Focus: Hong Kong – Financial Services – July 2008

New reciprocal arrangements between Hong Kong and Australia

In brief: On 7 July 2008, the Securities and Futures Commission of Hong Kong and the Australian Securities and Investments Commission signed a Declaration on Mutual Recognition of Cross-Border Offering of Collective Investment Schemes to expedite the public offering of collective investment schemes to retail investors in their respective markets. Partner Matthew Barnard (view CV) and Lawyer Angela Hui look at what these new arrangements mean for Australian funds going to Hong Kong, while Partner Susan Burns (view CV) and Senior Associate Penelope Barclay look at what it means for Hong Kong funds looking to enter the Australian market.

• Hong Kong
• Australia

How does it affect you? Managers of Hong Kong collective investment schemes wishing to offer their schemes to Australian retail investors may be eligible for exemptions from Australian scheme registration, licensing and product disclosure requirements. Australian funds will for the first time have the opportunity to market their products to the retail public in Hong Kong In the future, Australian fund product design may take advantage of the reciprocal arrangements to streamline the Hong Kong authorisation process

Hong Kong

Background

Previously, an Australian fund would not be authorised by the Hong Kong Securities and Futures Commission (the SFC) for retail distribution in Hong Kong because it did not have distinct trustee and manager roles.

In contrast, for funds that were established in a 'recognised jurisdiction' (such as Isle of Man or Luxembourg), the SFC would generally have their applications reviewed on the basis that the funds' structural and operational requirements and core investment restrictions already complied in substance with the SFC Code on Unit Trusts and Mutual Funds (the Code) (subject to a few exceptions).

New arrangement under the declaration

Under the new arrangement, Australian funds (other than hedge funds and, it would appear, property funds) are now capable of being authorised in Hong Kong. The SFC will process the authorisation application of an Australian fund on the basis that it has substantially complied with the disclosure, operational and reporting requirements of the Code. What is vital to this recognition is that the Australian fund must be managed by a manager licensed by the Australian Securities & Investments Commission (ASIC) and registered with ASIC. In addition:

• The fund assets must be held by a custodian licensed by ASIC, which must be separate from the fund manager. This requires a third-party custodian rather than a single responsible entity. Many, but not all, Australian funds should already satisfy this requirement.
  This appears to be a legacy of the SFC's requirement that there be a separate trustee and manager. Funds that are managed by a single responsible entity, where the custodial function is undertaken by the same entity, will not be able to take advantage of this arrangement. It is not yet clear whether investment schemes where the custodian is an entity associated with the manager will be similarly prohibited.
• The fund must comply with the monthly dealing requirements as set out in the code (monthly unit pricing and transactions). Most ASX-listed funds (who are already subject to reporting requirements) should have no difficulty satisfying these dealing requirements.
• The fund must meet the core investment restrictions set out in the code. While waivers may be given on a case-by-case basis, the code essentially requires that a fund has 'hard-wired' investment parameters, for example, as set out in the trust deed. With Australian funds, the parameters or guidelines are usually set out in the product disclosure statement, but these can always be changed at a later date. It remains to be seen whether the SFC might consider this requirement satisfied by means of a suitable undertaking (see further below).
• As with other foreign funds, the Australian fund must appoint a licensed Hong Kong representative.

Finally, the fund must not be principally marketed to investors in Hong Kong. The current threshold for foreign investment under the ASIC Regulatory Guide 178 Foreign Collective Investment Schemes is 30 per cent. As a matter of mutuality, the SFC has confirmed that it will also adopt the same threshold for the purpose of authorising Australian funds under the declaration, that is, an Australian fund will not be regarded as principally marketed to investors in Hong Kong if Hong Kong investors account for no more than 30 per cent of the value of the fund. The responsibility for monitoring and ensuring that such a threshold is not exceeded rests with the ASIC fund manager.

Some practical assistance

The SFC has also issued a circular to help clarify the requirements set out in the declaration and to provide some practical guidance on the actual authorisation procedures.

The circular also specifies certain information and documents that should be submitted to the SFC together with the application.

For example, the manager of the Australian fund should provide an undertaking to the SFC relating to various matters including that:

• it will take all reasonable steps to ensure that no more than 30 per cent, by value of all interests in the fund, are held by Hong Kong investors;
• it will comply with the requirements discussed above and also with certain specific provisions in the code; and
• it will notify the SFC of any significant changes concerning the fund and of any disciplinary action against the manager.

The manager will also need to submit its plan for monitoring compliance with the requirements of the declaration and the SFC in relation to the approval of Australian funds under the declaration.

The SFC is contemplating issuing a supplement or 'wrapper' that will highlight the nature and consequences of any significant differences between the Australian and Hong Kong regulatory requirements.

The manager will also need to submit its plan for monitoring compliance with the requirements of the declaration and the SFC in relation to the approval of Australian funds.

The SFC is contemplating that the Australian fund might issue a supplement or 'wrapper' to its standard product disclosure statement when distributing in Hong Kong. That wrapper would need to highlight the nature and consequences of any significant differences between the Australian and Hong Kong regulatory requirements.

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Australia

Nature of the relief

While, at this stage, ASIC has not released the underlying Class Order that will set out the conditions and limitations of the relief, the general principles are set out in the Declaration on Mutual Recognition of Cross-Border Collective Investment Schem es (the Declaration). The relief could be expected to be similar to that granted to Singaporean scheme operators in late 2007.

What schemes will be covered by the relief and what relief will be available?

All collective investment schemes authorised by the SFC, including mutual funds, unit trusts and other forms of collective investment schemes contemplated by the SFC's Code on Unit Trusts and Mutual Funds (exempt CIS), will be exempt from the requirement to register in Australia under Chapter 5C of the Corporations Act 2001 (Cth).

However, under the Declaration, to be entitled to this relief:

• the scheme manager must be licensed by the SFC to operate schemes in Hong Kong and must not be entitled to regulatory concessions available because it is subject to equivalent regulation outside Hong Kong; and
• marketing of the scheme must not be directed primarily at Australian investors or no more than 30 per cent of the value of interests in the scheme can be held by Australian members.

Licensing and disclosure relief will also be available. The exact terms of this relief are not yet available but we would expect them to be similar to those recently granted to Singaporean operators.

How to obtain the relief

As noted above, the relevant Class Order relief has not yet been released by ASIC. However, if it is similar to that granted to Singaporean operators late last year, the Hong Kong manager of the exempt CIS would need to actively seek the relevant exemption by:

• registering in Australia as a foreign company;
• lodging various documents with ASIC including:
  • evidence that it is authorised in Hong Kong to operate exempt CIS;
  • a deed poll covenanting to (among other things) comply with Hong Kong regulatory requirements and submitting to the non-exclusive jurisdiction of Australian courts;
  • the scheme's constituent documents and the most recent prospectus and financial statements; and
  • written consent to disclosures between ASIC and the SFC.
• agreeing to provide ongoing information to ASIC including:
  • significant changes to its approvals and registration to enable ASIC to determine whether their Hong Kong regulation remains sufficiently equivalent to justify the exemption; and
  • any breach of the Class Order relief.

What are the conditions for relying on the Class Order?

It is likely that, to rely on the class order, the Hong Kong manager will need to comply with certain conditions. Again, assuming that these are analogous to those granted to Singaporean operators, they will probably include:

• giving retail investors a prospectus for the scheme that complies with Hong Kong regulatory requirements and including in that prospectus information which is relevant to Australian retail investors (eg outlining their rights and remedies under Hong Kong dispute resolution mechanisms and significant Australian taxation implications);
• providing specified information about the exempt CIS to members;
• providing ASIC with annual financial statements of the exempt CIS; and
• maintaining a register of Australian-based members.

Conclusion

The Hong Kong regulatory system already has streamlined procedures for 'recognised jurisdictions'. These jurisdictions include the Isle of Man, Luxembourg, Ireland and United Kingdom. The new process for an Australian fund is different from that available for the existing recognised jurisdiction schemes, and it is too early to tell which route, in practice, will be easier. However, this is an important milestone, as this is the first mutual agreement of its kind reached between the SFC and an overseas regulatory authority. The inability of Australian funds, globally one of the most active and developed financial services industries, to access the Hong Kong retail markets has been seen by some as an anomaly, and the new reciprocal agreement is likely to be of interest to many industry participants.

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For further information, please contact:

Matthew Barnard International Partner, Hong Kong Ph: +852 2903 6212 Matthew.Barnard@aar.com.au		Susan Burns Partner, Sydney Ph: +61 2 9230 4697 Susan.Burns@aar.com.au
Tim Manefield International Partner, Hong Kong Ph: +852 2903 6216 Tim.Manefield@aar.com.au		Nigel Papi International Partner, Shanghai Ph: +86 21 6841 2828 Nigel.Papi@aar.com.au
Robert Clarke International Partner, Singapore Ph: +65 6535 6622 Robert.Clarke@aar.com.au		Nigel Russell International Partner, Ho Chi Minh City Ph: +84 8 822 1717 Nigel.Russell@aar.com.au

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