposed profits tax exemption, may inhibit its take up by private fund sponsors.

Related Services and Sectors:

Investment Funds, Regulatory

Portfolio Builder

Select the legal services that you would like to download or add to the portfolio

Download    Add to portfolio   
Title Type CV Email

Remove All


Click here to share this shortlist.
(It will expire after 30 days.)