With investors looking for stable income, an increasing number of fixed income and high yield bond funds making regular dividend payments are being offered in Hong Kong, some of which pay dividends or expenses out of capital so as to enhance or increase the amount of dividends received by investors. With this in mind, the Securities and Futures Commission in Hong Kong (SFC) has recently issued a circular to intermediaries reminding them of the special risks attaching to such products and their obligations in selling them. The SFC emphasised that intermediaries should not treat such products as suitable for all investors. The SFC has also updated its FAQs to clarify the information required to be disclosed to investors.
Application of FAQ 34
The updated disclosure requirements are applicable to SFC authorised funds that are making payments of dividends out of capital or paying expenses out of capital, thereby effectively increasing the net distributable income available for dividend payments.
Information to be disclosed
The fund’s offering documents (including KFS) should clearly state the fund’s dividend policy and also include prominent risk warnings for the payment of dividends and/or expenses out of capital. The warning statements should highlight the impact of such payments on the fund’s NAV and the capital available for investment (i.e. payment out of capital is similar to a return or withdrawal of capital). These statements should also be included in the upfront risk disclosure box of the fund’s marketing materials.
The compositions of the dividends for the last 12 months should be made available on a rolling basis, broken down into the relative amounts paid out of (i) net distributable income and (ii) capital. Such information can be made available by the manager / Hong Kong representative on request and also on the fund’s website.
Sample disclosures and the definition of net distributable income
The revised FAQ 34 also provided guidance as to (i) the format of disclosure, (ii) the minimum content requirements for dividend compositions, (iii) a prescribed warning statement, as well as, (iv) the period that should be covered. The SFC has defined "net distributable income": expenses paid out of capital should be deducted from the gross income; unrealised gains should not be counted and realised gains / net distributable income not distributed as dividend in a financial year should be counted as capital thereafter.
There is a six month transitional period (expiring on 7 May 2013) for funds and managers to comply with the new disclosure requirements for dividend composition. However, the enhanced disclosures for offering documents and marketing materials should be made as soon as possible.
The SFC’s circular and FAQs can be downloaded via the links below: