On 23 December 2020, the Securities and Futures Commission (SFC) updated its Frequently Asked Questions (FAQs) relating to Open-ended Fund Companies (OFCs) on matters related to custodians and the custody of assets and records of the OFC.
Appointment of multiple custodians
Under the Securities and Futures Ordinance, all scheme property of an OFC must be entrusted to a custodian of the OFC for safekeeping. The SFC clarified that this does not preclude the appointment of multiple custodians. Each custodian is required to hold in its custody such scheme property entrusted to it capable of being held, and for other scheme property entrusted to it which by its nature cannot be held in custody, the custodian would need to maintain a proper record of such property in the account of the OFC in the custodian’s books.
Application of subscription monies
The SFC also clarified that any subscription money received by a private OFC pending allotment of shares is monies being held on behalf of subscribing investors and is not the property of the OFC. Custodians need to keep subscription money in a separate designated collection account pending allotment of shares in the OFC. Once subscription in the OFC is accepted, the custodian should pay such amounts into a segregated bank account of the OFC within one business day.
Maintenance of “accounting” records by the custodian of a private OFC
In relation to the duty of a private OFC custodian to maintain proper and up-to-date records of all scheme property it holds or is entrusted to it, the FAQs clarify that such records should enable tracing of all movement of scheme property through the private OFC custodian’s systems with frequent reconciliations. It is expected that such records would be sufficient to show particulars of the private OFC’s liabilities (including financial commitments and contingent liabilities) and records of items such as holdings, transaction settlement status, corporation actions, cash balances, accrued fees, receivables, payables, and so on should be maintained to facilitate reconciliation.
Aside from the above clarifications, the FAQs also provide an update on the supporting documents required for an application for the appointment of a custodian which holds an SFC licence for conducting type 1 (dealing in securities) regulated activities, including content requirements for the custodian’s supporting organisational chart and the custody operational flow chart.