HK open-ended fund rules “too strict” in some areas

Private funds would likely shun Hong Kong's proposed structure for open-ended fund companies (OFCs) because the rules are too stringent in certain areas, said consultancy CompliancePlus in its submission to the local securities regulator.

The company also argued for other amendments to the proposals for the long-awaited framework. These included that the watchdog should clearly set out the differences between the available fund structures and should offer a pledge on how long it would take to process applications for the new funds.

Hong Kong's Securities and Futures Commission (SFC) had drafted the OFC rules in response to investment industry calls for a more flexible fund structure than the unit trust vehicle currently on offer in the territory. The two-month consultation period ended yesterday.

However, the requirements are too strict in respect of the investment scope of private funds, said CompliancePlus in the document sent to the SFC yesterday and seen by AsianInvestor.

The SFC has proposed that, under the OFC framework, 90% of a private fund's allocation should be invested in assets permitted under a type 9 licence, as well as cash, bank deposits, certificates of deposit, foreign currencies and foreign exchange. The other 10% – the 'de minimis' limit – can go into other types of instruments that would be more relevant for alternative asset managers.

But 10% is too restrictive a threshold and would discourage private OFCs from being set up in Hong Kong, said CompliancePlus, It would also “severely and unnecessarily limit the variety of products available to investors”. Instead, the consulting firm proposed that the de minimis limit be raised to 30%.

“It is important to draw a distinction between privately offered OFCs and publicly offered OFCs,” it explained. “While publicly offered OFCs should comply with more stringent rules, private OFCs should have flexibility to pursue their investment strategies, which is recognised in the proposal itself.”

CompliancePlus also argued that the SFC should not – as it has proposed – have to approve material scheme changes of a private OFC, because these relate to a company’s internal affairs. The regulator should simply have to be notified that such changes have been made, said the firm in its submission.

Separately, CompliancePlus expressed concern about the SFC's ability to handle fund authorisation and registration under the proposed new 'one-stop process': “We suggest that SFC should make a performance pledge, as it is important for applicants to know in advance the processing time of application.”

The consultancy also felt clearer information would be needed about the available fund structures. This could take the form of a “comparison table” laying out the difference between the OFC code and the Code on Unit Trusts and Mutual Funds. It would allow interested parties to make an informed decision and so that the SFC can prevent regulatory arbitrage between the two structures.

Along similar lines, CompliancePlus said that the regulator should be prepared to provide more workshops and information on the OFC structure.