Hong Kong’s Continuing Development As An Asset Management Hub

The value of Hong Kong domiciled retail funds grew 9 per cent year-on-year as at the end of June 2021, with net fund inflows of HK$62 billion. The number of SFC firms licensed for Type 9 regulated activity increased by 3 per cent to 1,930.

Throughout 2021 and into 2022, Hong Kong continued to take initiatives to advance its position as an asset and wealth management hub.

Fund Structures

The introduction by Hong Kong in recent years of new fund structures, namely the open ended fund company (OFC) structure administered by the SFC and the limited partnership fund (LPF) structure administered by the Companies Registry (CR), have proved popular.

OFCs have gained in popularity following the enhancements to the OFC regime in September 2020 (as covered in our previous article[ii]) and the introduction of the Government’s subsidy scheme (OFC Grant Scheme) in May 2021 (see below). LPFs have also proved a popular choice since their introduction in August 2020.

In addition, following the recent introduction of the statutory re-domiciliation mechanisms (see below), which provide legal and tax certainty for offshore funds wishing to re-domicile in Hong Kong, there should be additional uptake for the OFC and LPF structures.

OFC Grant Scheme

Under the OFC Grant Scheme, investment managers who have successfully incorporated an OFC or re-domiciled a non-Hong Kong fund corporation in Hong Kong as an OFC, can apply to the Government for a subsidy to cover up to 70 per cent of the eligible expenses in connection with that incorporation or re-domiciliation, capped at HK$1 million per OFC. An investment manager may apply for such a subsidy for a maximum of three OFCs.

The subsidy covers expenses paid to Hong Kong based service providers in relation to the incorporation of an OFC or the re-domiciliation of the non-Hong Kong fund corporation in Hong Kong as an OFC. Though the terms “incorporation” and “re-domiciliation” are not defined, based on guidance from the SFC, which also administers the OFC Grant Scheme, the following expenses should be eligible:

• Fees charged by law firms in respect of the preparation of the articles of association of the OFC, a subscription agreement for investors to subscribe for shares of the OFC, an investment management agreement between the OFC and the investment manager and a private placement memorandum (PPM) or other offering document in respect of the offering of the shares of the OFC.

• Fees charged by law or accountancy firms in respect of the provision of OFC formation related tax advice.

Under the OFC Grant Scheme, applications for an OFC subsidy must be made after an OFC has been successfully incorporated or re-domiciled and, in the case of a private OFC (as would normally be the case for a hedge fund using the OFC structure), no later than three months after the date of the certificate of incorporation or re-domiciliation issued by the Companies Registry.

The OFC Grant Scheme opened to applications on 10 May 2021 and will continue for three years until 9 May 2024. It is unclear whether the scheme requires the OFC to have been incorporated during that period of time or whether the scheme requires the application to be made during that period of time. It is important to make an application as early as possible because funding is limited to HK$270 million and once the funding has been fully committed to OFC subsidies, the application period may be curtailed. As a result, investment managers considering the setup of a fund may wish to incorporate an OFC as early as possible to maximise the opportunity to receive an OFC subsidy.

Statutory Re-domiciliation Mechanism

On 30 September 2021, both the Securities and Futures (Amendment) Ordinance 2021 and the Limited Partnership Fund and Business Registration Legislation (Amendment) Ordinance 2021 (Re-domiciliation Ordinances) were passed into law. These Re-domiciliation Ordinances enable foreign investment funds to be re-domiciled and registered in Hong Kong as either OFCs or LPFs depending on their legal form.

Under the Re-domiciliation Ordinances, after a re-domiciliation, a foreign investment fund in corporate form becomes and continues as an OFC and a foreign investment fund in limited partnership form continues to exist as an LPF. The re-domiciliation will neither create a new legal entity, nor affect the identity or continuity of the re-domiciled foreign investment fund.

At the same time, re-domiciliation will neither prejudice any existing contract, property, right, obligation or liability of the re-domiciled foreign investment fund, nor affect any legal proceedings commenced by or against the fund. With effect from the re-domiciliation date, all property of the foreign investment fund is the property of the re-domiciled OFC or LPF, as the case may be.

For Hong Kong tax purposes, the re-domiciliation does not amount to a transfer of assets or a change in the beneficial ownership of the assets of the foreign investment fund so it will not give rise to any Hong Kong stamp duty implications.

For an overseas corporate fund, an application should be made to the SFC to register the overseas fund as an OFC. As soon as reasonably practicable after such registration, the SFC will notify the CR which will then issue a certificate of re-domiciliation, certifying that the overseas fund has become an OFC.

For an overseas limited partnership fund, an application should be made to the CR by the general partner to register a non-Hong Kong limited partnership fund as an LPF. Such application must be submitted on behalf of the general partner by a Hong Kong firm or a solicitor. On registration, the CR will issue a certificate to that effect.

Within 60 days after the re-domiciliation, the re-domiciled OFC or the re-domiciled LPF must take all reasonable steps to procure the de-registration in its place of incorporation or its place of establishment (as the case may be), failing which the re-domiciled OFC’s registration with the SFC may be cancelled or the Registrar of Companies may strike the name of the re-domiciled LPF off the LPF Register, unless an approval for extension is granted.

Virtual Asset Management

Like a number of other asset management centres, Hong Kong has been looking at how best to regulate the sale and management of virtual assets, the issue being that many virtual assets do not fall within the definition of either “securities” of “futures contracts” under the Securities and Futures Ordinance (SFO).

Back in November 2018, the SFC published a statement and two circulars setting out its regulatory framework for virtual assets and its expectations. In particular, it stated that firms (VA managers) that hold a Type 9 (asset management) licence and manage portfolios that invest, solely or partially, in virtual assets that do not constitute securities or futures contracts and which have (i) a stated investment objective to invest in virtual assets, or (ii) an intention to invest 10 per cent or more of the gross asset value of the portfolio in virtual assets (de minimis threshold), would be subject to a set of pro forma terms and conditions (Type 9 T&Cs) imposed by way of licensing conditions.

The SFC subsequently published those Type 9 T&Cs in November 2019 and they cover a number of key aspects, including:

(i) General Principles – a requirement that the senior management of a VA manager should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the manager;

(ii) Organisation and Management Structure – including requirements relating to governance structure, senior management responsibilities, human resources, liquid capital, segregation of duties, conflicts, compliance, and risk management;

(iii) Virtual Asset Fund Management – including requirements regarding investing within the mandate, best execution, order allocation, house accounts, disclosure of leverage, and liquidity management;

(iv) Custody – including requirements regarding the safeguarding of fund assets and client money;

(v) Operations – including requirements relating to record keeping, fund portfolio valuation, audits, and side pockets;

(vi) Dealing with the Fund and Fund Investors – including requirements regarding the provision of adequate information to fund investors to enable them to make informed decisions about their investments;

(vii) Marketing Activities – including requirements that only professional investors should be permitted to invest in virtual asset funds (other than SFC authorised funds); and

(viii) Fees and Expenses – including requirements as to the disclosure and reasonableness of charges, commissions and rebates.

For these purposes “virtual assets” means digital representations of value which may be in the form of digital tokens, any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether they amount to “securities” or “futures contracts” as defined under the SFO.

As the with the Fund Manager Code of Conduct, certain of the Type 9 T&Cs are only applicable to VA managers that are responsible for the overall operation of a fund or which have been delegated responsibility for that function.

The joint circular published in January 2022 by the SFC and the Hong Kong Monetary Authority on intermediaries’ virtual asset related activities set out a number of new requirements in respect of the distribution of virtual asset products and the provision of virtual asset dealing services and advisory services, but did not change the requirements which apply to VA managers in respect of their management activities.

Footnotes:

[i] https://www.sfc.hk/-/media/EN/files/COM/Reports-and-surveys/AWMAS2020_e.pdf

[ii] https://www.ifcreview.com/articles/2021/june/hong-kong-strengthens-its-position-as-a-private-equity-and-hedge-fund-centre/

Gavin Cumming
Mr. Cumming joined the firm in 2005 and has day-to-day responsibility for the firm’s non-contentious financial services practice. He is recognized by AsiaLaw Leading Lawyers as a leading lawyer in financial services regulation. Mr. Cumming has broad and deep experience in corporate, commercial and tax matters with a particular focus on strategic and operational initiatives of asset managers, investment banks, private banks and other wealth managers, insurance companies, broker-dealers and market infrastructure operators. He has a wealth of experience in electronic trading and clearing systems, the formation of private funds, including hedge funds and private equity funds, capital raising for funds, the authorization of public funds for sale to the retail public, private equity portfolio transactions, change of control transactions involving regulated financial institutions, and ongoing compliance issues for regulated financial institutions.

Timothy Loh
Mr. Loh founded the firm in 2004 and has led it since its inception. He is responsible for the firm’s overall management and direction. He is recognized by independent editorial publications, including Chambers & Partners, the Asia-Pacific Legal 500 and Asialaw Leading Lawyers, as a leading lawyer in financial markets regulation, investment funds and mergers and acquisitions. Since founding this firm, he has advised clients on mergers & acquisitions, the aggregate value of which has exceeded US$3 billion. He has particular expertise in mergers & acquisitions involving regulated financial institutions. At the same time, he has taken lead roles in representing clients in seminal cases defining the ambit of the law governing financial markets and financial services in Hong Kong. He has appeared before the Legislative Council of Hong Kong a number of times to speak on proposed legislative changes to redefine the regulatory framework governing the financial markets in Hong Kong.