The SFC s Authorization, Compliance Requirements and Compliance Issues on Exchange Traded Funds ( ETFs )

Transcription

1 The SFC s Authorization, Compliance Requirements and Compliance Issues on Exchange Traded Funds ( ETFs ) June 2014 Gwendoline Lam, Research Assistant CompliancePlus Consulting Limited 801, Two Exchange Square, 8 Connaught Place, Central, Hong Kong Tel: (852)

2 Disclaimer The information in this presentation is CONFIDENTIAL. It is intended solely for use by the person to whom it is given and may not be reproduced or redistributed. This presentation is not for distribution to the general public but for intended recipients only and may not be published, circulated, reproduced or distributed in whole or part to any other person without the written consent of CompliancePlus Consulting Limited. In addition, this presentation is for informational and illustrative purposes only and should not be construed as legal, tax, investment or other advice. This presentation does not constitute an offer to provide legal and accounting services and opinion by CompliancePlus Consulting Limited. All Copyrights reserved. CompliancePlus Consulting 2

3 Agenda 1. Brief Introduction of ETFs 2. SFC s Authorization for ETFs 3. ETFs Compliance Requirements 4. Further Information CompliancePlus Consulting 3

4 1 BRIEF INTRODUCTION OF ETFS What are ETFs? What are the differences between ETFs and mutual funds? What are the types of ETFs listed in Hong Kong? 4

5 1. Brief Introduction of ETFs (1) What are ETFs? Exchange Traded Funds Passively managed and open-ended funds All listed ETFs on the Hong Kong Stock Exchange ( HKEx ) securities market are authorised by the Securities and Futures Commission ( SFC ) as collective investment schemes ( CIS ). Designed: o To track the performance of their underlying benchmarks (e.g. an index, a commodity such as gold, etc.); and o To offer investors an efficient way to obtain cost-effective exposure to a wide range of underlying market themes Bought or sold through the brokers anytime during the securities market s trading hours CompliancePlus Consulting 5

6 1. Brief Introduction of ETFs (1) What are ETFs? (Examples) CompliancePlus Consulting 6

7 1. Brief Introduction of ETFs (1) What are ETFs? (List of ETF Managers) Issuer Name Telephone No. Website Enquiry 1 Blackrock Asset Management North Asia Limited isharesasiaenquiry@ blackrock.com 2 BOCI-Prudential Asset Management info@boci-pru.com.hk Limited 3 Bosera Asset Management (International) ask@bosera.com.hk Co., Limited etf 4 China Asset Management (Hong Kong) Limited hkfund_services@chinaa mc.com 5 China International Capital Corporation Hong Kong Asset Management Limited 6 China Universal Asset Management (Hong RQFIICSI300@ Kong) Company Limited ChinaUniversalAsset.com 7 CMS Asset Management (HK) Co., Limited enquiry@cmsamhk.com 8 CSOP Asset Management Limited info@csopasset.com 9 Da Cheng International Asset Management Company Limited CompliancePlus Consulting 7

8 1. Brief Introduction of ETFs (1) What are ETFs? (List of ETF Managers) (cont d) Issuer Name Telephone No. Website Enquiry 10 DB Platinum Advisors (part of Deutsche Bank Group) 11 E Fund Management (Hong Kong) Co.,Limited ml clientservice@efunds.com. hk 12 Enhanced Investment info@eip.com.hk Products Limited 13 ETF Securities (HK) Limited InfoHK@etfsecurities.com stor/hk/en-gb 14 Hai Tong Asset Managment (HK) Limited htiam@htisec.com 15 Hang Seng Investment Management Limited etf@hangseng.com 16 Harvest Global Investments Limited HGIclientservice@hk.jsfund 17 HSBC Investment Funds (Hong Kong) Limited HSBC ETFs Trust: ABF Hong Kong Bond Index Fund: hk HSBC ETFs Trust: hk ABF Hong Kong Bond Index Fund: ent.hsbc. com/hk-abf.cn HSBC ETFs Trust: hsbc.etf@hsbc.com.hk ABF Hong Kong Bond Index Fund: CompliancePlus Consulting 8

9 1. Brief Introduction of ETFs (1) What are ETFs? (List of ETF Managers) (cont d) Issuer Name Telephone No. Website Enquiry 18 Lippo Investments Management Limited Mirae Asset Global Investments (Hong Kong) Limited Ping An of China Asset Management (Hong Kong) Company Limited asset.pingan.com.hk k 21 Polaris Securities (Hong Kong) Limited Sensible Asset Management Hong Kong Limited m.hk 23 State Street Global Advisors Asia Limited 24 State Street Global Advisors Singapore Limited 25 The Vanguard Group, Inc CompliancePlus Consulting 9

10 1. Brief Introduction of ETFs (1) What are ETFs? (cont d) CompliancePlus Consulting 10

11 1. Brief Introduction of ETFs (2) What are the differences between ETFs and mutual funds? ETFs Sell creation units to authorized participants ( APs ) only, not investors Publish the contents of creation units daily Investors buy and sell shares on exchanges at the market price, not at NAV Can be more fully invested since cash does not flow in and out of the portfolio on a daily basis Mutual Funds Offer and redeem shares to the public Publish the contents of creation units continuously At the end of each business day, mutual funds calculate their net asset value ( NAV ) Investors buy and sell shares at the nextdetermined NAV (forward pricing) CompliancePlus Consulting 11

12 1. Brief Introduction of ETFs (3) What are the types of ETFs listed in Hong Kong? Physical ETFs Directly buy all the assets needed to replicate the composition and weighting of their benchmark (e.g. constituents of a stock index). However, some only buy a portion of the assets needed to replicate the benchmark or assets which have a high degree of correlation with the underlying benchmark. Some physical ETFs with underlying equity-based indices may also invest partially in futures and options contracts. Synthetic ETFs Do not buy the assets in their benchmark, but invest in financial derivative instruments to replicate the benchmark s performance. The ETFs are required to have collateral when investing in derivatives. An ETF s net risk exposure to any single counterparty cannot be more than 10% of its NAV. (Details on collateral requirements should refer to the SFC s press release.) CompliancePlus Consulting 12

13 2 SFC S AUTHORIZATION FOR ETFS Why should a fund require the SFC s authorization? What does the SFC s authorization involve? What are the authorization requirements? 13

14 2. The SFC s Authorization 2.1 Why should a fund require the SFC s authorization? Pursuant to the Securities and Futures Ordinance (Cap 571) ( SFO ), authorization by the SFC is required for all ETFs listed in Hong Kong. Unless one of the exemptions under section 103 of the SFO applies: e.g. funds that exclusively target professional investors * do not require SFC authorization. The SFC derives its fund authorization powers from section 104 of the SFO. The Code on Unit Trusts and Mutual Funds establishes guidelines for the authorization of collective investment schemes ( CIS ) which include ETFs ETF is authorized under the UT Code Chapter 8 Specialized Scheme. Subject to the SFC investment products team s approval *The term professional investors is defined in section 1 of Part 1 of Schedule 1 to the SFO and in the Securities and Futures (Professional Investor) Rules. CompliancePlus Consulting 14

15 2. The SFC s Authorization 2.2 What does the SFC s authorization involve? In order to authorize a fund which intends to offer its products to the public, we first consider the acceptability of: the fund s legal form and structure the fund s key operating parties, including the fund manager and the trustee/custodian the fund s operational features, e.g. dealing frequency, valuation, etc. the fund s investment nature and compliance with the relevant requirements of the UT Code the disclosure quality of the fund s offering document the fund s compliance with the UT Code s post-authorization obligations, e.g. notice period for fee increases, pricing errors, etc. Depending on the structure of the fund and the level of compliance with the UT Code, we may also consider other factors that are relevant to a specific fund application. CompliancePlus Consulting 15

16 2. SFC s Authorization 2.3 What are the authorization requirements? UT Code Part II: Authorization requirements Chapter 4: Trustee/Custodian Appointment of Trustee/Custodian 4.1 Every collective investment scheme for which authorization is requested must appoint a trustee/custodian acceptable to the Commission. Notes (1): Schemes established under trust must have a trustee and mutual fund corporations must have a custodian. This chapter lists the general obligations of the trustee/custodian, whichever is appointed. Trustees are expected to fulfill the duties imposed on them by the general law of trusts. In the case of a mutual fund corporation, the responsibilities of a custodian should be reflected in a constitutive document such as a Custodian Agreement. [see Appendix D] Notes (2): An acceptable trustee/custodian should either: (i) on an ongoing basis, be subject to regulatory supervision; or (ii) appoint an independent auditor to periodically review its internal controls and systems on terms of reference agreed with the SFC and should file such report with the SFC. [see Appendix G - Guidelines for Review of Internal Controls and Systems of Trustees/Custodians ] CompliancePlus Consulting 16

17 2. SFC s Authorization (3) What are the authorization requirements? Independence of trustee/custodian and the management company 4.7 The trustee/custodian and the management company must be persons who are independent of each other. 4.8 Notwithstanding 4.7 UT Code above, if the trustee/custodian and the management company are both bodies corporate having the same ultimate holding company, whether incorporated in Hong Kong or outside Hong Kong, the trustee/custodian and the management company are deemed to be independent of each other if:- (a) (i) they are both subsidiaries of a substantial financial institution; (ii) neither the trustee/custodian nor the management company is a subsidiary of the other; (iii) no person is a director of both the trustee/custodian and the management company; and (iv) both the trustee/custodian and the management company sign an undertaking that they will act independently of each other in their dealings with the scheme; or (b) the scheme is established in a jurisdiction where the trustee/custodian and the management company are required by law to act independently of one another. CompliancePlus Consulting 17

18 2. SFC s Authorization (3) What are the authorization requirements? Chapter 5: Management company and auditor Appointment of the management company 5.1 Every collective investment scheme for which authorization is requested must appoint a management company acceptable to the Commission, except as provided for self-managed schemes below. Note: The investment management operations of a fund management company or those of the investment adviser (where the latter has been delegated the investment management function) should be based in a jurisdiction with an inspection regime acceptable to the Commission. A list of acceptable inspection regimes is published on the Commission s website. The Commission will consider other jurisdictions on their merits and may accept an undertaking from the management company that the books and records in relation to its management of a scheme will be made available for inspection by the Commission on request. CompliancePlus Consulting 18

19 2. SFC s Authorization (3) What are the authorization requirements? 5.2 A management company must:- a) be engaged primarily in the business of fund management; b) have sufficient financial resources at its disposal to enable it to conduct its business effectively and meet its liabilities; in particular, it must have a minimum issued and paid-up capital and capital reserves of HK$1 million or its equivalent in foreign currency; c) not lend to a material extent; and d) maintain at all times a positive net asset position. Qualifications of Directors 5.4 The directors of the management company must be of good repute and in the opinion of the Commission possess the necessary experience for the performance of their duties. In determining the acceptability of the management company, the Commission may consider the qualifications and experience of persons employed by the management company and any appointed investment adviser. CompliancePlus Consulting 19

20 2. SFC s Authorization (3) What are the authorization requirements? General obligations of a management company 5.10 A management company must:-. a) manage the scheme in accordance with the scheme's constitutive documents in the best interest of the holders. It is also expected to fulfill the duties imposed on it by the general law; b) maintain or cause to be maintained the books and records of the scheme and prepare the scheme's accounts and reports. At least two reports must be published in respect of each financial year. These reports must be sent to all registered holders and filed with the Commission within the time frame specified in 11.6 UT Code; and c) ensure that the constitutive documents are made available for inspection by the public in Hong Kong, free of charge at all times during normal office hours at its place of business or that of its Hong Kong Representative and make copies of such documents available upon the payment of a reasonable fee. CompliancePlus Consulting 20

21 3 ETFS COMPLIANCE REQUIREMENTS What do ETFs comply with? What are the basic requirements of ETFs? What are the streamlined regulatory regime for ETFs? 21

22 2.1 What do the ETFs comply with? The SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (2nd edn, April 2013) Section II: Code on Unit Trusts and Mutual Funds Appendix I: Guidelines for Regulating Index Tracking Exchange Traded Funds (Section II: p.86 93) The Code on Unit Trusts and Mutual Funds ( UT Code ) have been in effect since 25 June CompliancePlus Consulting 22

23 2. ETFs Compliance Requirements (2) FOUR Basic Requirements of ETFs CompliancePlus Consulting 23

24 2.2 FOUR Basic Requirements of ETFs: Overview 1. General Compliance with the UT Code 2. Preparation of a Product Description Document (for ETFs that do not conduct IPO or its equivalents) 3. Specific Compliance with the UT Code: 8.6(a) (e) or 8.8 of the UT Code 4. To Be Listed or Traded on HKEx CompliancePlus Consulting 24

25 2.2 Basic Requirements for ETFs: (1) General Compliance with the UT Code Whether local/overseas ETFs Must comply with the structural, operational and core investment requirements under the UT Code Must also abide by the on-going compliance and reporting requirements under the UT Code subject to the applicable relief laid down in these guidelines if they seek authorization from the SFC. CompliancePlus Consulting 25

26 2.2 Basic Requirements for ETFs: (2) Preparation of a Product Description Document (for ETFs that do not conduct IPO or its equivalents) ETFs that do not conduct initial public offerings ( IPO ) or any forms of public sales or subscriptions are not obliged to produce a Hong Kong Offering Document as stated in 6.1 of the UT Code. Instead, they must prepare a Product Description Document in both English and Chinese. The term offering document shall be replaced by the term Product Description Document wherever the former appears in this UT Code (see Paragraph 10 below) in relation to this type of ETFs. CompliancePlus Consulting 26

27 2.2 Basic Requirements for ETFs: (2) Preparation of a Product Description Document [Example] CompliancePlus Consulting 27

28 2.2 Basic Requirements for ETFs: (3) Specific Compliance with the UT Code: 8.6(a) (e) or 8.8 Part I: Given ETF are index funds, the requirements set out in 8.6 (a) to (e) of the UT Code are broadly applicable to ETFs, unless otherwise stated in this appendix. General Criteria: 8(a) to 8(d) UT Code Are the strategies used by the index fund in tracking its index compatible with 8.6(b) of the UT Code? If the Fund invests in other appropriate investment instruments, such as derivatives permitted under this UT Code or otherwise accepted by the SFC, is it in accordance with the Fund s disclosed investment strategies and restrictions? Acceptable indices: 8(e)(i) to 8(e)(v) UT Code Are the criteria below followed? Clearly defined objective and/ or the market sector it aims to represent should be clear Index should be broadly based in general Index should be investible, where applicable Index should be transparent and published in an appropriate manner Objectively calculated and rules-based CompliancePlus Consulting 28

29 2.2 Basic Requirements for ETFs: (3) Specific Compliance with the UT Code: 8.6(a) (e) or 8.8 Part II: Where an ETF adopts: (structured funds) the strategy of investing in financial derivative instruments; or synthetic replication for the purpose of achieving its investment objective, the requirements set out in 8.8 of the UT Code must also be complied with. The management company of a structured fund and the issuer of financial derivative instruments shall be independent of each other. Where the scheme is a mutual fund company, the majority of the board of directors of the scheme shall be independent directors. The valuation of the financial derivative instruments has to be marked-to-market daily. Collateral has to be provided to limit the exposure of the scheme to the counterparty risk of the issuer of financial derivative instruments to no more than 10% of the NAV of the scheme. Collateral must meet the following requirements: liquidity, valuation, diversification, correlation, management of operational and legal risks, independent custody, enforceability, unavailability for secondary recourse Disclosure requirements CompliancePlus Consulting 29

30 2.2 Basic Requirements for ETFs (4) To Be Listed or Traded on HKEx It is a condition for authorizing an ETF that intends to be: primarily traded in Hong Kong; and authorized under the UT Code (referred to as Local ETFs in these guidelines), that it must be either listed or traded on the Stock Exchange of Hong Kong Limited. CompliancePlus Consulting 30

31 2.2 FOUR Basic Requirements of ETFs: Summary 1. General Compliance with the UT Code The structural, operational and core investment requirements The on-going compliance and reporting requirements 2. Preparation of a Product Description Document (for ETFs that do not conduct IPO or its equivalents) 3. Specific Compliance with the UT Code Index funds: 8.6(a) (e) UT Code Structure funds: 8.8 UT Code 4. To Be Listed or Traded on HKEx CompliancePlus Consulting 31

32 2. ETFs Compliance Requirements (3) Streamlined Regulatory Regime for ETFs CompliancePlus Consulting 32

33 2.3 Streamlined Regulatory Regime for ETFs: Overview 1. ETFs that do not conduct IPO: Annex I (refer to Basic Requirement 2) 2. General relief from 8.6 UT Code (refer to Basic Requirement 1) 3. General relief from 8.6(h) UT Code 4. Disclosure of Risk Warnings under 8.6(j) UT Code 5. Name of the ETF under 8.6(m) UT Code 6. Modified post-authorization notification and approval procedures a) Increase in Fees and Charges in 11.1A UT Code b) Publication of NAV in Local Newspapers in 11.7 UT Code CompliancePlus Consulting 33

34 2.3 Streamlined Regulatory Regime for ETFs: Overview (3) General relief from 8.6(h) UT Code Investment restrictions in 8.6(h)(i) and (ii) UT Code do not apply if: a) an ETF adopts a representative sampling strategy which does not involve the full replication of the constituent securities of the underlying index in the exact weightings of such index; b) the strategy is clearly disclosed in the Product Description Document/Hong Kong Offering Document of the ETF (as the case may be); c) the excess of the weightings of the constituent securities held by the ETF over the weightings in the index is caused by the implementation of the representative sampling strategy; d) any excess weightings of the ETF holdings over the weightings in the index must be subject to a maximum limit reasonably determined by the ETF after consultation with the SFC. In determining this limit, the ETF must consider the characteristics of the underlying constituent securities, their weightings and the investment objectives of the index and any other suitable factors; CompliancePlus Consulting 34

35 2.3 Streamlined Regulatory Regime for ETFs: Overview (3) General relief from 8.6(h) Investment restrictions in 8.6(h)(i) and (ii) UT Code do not apply if: (cont d) e) limits laid down by the ETF pursuant to paragraph 11(d) above must be disclosed in the Product Description Document/Hong Kong Offering Document (as the case may be); f) disclosure must be made in the ETF s semi-annual and annual reports as to whether the limits imposed by the ETF itself pursuant to paragraph 11(d) have been complied with in full. If there is non-compliance with the said limits during the relevant reporting period, this must be reported to the SFC on a timely basis and an account for such non-compliance should be stated in the report relating to the period in which the non-compliance occurs or otherwise notified to investors; and g) nothing in paragraphs 11(d), (e) and (f) above applies to an overseas ETF governed by an Acceptable ETF Regime or by the relevant overseas jurisdiction (see the Note to paragraph (d) in Annex (III) to these guidelines). CompliancePlus Consulting 35

36 2.3 Streamlined Regulatory Regime for ETFs: Overview (4) Disclosure of Risk Warnings under 8.6(j) UT Code Provisions relating to disclosure of index funds information in 8.6(j) UT Code do not apply where Annex (I) does not require the same. In particular, where proper risk warnings are disclosed, provisions relating to disclosure of risk warnings in 8.6(j)(iv), (v), (vi), (vii), (x), (xi), (xii) and (xiv) UT Code need not be strictly adhered to. CompliancePlus Consulting 36

37 2.3 Streamlined Regulatory Regime for ETFs: Overview (5) Name of the ETF under 8.6(m) UT Code 8.6(m) UT Code does not apply if the name adopted is not misleading or deceptive as to the nature of the ETF and its investment objectives and strategy. CompliancePlus Consulting 37

38 2.3 Streamlined Regulatory Regime for ETFs: Overview (6) Modified post-authorization notification and approval procedures The notification and approval requirements under 11.1A and 11.7 of the UT Code are modified to the following extent: a) Increase in Fees and Charges in 11.1A UT Code: The prior notice requirements under 11.1A UT Code does not apply to adjustments in management fees if: i. the proposed adjustments in management fees do not require holders approval; and ii. either a notice for the fee adjustments is published as stated in paragraph 14(c) or where the ETF is governed by an Acceptable ETF Regime or in the relevant overseas jurisdiction (see the Note to paragraph (d) in Annex (III)), there is no notification requirement for this type of fee adjustments in that jurisdiction; CompliancePlus Consulting 38

39 2.3 Streamlined Regulatory Regime for ETFs: Overview (6) Modified post-authorization notification and approval procedures The notification and approval requirements under 11.1A and 11.7 of the UT Code are modified to the following extent: (cont d) b) Publication of NAV in Local Newspapers in 11.7 UT Code: On the basis that information is available to investors in accordance with paragraphs 17 to 21 in these guidelines (where applicable), the obligation under 11.7 UT Code to publish NAV in local newspapers is dispensed with. The management company must immediately notify the SFC as soon as practicable if dealing in units/shares on the SEHK ceases or is suspended. c) Unless otherwise waived or provided for in paragraph 24(g) below, all notices and public announcements made by ETFs in accordance with the UT Code and these guidelines must be prepared in both English and Chinese. Note: for avoidance of doubt, nothing in paragraph 14 shall exempt an ETF from compliance with 11.1, 11.4 and 11.5 of the UT Code. CompliancePlus Consulting 39

40 4 FURTHER INFORMATION What do ETFs comply with? What are the basic requirements of ETFs? What are the streamlined regulatory regime for ETFs? 40

41 For Further Information The individual ETF s website which shows detailed information about the ETF, including its prospectus, annual reports, fund fact sheet, NAVs, underlying benchmark values, holdings, historical performance, etc. The hyperlink to an individual ETF s website can be found on the ETF section of the HKEx website ( ETF information submitted by the respective ETF managers can also be obtained from the HKExnews website. These guidelines do not apply retrospectively to index tracking exchange traded funds already authorized on or before 24 October With respect to ETFs that have been submitted to the SFC for approval pursuant to this UT Code but have not been authorized before 24 October 2003, they may elect to comply with this UT Code as amended by these guidelines. These guidelines do not preclude the right of the SFC to impose any conditions for the authorization of an ETF as may be reasonable in the circumstances. CompliancePlus Consulting 41

42 About CompliancePlus CompliancePlus Consulting specializes in compliance and regulatory requirements for licensed firms, licensed persons, fund management companies, hedge fund managers and all types of financial institutions in Asia. Our team members have a proven track record of delivering practical and tested compliance solutions to our clients, with extensive industry experience in different areas and business divisions of the finance industry. Some of them have served as Senior Compliance personnel in major financial institutions with offices and operations across the Asia Pacific Region. CompliancePlus brings the most comprehensive and value-added compliance services to our clients, enhancing their competitiveness in the finance industry. This presentation is for information only and in no way constitute legal or other professional advice Contact: Josephine Chung, Director, CompliancePlus Consulting jchung@complianceplus.hk Tel: Copyrights 2014 CompliancePlus Consulting Limited CompliancePlus Consulting 42

43 - END - Thank you! CompliancePlus Consulting 43