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Authored by: Pinky Siu and Calvin Li
One of the advantages of adopting the open-ended fund company (OFC) for a Hong Kong fund is the flexibility to appoint different custodians for different sub-funds within the same OFC. This position is confirmed in Q23 of the Frequently Asked Questions relating to Open-ended Fund Companies (FAQ) published by the Securities and Futures Commission (SFC), which supplements the SFC’s requirements on private OFCs appointing multiple custodians.
Such arrangement for appointing multiple custodians is also possible for public OFCs (i.e. funds which are authorised by the SFC for sale to the public in Hong Kong). In terms of custody of assets, a public OFC is expected to comply with the requirements in the FAQ, in particular, the Instrument of Incorporation (Instrument) and/or custodian agreement of the OFC should include provisions achieving the following:
(i) ensure that all scheme property must be duly entrusted to the custodian(s) of the OFC;
(ii) demarcate the rights and liabilities of each custodian clearly as to the respective scheme property that each custodian is entrusted with and responsible for; and
(iii) provide for a default mechanism to place into custody any scheme property potentially arising at the umbrella-level OFC (such as any assets which may be attributed to the umbrella due to accounting treatment, or otherwise arising) to a specified custodian of the OFC.
Deacons recently worked on the first public OFC with multiple custodians, which appoints different custodians for its sub-funds. The SFC expects each custodian to be appointed as the custodian of the OFC at the umbrella level in addition to being appointed as the custodian of the specific sub-fund it is appointed. Since a public OFC is authorised under the Code on Unit Trusts and Mutual Funds, all custodians are expected to take collective responsibility of the regulatory obligations that cannot be attributed specifically to a sub-fund. Examples of such collective regulatory obligations include certification of umbrella-level amendments to the Instrument, confirmation in the annual report whether the management company has managed the OFC in accordance with the Instrument, etc.
Applicants are encouraged to engage with the SFC early if they intend to adopt multiple custodians structure for a public OFC.
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