FAQs – Publicly offered investment products: Open-ended Fund Companies

The Securities and Futures Commission (SFC) has published revised frequently asked questions (FAQs) relating to Open-ended Fund Companies (OFCs). The FAQs aim to „provide basic information to market practitioners in respect of open-ended fund companies“, thereby addressing a wide range of topics ranging from registration issues to the discontinuation of sub-funds.
Besides some editorial changes (renumbering of pages), this latest revised version contains modifications to the following existing FAQs and the addition of a new one, which read as follows – as quoted:
FAQ 20: Are OFCs qualified for the mutual fund recognition (“MRF”) arrangements entered into by the SFC? (page 19 – modified)
Answer: SFC-authorized funds structured in the form of OFCs are eligible under the scope of the MRF arrangements entered into by the SFC with the Swiss Financial Market Supervisory Authority, the Autorité des Marchés Financiers of France, the Financial Conduct Authority of the United Kingdom, the Commission de Surveillance du Secteur Financier of Luxembourg, the Dutch Authority for the Financial Markets of the Netherlands and the Securities and Exchange Commission of Thailand, respectively11. SFC-authorized Islamic OFCs are also eligible under the scope of the MRF arrangement entered into by the SFC with the Securities Commission of Malaysia11. Discussions are underway with other relevant overseas regulators with a view to seeking the inclusion of OFCs in the MRF arrangements. Further updates will be made where there are relevant developments.
FAQ 21B: Can a private OFC apply for an extension of time for the publication and filing of its annual report? (page 22 – new)
Answer: Pursuant to 9.8 of the OFC Code, an annual report of an OFC must be published within four months of the end of the OFC’s financial year (“AR Publication Period”). 9.9 of the OFC Code further provides that all financial reports published by the OFC must be filed with the SFC within the time frame specified in 9.8 of the OFC Code (“AR Filing Period”). The SFC may modify or relax the application of a requirement in the OFC Code if it considers that, in particular circumstances, strict application of the requirement would operate in an unduly burdensome or unnecessarily restrictive manner. Any application from a private OFC seeking a waiver from the AR Publication Period and/or AR Filing Period must be supported by detailed reasons why the waiver is sought. Generally, the SFC may consider granting a waiver where strict application of the requirement would be unduly burdensome or unnecessarily restrictive, including for example, where a private OFC involves a fund-of-funds structure and there is a difference in the financial accounts publication period between the underlying investment fund and that of the OFC, or where other substantive difficulty in meeting the requirement is otherwise demonstrated. OFCs are encouraged to contact the relevant case officers for consultation in advance should they wish to apply for such waiver.
FAQ 23: Can multiple custodians be appointed for an OFC? Where multiple custodians are appointed, what would be the rights and liabilities of each custodian? (page 24 – modified)
Answer: Section 112ZA(2) of the SFO requires that all the scheme property of an OFC must be entrusted to a custodian of the OFC for safekeeping. This does not preclude the appointment of multiple custodians (including by the appointment of a different custodian for each sub-fund). In any case, the OFC must ensure that no scheme property should be left without custody.
It is noted that applications for registration of a private OFC and/or its sub-funds may include a proposed appointment of multiple custodians from time to time. Please be reminded that where multiple custodians are to be appointed, the instrument of incorporation and/or custodian agreement of the OFC should include provisions achieving the following:
(i) ensure that all scheme property must be duly entrusted to the custodian(s) of the OFC;
(ii) demarcate the rights and liabilities of each custodian clearly as to the respective scheme property that each custodian is entrusted with and responsible for; and
(iii) provide for a default mechanism to place into custody any scheme property potentially arising at the umbrella-level OFC (such as any assets which may be attributed to the umbrella due to accounting treatment, or otherwise arising) to a specified custodian of the OFC.
Please be reminded that pursuant to Section 112ZA(4) of the SFO, each custodian appointed by an OFC is subject to the duty to take reasonable care, skill and diligence to ensure the safe keeping of the scheme property of the OFC that is entrusted to it. In addition, custodians of an OFC should observe the custody requirements in the OFC Code. For example, each custodian must ensure that it has sufficient experience, expertise and competence in safekeeping the asset types in which the OFC invests; and maintain adequate internal controls and systems commensurate with the custodial risks specific to the type and nature of assets in which the OFC invests. The appointment of each custodian of an OFC is subject to the SFC’s approval. Applicants are welcome to contact the relevant case officers to seek further guidance from the SFC if in doubt, especially where a public OFC would like to appoint multiple custodians.