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Hong Kong’s SFC Concludes Proposed Amendments To Code On Pooled Retirement Funds.

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Legal Analysis & News – Asia Pacific – Hong Kong – Regulatory & Compliance – Investment Funds

11 November 2021

On 28 October 2021, the Securities and Futures Commission (SFC) released the consultation conclusions on proposed amendments to the Code on Pooled Retirement Funds (PRF Code). The amended PRF Code will become effective upon gazettal, which is expected to be some time in November 2021 (Effective Date). The proposals are part of the SFC’s holistic review of the PRF Code following the revision of the Code on Unit Trusts and Mutual Funds (UT Code) which was implemented in 2019, as well as the codifications of existing practices.
 

Key proposed amendments                           

                                                                          

Key proposed amendments to the PRF Code include:
 

  1. Introduction of obligations for key operators (i.e. product providers, trustees, management companies and insurance companies)

  2. Introduction of requirements in relation to fund operations (e.g. valuation and pricing, dealing, reporting, pricing errors, suspension and deferral of dealings, and transactions with connected persons)

  3. Strengthening requirements for trustees of PRFs (i.e. enhancement of annual independent internal control review requirements and submission of an internal control review report to the SFC)

  4. Introducing specific requirements for different types of investment portfolios
     

The proposed amendments under the consultation conclusions are substantially the same as those set out in the SFC’s consultation paper issued in December 2020, with clarifications to specific requirements such as obligations of PRFs’ key operators and to allow flexibility for certain operational and disclosure requirements. The following are some of the clarifications:
 

  • For the purpose of “constitutive documents”, material agreements may include but are not limited to investment management agreements and custodian agreements. (para 16)

  • A product provider is responsible for procuring other relevant parties to observe all the requirements of the PRF Code. The term “relevant parties” means the relevant key operators, namely the trustee, management company, insurance company and Hong Kong representative. (para 17)

  • The appointment of a management company for an investment portfolio which is not a direct investment fund is optional. In such case, the management company should hold the appropriate SFC licence or be based in an acceptable inspection regime, and comply with other eligibility requirements and relevant obligations under the amended PRF Code. (para 34)

  • The product provider should comply with the requirements for “PRF Documentation” and “Fees and Charges” of Chapter 8 of the amended PRF Code. The investment restrictions in Chapter 8 and the requirements for valuation and pricing shall be complied with by the management company, and where no management company is appointed, by the trustee or the insurance company of the PRF. (para 42 and 43)

  • An investment portfolio (FoF) which is classified as a fund investing in SFC-authorised funds should disclose the identities of the underlying funds and their respective proportions / ranges. A change in the respective proportion of underlying funds within a disclosed range would not require the SFC’s prior approval. (para 54)

  • For a FoF which invests in non-retail APIFs, the names and key information of these APIFs (including their investment objectives and policies and the risk factors) should be disclosed in the principal brochure. (para 82)

  • For a FoF, it is clarified that the sponsor (usually the Product Provider) is not forbidden from charging sponsor fees, as long as this is fully disclosed in the principal brochure. (para 61)

  • For investment portfolios that are closed for new subscriptions, information may be provided to existing scheme participants separately upon request. (para 74)

  • The information disclosure templates set out the minimum disclosure requirements for each type of investment portfolio. Product providers are allowed flexibility for the format of the principal brochure. (para 81)

  • For FoF, in terms of disclosure of the aggregate ongoing fees of underlying funds (calculated on a pro-rata basis), an increase in fees from the current level up to the permitted maximum level as disclosed in the principal brochure will not require the SFC’s prior approval. The principal brochure should be updated as soon as reasonably practicable. (para 76)
     

The SFC will provide further guidance to the industry by way of FAQs.
 

Implementation timeline
 

Existing PRFs and those applying for the SFC’s authorisation before the Effective Date, with key operators currently acting for SFC-authorised PRFs, will have (unless otherwise specified) a 12-month transitional period from the Effective Date for compliance. In all other cases, the amended PRF code will take immediately from the Effective Date.


 

For more information, please contact:

Pauline Woo, Counsel, Deacons

[email protected]