FAQs – Publicly offered investment products: Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds

The Securities and Futures Commission of Hong Kong (SFC) has published revised Frequently Asked Questions (FAQs) on Post Authorization Compliance Issues of SFC-authorized Unit Trusts and Mutual Funds. These FAQs cover issues such as ongoing requirements after the fund or trust was approved, notification requirements in case of (possible) trading suspension, or subsequent authorization obligations, if a fund’s strategy is to be changed – just to name a few.
This latest version contains numerous revisions throughout the entire document, ranging from editorial changes only (e.g. insertion of a missing word) to the addition of multiple new FAQs. Below, we present those FAQs that were added to the document anew. Those that have been essentially modified are listed at the bottom of this Event.
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Newly added FAQs – as quoted:
FAQ 4B: How does the reporting threshold of pricing errors set out in paragraph 10.2A (and its Note) of the UT Code apply where SFC-authorized funds have multiple simultaneous pricing errors with different root causes? (Page 9)
Answer: Pursuant to paragraph 10.2A of the UT Code, any pricing errors of SFC-authorized funds resulting in an incorrect price of 0.5% or more of the net asset value (NAV) per unit/share must be reported to the SFC immediately. Managers of SFC-authorized funds must report to the SFC all simultaneous pricing errors of a fund, including where the errors have different root causes, if their aggregate impact results in an incorrect price of 0.5% or more of the NAV per unit/share on any dealing day.
FAQ 4C: What are the compensation requirements for the pricing errors of SFC-authorized funds falling under Note to 10.2A of the UT Code? (Page 10)
Answer: All investor(s) and/or SFC-authorized fund(s) affected by the pricing errors falling under paragraph 10.2A (and its Note) of the UT Code are expected to be compensated pursuant to the requirements set out in paragraph 10.2B of the UT Code. Nevertheless, the SFC will review such pricing error(s) holistically by taking into account all the relevant circumstances (eg, the duration, reasons and materiality of the pricing error, and justifications by the management company) to ascertain the appropriate compensation arrangements and other remedial measures (if any) on a case-by-case basis.
FAQ 4D: What are the compensation requirements for the pricing errors of SFC-authorized funds which are offered both in and outside of Hong Kong? (Page 10)
Answer: Managers of SFC-authorized funds should comply with all applicable local and overseas rules and regulations governing the compensation arrangements for pricing errors (including paragraph 10.2B of the UT Code), and ensure all affected investors receive fair treatment regardless of their location.
FAQ 4E: If a material breach has occurred in relation to an SFC-authorized UCITS fund, what form should the manager submit to inform the SFC of the material breach? (Page 10)
Answer: Pursuant to paragraph 4.1(c) of the Overarching Principles Section of the Handbook, management companies of all SFC-authorized schemes are required to inform the SFC promptly of any material breaches. Since UCITS funds are subject to their home regulators’ supervision, we have adopted the following streamlined process for such funds.
– Managers of UCITS funds should inform the SFC of material breaches by submitting the completed Ongoing Compliance Form for Filing of Material
Breach(es) (Breaches Filing Form). The Breaches Filing Form is only applicable to:
(i) breach(es) of investment restriction(s) under the fund’s home jurisdiction’s laws and regulations; and/or
(ii) breach(es) of other restriction(s) or requirement(s) that is/are subject to the fund’s home regulator’s supervision.
– Nevertheless, the following breaches should still be reported to the SFC by submitting the completed Ongoing Compliance Form for Reporting of Material Breach(es) (Breaches Reporting Form):
(i) breach(es) of provisions under the UT Code that are applicable to UCITS funds (eg, the fund’s net derivative exposure); and/or
(ii) breach(es) of other applicable SFC-specific disclosure requirements (eg, investments in certain specific asset classes, risk disclosures, disclosures of ongoing charges and past performance information, etc.).
– The Breaches Filing Form and Breaches Reporting Form allow managers to file or report breaches of multiple funds in a single form, if the nature of the breaches (eg, the laws and regulations being breached) and other key facts and circumstances (eg, the affected period, underlying reason(s) and responsible party(ies)) are largely the same.
– Where no Hong Kong investors invest in the UCITS fund during the affected period, managers are not required to file or report the material breaches of the UCITS fund to the SFC.
FAQ 4F: The Breaches Filing Form consists of two parts (Part A and Part B). When does the manager of a UCITS fund need to submit the two parts respectively? (Page 11)
Answer: Where a breach falling under the streamlined process has occurred, the manager of the relevant UCITS fund should promptly inform the SFC upon the discovery of the breach, by completing and submitting Part A of the Breaches Filing Form to the SFC. Subsequently, the manager of the relevant UCITS fund is required to file to the SFC further details of the breach, including the corresponding remedial measures (including all of the required compensation arrangements) and the reason(s) for the breach. The manager is expected to do so by completing and submitting Part B of the Breaches Filing Form to the SFC once the following parties do not have any comments on the breach and the corresponding remedial measures (including all of the required compensation arrangements) taken or to be taken (and to the extent that any such party has any comment(s), all such comment(s) have been properly addressed):
(i) the depositary;
(ii) to the extent that compensation to affected Hong Kong investor(s) is required and the compensation methodology and calculation are required to be reviewed by an independent auditor under the laws and regulations of the fund’s home jurisdiction, the independent auditor; and
(iii) the home regulator.
The manager of the relevant UCITS fund will also be required to provide certain confirmations as provided under the Breaches Filing Form.
FAQ 4G: What should the manager of a UCITS fund do when an event with a material adverse effect arises from a breach or pricing error of an SFCauthorized UCITS fund? (Page 12)
Answer: Managers are reminded to inform the SFC promptly of any event which has a material adverse effect on an SFC-authorized fund or its investors (in the case of a UCITS fund, such as the withdrawal or suspension of authorization or approval for public offering in its home jurisdiction, and the imposition of any conditions or restrictions, changes in any authorization or approval conditions by the home regulator, etc.). This applies at all times, including when an event with a material adverse effect arises from a breach or pricing error of an SFCauthorized UCITS fund subsequent to the submission of the corresponding Breaches Filing Form and/or Pricing Errors Filing Form (as the case may be). The SFC may require the submission of further information and documents as it deems appropriate in respect of any breaches and/or pricing errors of any SFCauthorized funds (including UCITS funds) on a case-by-case basis.
FAQ 16E: Under what circumstance(s) may fund managers shorten the written notice period to investors for 11.1 Scheme Changes? (Page 27)
Answer: Normally, one month’s prior written notice is expected to be provided to investors for 11.1 Scheme Changes, whereas a shorter notice period may be permitted where the proposed scheme changes are of demonstrable benefit to investors as provided under Note (2) to 11.2 of the UT Code or otherwise agreed by the SFC. A shorter notice period is acceptable for 11.1 Scheme Changes if the fund manager has obtained written consent from all of the fund’s investors. In case of doubt, early consultation with the SFC is encouraged.
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##### The following FAQs were modified:
– FAQ 3A1, page 4: What are the notification requirements regarding the suspension of dealings of an SFC-authorized fund?
– FAQ 4, page 8: If a pricing error has occurred in relation to an SFC-authorized UCITS fund, what form should the manager submit to inform the SFC of the pricing error?
– FAQ 4A, page 9: The Pricing Errors Filing Form consists of two parts (Part A and Part B). When does the manager of a UCITS fund need to submit the two parts respectively?
– FAQ 5, page 12: A fund may change its investment policy or strategy or restrictions on the use of derivatives. Would prior approval from the SFC and prior notice to investors be required regarding such change?
– FAQ 11A, page 18: Do scheme changes involving (a) an appointment of investment delegate(s) which are currently managing other existing SFCauthorized fund(s) and (b) the removal of investment delegate(s) require prior approval from the SFC pursuant to paragraph 11.1(b) of the UT Code? Would prior notice be required to be provided to investors regarding these changes?
– FAQ 19, page 28: What are the disclosure and approval requirements for an existing SFC-authorized fund which intends to invest in the Mainland market through the Northbound Shanghai Trading Link7 and the Northbound Shenzhen Trading Link under the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect (collectively, “Stock Connect”) respectively?
– FAQ 20, page 31: What are the disclosure and approval requirements for an existing SFC-authorized fund which intends to invest in the Mainland debt securities market through CIBM Direct and/or Bond Connect?
– FAQ 27, page 38: Paragraph 11.6 of the UT Code provides that as an alternative to the distribution of printed financial reports, holders may be notified of where such reports, in printed and electronic forms, can be obtained within the relevant time frame (Financial Reports Notification). Can an SFC-authorized fund which is currently using the Financial Reports Notification arrangement continue to distribute its financial reports to holders in such manner?