Getting ready for mutual recognition from a licensing perspective

Our client alert, Mutual fund recognition between HK and Mainland China – Exciting opportunities ahead, discussed the recent announcement by Hong Kong’s Securities and Futures Commission (SFC) of a plan for mutual recognition of recognised funds between China and Hong Kong. It is anticipated that qualifying SFC-authorised funds will be domiciled in and operating from Hong Kong. We set out below some of the practical points for fund management companies to consider from an SFC licensing perspective.

• It is unclear at this stage what is meant by “operating from Hong Kong”. However, we would expect that as a minimum, the fund management company for an SFC-authorised fund will need to be based in Hong Kong. If this is the case, the fund management company must be licensed by the SFC for type 9 regulated activity (asset management).
• In addition to being licensed by the SFC, the fund management company will also need to satisfy the SFC’s requirements under Chapter 5 of the Code on Unit Trusts and Mutual Funds and be approved by the SFC. The fund management company needs two key persons, each with five years of public fund experience. The two key persons do not need to be responsible officers of the SFC licensed entity.
• If the fund management company is subject to a licensing condition such that it can only provide services to “professional investors”, then that condition would need to be removed before the entity can be approved by the SFC to manage SFC authorised-funds.
• The SFC is only willing to remove the professional investor condition after the licensed entity has updated its business plan to cover its expanded scope of business. At the same time, the company’s compliance manual would need to be revised to include obligations relevant to the new retail business.