Hong Kong - New Developments From The SFC For The Open-ended Fund Company Regime Relating To Customer Due Diligence And Custodial Requirements.
Legal News & Analysis - Asia Pacific - Hong Kong - Regulatory & Compliance
12 January 2021
Hong Kong's Securities and Futures Commission (SFC) published a number of developments to its open-ended fund companies (OFC) regime in the last few weeks of 2020. On 23 December 2020, the SFC released both its conclusions ("Conclusions") on the customer due diligence (CDD) requirements for OFC consultations and updated frequently asked questions (FAQ) relating to OFCs to clarify custodial requirements.
The Conclusions represent the culmination of the SFC's further consultation on the CDD requirements to be imposed on OFCs, as released in September 2020 in its consultation conclusions related to further enhancements to the OFC regime ("September Conclusions").1 The new CDD requirements will come into effect after a six-month transition period following the completion of the legislative process to amend the Securities and Futures Ordinance (SFO). The September Conclusions contained, amongst other things, liberalisation of the types of entities that can act as custodian and the updated FAQ provide clarification of the requirements for an OFC's custodial arrangements. We discuss the Conclusions and updated FAQ in more depth in this Alert.
Customer due diligence requirements
Pursuant to the Conclusions2, instead of requiring OFCs to maintain a significant controllers’ register, an OFC is required to appoint a responsible person to perform anti-money laundering and counter-financing of terrorism (AML/CFT) functions; the appointment of which should be made by the board of directors of the OFC. The OFC's responsible person would carry out AML/CFT functions provided under Schedule 2 to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, similar to the requirements imposed on limited partnership funds under the Limited Partnership Fund Ordinance in an effort to harmonise AML/CFT requirements across different investment vehicles.
Updated FAQ related to custodian requirements
The SFC has provided useful updates to its FAQ (adding questions 6A, 23, 24 and 25) relating to OFCs to clarify requirements for custodial arrangements, which include the following:
Further guidance on the documentation required for an application in which the proposed custodian for a private OFC is a licensed corporation or registered institution licensed or registered for Type 1 regulated activity, which includes evidence to demonstrate the proposed custodian's compliance with eligibility requirements under 7.1(b) of the Code on Open-ended Fund Companies ("OFC Code"). Such evidence includes, for example: (1) a copy of a valid certificate showing its licensing/registration status; (2) the name and CE number of the responsible officer(s) or executive officer(s) responsible for the overall management and supervision of its custodial function; (3) an updated organisational chart; and (4) where the existing systems and controls of the proposed custodian for the safekeeping of client assets of its Type 1 registered activity business will not be used for safekeeping of the scheme property of the OFC, a custody operational flowchart together with the reason(s) for not using such existing systems and controls for safekeeping of the OFC's assets.
An OFC may appoint multiple custodians, with each custodian required to comply with the requirements related to the safekeeping of the OFC's assets under the SFO and the OFC Code.
With respect to the segregation requirement for OFC assets, subscription money received and held pending the allotment of shares in the relevant private OFC is not considered property of the OFC, but rather is held on behalf of the subscribing investors until the subscription is accepted.
Further guidance on the meaning of "accounting" records in terms of recordkeeping for purposes of paragraph 7 of Appendix A to the OFC Code. For example, the records should enable all movements of the OFC's assets to be traced through the private OFC custodian’s systems with frequent reconciliations.
Whilst the guidance provided by the updated FAQ is effective immediately, the new CDD requirements will come into effect after a six-month transition period following the completion of the legislative process to amend the SFO.
As part of the published material for OFC developments, the SFC also released an updated Information Checklist, as published on the SFC website.
We will continue to monitor further developments in the OFC regime as the SFC refines the necessary legislative changes to give further effect to its proposals. If you have any questions on any of the above matters, please do not hesitate to liaise with your usual contact at Baker McKenzie or the lawyers listed in this Alert.
For further information, please contact:
Sophia Man, Partner, Baker McKenzie
1 Please refer to our previous client alert regarding the OFC enhancements for a more detailed separate discussion on prior changes to the OFC regime: https://insightplus.bakermckenzie.com/bm/financial-institutions_1/hong-kong-sfc-confirms-enhanced-open-ended-fund-company-regime.