2nd Day of Christmas – Open-Ended Fund Companies (OFCs) in Hong Kong
At the moment, a Hong Kong-domiciled open-ended mutual fund can only be structured as a unit trust – not as a corporation or company – due to restrictions in the Companies Ordinance on the redemption of shares. The industry has lobbied for many years for legislation that would allow HK-domiciled open-ended vehicles to be structured as corporations.
The proposed OFC legislation would allow such HK-domiciled open-ended corporations to be established, with at least two directors – one of whom must be HK-resident. Publicly distributed funds structured as OFCs would need to go through the usual fund authorization process with the Securities and Futures Commission (SFC), but the proposed legislation goes further to suggest that even privately distributed OFCs must be “registered” with the SFC, although it is not yet clear what form such “registration” would take.
Currently, privately placed funds are not subject to any requirement to register with or to notify the SFC before they may be privately placed. If adopted, a requirement that privately placed HK-domiciled OFCs be registered would mean that they will bear a higher burden than non-HK domiciled funds that are privately placed, unless the intention is to extend such registration requirement to non-HK domiciled funds as well.
Additionally, the investment manager(s) and custodian of an OFC would need to be Hong Kong-based and (in the case of the investment manager) licensed and regulated by the SFC. These are even higher eligibility thresholds than are currently imposed on publicly available retail funds.