Hong Kong’s SFC consults on Code on Pooled Retirement Funds

On 18 December 2020, the Securities and Futures Commission (SFC) issued a public consultation paper (Consultation) on proposed amendments to the Code on Pooled Retirement Funds (PRF Code).

The proposals are part of the SFC’s holistic review of the PRF Code following the revision of the Code on Unit Trusts and Mutual Funds (UT Code) which was implemented in 2019. The proposed changes align certain requirements to those applicable to unit trusts and investment-linked assurance schemes in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.

Key proposed changes

Key proposed changes to the PRF Code include:

1. Introduction of obligations for key operators (i.e. product providers, trustees, management companies and insurance companies)

    

2. Introduction of requirements in relation to fund operations (e.g. valuation and pricing, dealing, reporting, pricing errors, suspension and deferral of dealings, and transactions with connected persons)

    

3. Strengthening requirements for trustees of PRFs (i.e. enhancement of annual independent internal control review requirements and submission of an internal control review report to the SFC)

    

4. Introducing specific requirements for different types of investment portfolios

The SFC is proposing that a product provider (referred to as “applicant company” under the existing PRF Code) would be designated for each PRF and will be responsible for observing or procuring other relevant parties to observe all the requirements of the PRF Code and any authorization conditions imposed by the SFC. The product provider will also have additional obligations under the revised PRF Code.

The SFC is also introducing obligations to clearly state the obligations of insurance companies of PRFs and investment portfolios structured in the form of insurance policies. In particular, the SFC is enhancing requirements for insurance companies performing functions analogous to those of a management company and trustee in respect of a PRF in the form of an insurance policy. The obligations of management companies and trustees of PRFs would be enhanced to align with those under the UT Code.

The current requirements provide that investment portfolios (other than guaranteed funds) shall comply with the applicable core investment requirements under Chapter 7 of the UT Code. The SFC is now proposing investment portfolios to be structured as one of the following: (a) funds investing in SFC-authorized funds, (b) cash management portfolios, (c) guaranteed funds, and (d) direct investment funds. For funds investing in SFC-authorized funds, the names of the underlying funds and their respective investment allocations must be disclosed in the PRF’s principal brochure and any remaining net asset value has to be held in cash or cash equivalents. Direct investment funds (whether in trust form or an insurance policy) will have to be managed by a management company which is (a) licensed or registered for Type 9 regulated activity, and (b) currently managing funds authorized by the SFC under the UT Code. Thus, a direct investment fund in the form of an insurance policy which is currently not managed by an SFC-licensed manager, would need to appoint an SFC-licensed manager which is currently managing funds authorized by the SFC under the UT Code under this new requirement.

The disclosure requirements for PRF principal brochures will be enhanced and updated with reference to the disclosure requirements for comparable products under other SFC product codes. The PRF’s principal brochure must also contain disclosures as required by the newly introduced information disclosure templates which set out the minimum disclosure requirements for each of the four types of investment portfolios. These templates will be published on the SFC’s website.

Implementation timeline

The SFC proposes a 12-month transitional period for compliance with:

1. the revised PRF Code for PRFs currently authorized or applying for authorization with the SFC before the effective date, and which have key operators currently acting for SFC-authorized PRFs (Existing Operators
2. certain provisions of the revised PRF Code for PRFs with Existing Operators applying for SFC-authorization on or after the effective date (New PRFs).

For all other New PRFs, the revised PRF Code will take effect immediately upon its gazettal.

Consultation timeline

The Consultation is open for comment until 19 March 2021.