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On 7 July 2008, the Hong Kong Securities and Futures Commission (SFC) and the Australian Securities & Investments Commission (ASIC) signed a Declaration on Mutual Recognition of Cross-border Offering of Collective Investment Schemes (Declaration). Both regulators see this initiative as a milestone. This is because the effect of the Declaration is the creation of new opportunities for the public offering of funds, already authorised by either the Hong Kong or the Australian regulator, in the other location. On the same day the SFC issued a Circular setting out some practical guidelines (Circular).
Both the SFC and ASIC are still fine-tuning their own local requirements for the authorisation process, disclosure of information and on-going compliance, and will publish further information in due course. In the spirit of promoting a "level playing field", it is expected that the approval criteria adopted by the SFC and ASIC will generally be comparable, for example in relation to disclosure and the types of documents required to be submitted for approval. For that reason, provided the local requirements can be met, the local approval process should be relatively straight forward. Indeed, the SFC stated in its press release, "ASIC-registered funds seeking to be marketed in Hong Kong still will require authorisation from the SFC but will enjoy a streamlined vetting process."
It would appear from the Circular that other than any separate information specifically required by the SFC, funds already registered with ASIC will be deemed to have substantially complied with the SFC’s Code on Unit Trusts and Mutual Funds.
However, the following issues merit further consideration:
- This will not provide a "backdoor" approval process. Neither regulator will permit a fund to be principally marketed to investors in its jurisdiction under this new regime. Australian regulations already provide that "the foreign collective investment scheme operator must not source more than 30% of the value of investments in the scheme or company from investors resident in Australia"; and the SFC indicated in the Circular that a similar 30% limit would be imposed on ASIC registered collective investment schemes seeking authorisation in Hong Kong. It is worthwhile to note that in practice, it may be difficult to monitor compliance with the 30% threshold for open-ended collective investment schemes, as investors are free to subscribe and redeem out of the schemes.
- ASIC registered funds are typically managed by a "responsible entity" so that the investment management and custodial functions are undertaken by that same entity. However, the SFC requires that the ASIC-regulated custodian for a fund be separate from the manager. This requirement may reduce the number of ASIC-registered funds which can be made available for retail distribution in Hong Kong under this new regime.
Fund managers with retail products already on sale in Australia or Hong Kong will no doubt be keen to explore the new business opportunities this Declaration promises and will be looking forward to the issuance by the regulators of the specific guidelines. We will keep you updated in this regard.
Clients will of course need to give separate consideration to tax issues in due course once each regulator has finalised the specifics of how it intends to implement the terms of the Declaration.
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