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The Securities and Futures Commission (SFC) has recently issued a consultation paper to propose changes to the open-ended fund company (OFC) regime.
The changes seek to fine-tune some areas in the current regulations on the OFC, with a view to enhancing Hong Kong’s competitiveness as a preferred fund domicile and encouraging more private funds to set up in Hong Kong. The key points of the consultation are as follows:
| 1. | Currently, entities that wish to act as an OFC’s custodian must satisfy the requirements for custodians under the SFC Code on Unit Trusts and Mutual Funds. The SFC proposed to allow intermediaries licensed or registered for type 1 regulated activities to act as custodians for private OFCs (subject to some further criteria). |
| 2 | The investment scope of a private OFC will expand to include “shares or debentures of a private company” and “loans”, provided that the private OFC’s assets must include a portfolio of those asset types the management of which would constitute a type 9 regulated activity. |
| 3. | Provisions will be introduced in the legislation to enable the “re-domicile” of an overseas corporate fund to Hong Kong using an OFC structure. It is intended there will be no change to the legal personality of the fund, and accordingly no transfer of assets will be necessary; and this may be significant from a stamp duty perspective. The existing rights and obligations under contracts made and the effectiveness of any resolution previously passed will remain unaffected by the fund’s registration as an OFC. |
| 4. | A new requirement for keeping a register of beneficial shareholders (significant controllers) under the OFC rules will be introduced. |
The new changes are proposed amidst the implementation of the Economic Substance Law of the Cayman Islands, which requires Cayman entities carrying on certain activities to maintain a level of operational substance within the Cayman Islands, commensurate with the income generating activities of the entity. Recently some private funds have seen changes in their investment delegation structure whereby the investment responsibilities are directly delegated to a Hong Kong licensed entity.
While the Cayman Islands have been a popular jurisdiction for managers to domicile their funds, with the proposed changes to the OFC regime, in particular the new provisions enabling re-domicile of funds, the OFCs may prove an attractive alternative for managers which carry on management activities in Hong Kong.
The SFC is inviting comments on the proposals, to be received no later than 20 February 2020.
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