Delegation by managers under Hong Kong’s OFC regime

An open-ended fund company (OFC) must at all times have an investment manager (Fund Manager) who is responsible for managing the scheme property. To bring in expertise in respect of a specific market or strategy or for other various reasons, Fund Managers may engage sub-managers, advisors or delegates. The delegation of the investment management function by a Fund Manager is permissible under the OFC regime. In respect of unauthorized funds, the appointment of a sub-manager or Fund Manager’s delegate is not subject to the approval of the Securities and Futures Commission (SFC). As a general principle, the SFC’s Code on Open-Ended Fund Companies (OFC Code) provides that, where a delegate is appointed by the Fund Manager, the Fund Manager as a key operator shall exercise due care in the selection, appointment and ongoing monitoring of such sub-manager or delegate.

The Fund Manager must comply with the obligations under the SFC’s Fund Manager Code of Conduct (FMCC), in the same manner as any SFC-licensed investment managers of funds established offshore. The FMCC provides that a Fund Manager should exercise due skill, care and diligence in the selection and appointment of third-party delegates. Where functions of the Fund Manager are delegated to third parties, there should be ongoing monitoring of the competence of delegates, to ensure that the principles of the FMCC are followed. Although the investment management role of the Fund Manager may be sub-contracted, the responsibilities and obligations of the Fund Manager to the OFC it manages may not be delegated. The Fund Manager shall remain liable for any actions or omissions undertaken by its sub-manager or delegate for compliance with applicable laws and regulations. The delegation agreement would therefore have to be carefully drafted to accommodate various matters pertaining to such delegation, including the appointment and resignation of the delegate, as well as powers and duties of each party. Legal expenses incurred in the preparation of such agreements are typically regarded as part of the fund’s incorporation expenses.

The OFC Code provides that an OFC should put in place appropriate arrangements as far as reasonably practicable for the purpose of complying with the requirement for the OFC to have at least one investment manager licensed or registered with the SFC for type 9 regulated activity. The example given in the OFC Code refers to a replacement arrangement in the event of any retirement or removal of the investment manager. However, at present, it is unclear whether co-management is permitted for OFCs. “Co-management” typically refers to an arrangement whereby two (or more) entities are appointed as co-managers by an investment fund.

Interest in setting up OFCs has been growing since the Financial Secretary announced the OFC subsidy scheme earlier this year. The grant will cover 70% of eligible expenses paid to Hong Kong-based service providers (with a cap of HK$1 million) in the course of setting up a new OFC or in an existing offshore corporate fund re-domiciling to Hong Kong. The SFC recently indicated that the grant would be subject to a “first-come-first-served” basis. More implementation details will be announced by the SFC upon approval of the OFC subsidy scheme by the Legislative Council.