Author: Rory Gallaher
Service Area: Financial Services
Date: December 2012
Country: Hong Kong


Financial Services Newsletter
Issue 8 of 2012: December


Hong Kong domiciled funds – a changing landscape

by Alwyn Li (

Fund structures in Hong Kong

The majority of funds available to the Hong Kong public are UCITS funds domiciled in Ireland or Luxembourg. Often the offering documents for these funds need to be amended to meet Hong Kong disclosure requirements. In practice, product issuers invariably need to go back to their home regulators to seek further approval in respect of such amendments. A locally domiciled unit trust dedicated to the Hong Kong market would avoid these hurdles.

A Hong Kong domiciled platform would not only allow greater flexibility in meeting local standards and disclosure requirements, but it would also open up other opportunities for product issuers. For example, an Approved Pooled Investment Fund for sale to MPF (mandatory provident fund) local retirement schemes needs to be Hong Kong domiciled. Also, as real estate properties are no longer eligible investments for the Immigration Department's Capital Investment Schemes, many fund houses are taking advantage of the gap by setting up and registering their Hong Kong domiciled fund products for such purposes.

Currently Hong Kong funds are established as unit trusts as restrictions in the Companies Ordinance on share buy backs and the reduction of share capital make companies with variable capital impractical.

Open-ended investment companies

To facilitate the development of the mutual funds industry in Hong Kong, the government has initiated discussions on a legal framework for locally domiciled open-ended or variable capital investment companies. Unlike a unit trust platform, the benefit of an open-ended investment company is that it has a separate legal identity. Also, trustees of a unit trust platform are mindful of the onerous duties and fiduciary obligations imposed on them under trust law, which can lead to inflexibility. As such, many hedge fund managers prefer an open-ended investment company vehicle.

Future developments

It has recently been reported that Hong Kong's Financial Services Treasury Bureau has made a proposal to the China Securities Regulatory Commission on mutual recognition. Under the proposal, Hong Kong domiciled funds could be sold to mainland investors and, in turn, PRC domiciled funds could be sold to Hong Kong investors. Generally, fund managers welcome such possible reforms which, for international houses, would make a Hong Kong domiciled platform more attractive.

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SFC consultation on proposals to enhance the regulatory regime for non-corporate listed issuers
by Scott Carnachan (

The Securities and Futures Commission (SFC) is consulting on proposals to enhance the regulatory regime for non-corporate entities that are listed on The Stock Exchange of Hong Kong Ltd (SEHK). You have until 24 December 2012 to make a submission on the proposals.

The proposals seek to apply the same level of regulation and market transparency to all listed entities, regardless of their legal form. Currently, some provisions in Parts XIII to XV of the Securities and Futures Ordinance (SFO) (which relate to market misconduct and disclosure of interests) apply only to listed entities that are in corporate form. In 2010, the SFC consulted on proposals to extend Parts XIII to XV of the SFO to listed collective investment schemes (CIS). The current proposals build on that consultation and also include other vehicles such as business trusts and partnerships that may be listed on SEHK.

Key elements of the proposals include:

  • amending the provisions of Parts XIII to XV of the SFO to expressly cover all forms of listed entities, with an exclusion for listed open-ended CIS from the disclosure of interests regime;
  • extending the SFC's powers to investigate and take action against breaches under Parts VIII and X of the SFO to cover all forms of listed entities;
  • extending the statutory disclosure requirement for price-sensitive information regarding listed corporations under Part XIVA of the SFO to all forms of listed entities (Part XIVA will come into effect on 1 January 2013 - Deacons earlier client alert on this new statutory disclosure requirement is available here). Listed CIS (primarily REITs and ETFs) are currently subject to various non-statutory disclosure requirements under the relevant SFC product codes;
  • clarifying that, for the purposes of the SFO, the "issuer" or the "listed corporation" of a listed depository receipt is the issuer of the underlying shares or units (and not the depository bank); and
  • excluding entities whose only listed securities are debentures from the disclosure of interests regime. This proposal will remove the current need for such entities to apply to the SFC for an exemption from the disclosure of interests regime.

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Five things fund promoters should know about "direct marketing" in Hong Kong
by Deepak Mahtani ( and Elizabeth MacDonald (

The provisions of the Personal Data (Privacy) (Amendment) Ordinance (PDPAO) relating to direct marketing are expected to come into effect in April 2013. Here we answer five key questions for fund promoters.

  1. I regularly contact my Hong Kong clients about fund products which may interest them. Is this direct marketing?
    Yes, the law defines "direct marketing" very broadly.

  2. How can I comply with the new requirements when direct marketing to Hong Kong clients for the first time?
    Before using personal data for direct marketing purposes, you (the data user) must inform the client (the data subject) that the personal data may be used for direct marketing and obtain the client's prior informed consent or indication of no objection. You must provide the client with information about the personal data to be used (e.g. name, telephone); the class of products, facilities or services to be marketed; and a response channel whereby the client can provide consent. For existing clients, there are "grandfathering" provisions: see question 4.

  3. Do I need to get the client's consent every time I wish to market a new product or service?
    Client consent can be obtained generally or selectively with regard to the intended use of the personal data, and one-off consent will be acceptable provided the consent is not withdrawn.

  4. What about existing clients? Are there any transitional measures?
    The PDPAO has "grandfathering" provisions: the direct marketing provisions will not apply if, before commencement of the PDPAO's direct marketing regime, (i) you explicitly and clearly informed the client of the intended use of the personal data for direct marketing of a class of products, facilities or services; (ii) you have used the data for this purpose; (iii) the client has not required you to stop doing so; and (iv) you otherwise comply with the PDPAO.

  5. Our Hong Kong office is a subsidiary of an international organisation. What steps should we be taking to ensure good data protection practices?
    Any transfer of personal data for direct marketing (whether intra group or not) must comply with the new PDPAO requirements. You will need to provide the information noted at 2 above in writing, state if such transfer is for gain, and obtain the prior specific informed consent of the client for such transfer. Companies transferring clients' personal data to group companies for use in direct marketing should review how such data is transferred, how such transfers are tracked and who is responsible for managing and monitoring personal data requests.

Non-compliance with the provisions where personal data are provided for gain will constitute a criminal offence with fines of up to HK$1,000,000 and imprisonment for up to five years; where the breaches are not in respect of provision of personal data for gain, the sanctions are fines of up to HK$500,000 and imprisonment for up to three years. A defence is available if the data user can prove that it took all reasonable precautions and exercised all due diligence to avoid the commission of the offence.

In order to benefit from the defence, companies are advised to review current practices regarding the collection and use of personal data in direct marketing in order to promote compliance with the PDPAO and to demonstrate adequate measures are in place.

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SFC licensing and compliance hints
by Rebecca Yip (

Licensing Information Booklet: The SFC revised the Licensing Information Booklet in November. In addition to revising the content relating to Type 10 regulated activity (providing credit rating services) and the SFC's online portal, it made the following clarifications:

  • technically speaking individual licence applications are submitted not just by the individual but also by the proposed licensed company because the licensed company has to verify that the information provided by the individual is "true, complete and correct". The SFC will also typically deal with the licensed company in relation to an individual application (Paras 7.4 -7.6)
  • in order to encourage use of the SFC Online Portal, the SFC has indicated that processing times may be faster if applications are submitted via the Portal (Para 7.11)
  • when applying for a replacement of a lost licensing certificate, a statutory declaration must be submitted - the SFC has removed the option of submitting a police report (Para 8.18)
  • the booklet makes it clear that all "significant" changes to the nature of business, types of service and business plan must be notified to the SFC (Table 4)

Investor Education Centre: The IEC was established in November 2012 and so the SFC's InvestEd site has been replaced with the IEC's website There is an email subscription service for receiving IEC updates.

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SFC routine inspection update
by Nick Chiu (

Updating the organisation chart: When the SFC conducts an onsite inspection, it will usually request a copy of the organisation chart, listing all employees and licensed persons, detailing any licences held by them and their respective positions, duties and responsibilities. It will save a lot of trouble if licensed firms keep the organisation chart updated on an ongoing basis.

Submission of financial returns online: The SFC's e-FRR System provides a platform for licensed firms to submit financial returns online through use of an e-Certificate. The SFC usually only issues two e-Certificates to each licensed firm and typically these go to the first two ROs to be appointed. It is important to remember however that e-Certificates should not be lent to others – the only person who should use a certificate to submit returns is the person to whom the certificate was issued. It is possible for non ROs, such as a financial controller or CFO to apply for their own e-Certificate, in which case they can submit returns on their own, subject to approval by the SFC.

Type 9 FRR filing reminder: Most type 9 licensees will need to submit their next semi-annual financial returns by 21 January 2013 and should remember to include a Form 12. If you require assistance in connection with financial return submissions, please let us know.

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Recent Deacons' publications

Hong Kong IP Bulletin - December 2012

CIRC releases new QDII rules: New opportunities to tap into PRC insurance funds

Please click here to view or download this publication.


Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.