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Funds Management - Real Estate & Superannuation

Focus: Funds Management – October 2008

Offering Hong Kong investment schemes in Australia

In brief: The Australian Securities and Investments Commission has released a class order to facilitate the offering to Australian retail investors of collective investment schemes which have been authorised by the Hong Kong Securities and Futures Commission. Partner Susan Burns (view CV) and Senior Associate Penelope Barclay look at a new regime where such schemes will effectively be governed by Hong Kong law, thereby reducing the Australian regulatory requirements which would otherwise apply.

How does it affect you?

  • Hong Kong operators wishing to take advantage of the waivers available under the class order will need to apply to ASIC – the class order does not apply automatically.
  • While the class order provides useful exemptions from the scheme registration and disclosure requirements and some waivers from the licensing requirements, Hong Kong operators wishing to issue interests in their SFC-regulated schemes to Australian retail investors will still need to enter into an intermediary arrangement with an Australian financial services licensee.

Background

Recently, the Australian Securities & Investments Commission (ASIC) and the Hong Kong Securities and Futures Commission (the SFC) signed the Declaration on Mutual Recognition of Cross-Border Offerings of Collective Investment Schemes. The SFC has issued a circular providing practical guidance on the Hong Kong authorisation procedures for Australian schemes. ASIC has released CO 08/506 Hong Kong collective investment schemes (the Class Order) which puts into effect the reciprocal Australian arrangements applying to operators of SFC-authorised schemes by:

  • providing exemptions from the scheme registration and certain disclosure and licensing requirements under the Corporations Act 2001 (Cth); and
  • setting out the conditions on which these exemptions are granted.

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What types of schemes are covered by the Class Order?

The Class Order covers collective investment schemes that are:

  • authorised by the SFC. It does not cover those schemes which are offered in Hong Kong but exempted from the SFC authorisation process because they are the subject of equivalent regulation in their home jurisdiction;
  • structured either as trusts or mutual fund corporations; and
  • not principally aimed at Australian investors. To qualify, the scheme marketing must not be primarily directed at Australian investors and no more than 30 per cent of the value of the scheme interests may be held by Australian investors.

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Exemptions

Subject to meeting certain conditions, the Class Order provides exemptions to Hong Kong scheme operators from:

  • the scheme registration requirements;
  • the financial product disclosure requirements, apart from:
    • the dispute resolution arrangements applying to retail investors (including membership of an external dispute resolution scheme); and
    • the advertising restrictions,

provided that the operator gives Australian investors a copy of the current SFC-authorised offer document;

  • the following licensing requirements:
    • dealing in scheme assets;
    • dealing in derivatives and foreign exchange contracts for hedging purposes, (provided that such dealings with Australian clients are not a significant part of the operator's business); and
    • providing a custodial or depository service for the scheme.

ASIC has indicated that:

  1. in order to issue interests in the scheme to Australian investors, Hong Kong operators will need to enter into an intermediary authorisation arrangement with an Australian licensee under section 911A(2)(b) of the Corporations Act1; and
  2. it will not require the operator to be licensed in order to provide any general financial product advice contained in the Hong Kong offer document which must be provided to Australian investors2.

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Application

The operator must apply to ASIC for relief under the Class Order and provide a significant amount of supporting documentation, including:

  • evidence of the scheme's authorisation by the SFC;
  • a deed of covenants relating primarily to legal, jurisdictional and exchange of information requirements;
  • copies of the scheme's constitution, current offer document and most recent financial statements and audit reports;
  • the processes the operator will use to monitor and assess its compliance with the Class Order and other relevant Australian regulatory requirements; and
  • an outline of how it intends to seek Australian investors.

Before the Hong Kong operator can rely on the Class Order, ASIC must confirm that the documentation it has provided is adequate.

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Conditions

The Hong Kong operator must also meet a large number of ongoing conditions, including:

  • disclosing in the offer document provided to Australian investors various matters of particular relevance to retail investors such as the fact that the scheme will be regulated by Hong Kong, rather than Australian, law; differences between the Australian and Hong Kong regulatory regimes; rights and remedies available under Hong Kong law and how they can be accessed by Australian investors; taxation implications of the investment and dispute resolution and cooling-off arrangements;
  • notifying ASIC, within five business days, once a Hong Kong offer document has first been provided to Australian investors;
  • providing annual financial and audit reports to ASIC;
  • maintaining a member register in Australia; and
  • notifying ASIC about significant changes to the operator's SFC authorisation, the Hong Kong regulatory requirements, any exemptions granted to the operator by the SFC and any disciplinary action taken by an overseas regulator against the operator.

If you would like more information on this or any other funds management matter, please call one of our experts below.

Footnotes
  1. Regulatory Guide 178 Foreign Collective Investment Schemes at [RG 178.62].
  2. The offer document will be treated as an exempt document in these circumstances.

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For further information, please contact:

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