Oversight August 2017 simmons-simmons.com elexica.com Mutual Recognition of Funds between France and Hong Kong Introduction The Securities and Futures Commission of Hong Kong (SFC) and the Autorité des Marchés Financiers (AMF) (collectively, the Authorities) concluded a Memorandum of Understanding (MoU) on 10 July 2017 to enhance cooperation in relation to (i) certain Covered Funds, being French-domiciled UCITS funds and Hong Kong-domiciled collective investment schemes, offered, marketed and distributed on a cross-border basis to the public in Hong Kong or retail investors in France respectively, and (ii) Covered Management Companies, being management companies of collective investment schemes, based in Hong Kong or France and licensed by the SFC or authorised by the AMF respectively. In light of increasing cross-border asset management activities, the conclusion of the MoU seeks to promote reciprocal market access for fund providers by facilitating cross-border offering, marketing and distribution of certain funds between the two jurisdictions. Under the Securities and Futures Ordinance (SFO) marketing of funds to the public is prohibited unless either within an exemption or the relevant advertisement is approved by the SFC. In practice the SFC will only approve advertisements in respect of funds which the SFC has authorised under the SFO. The MoU is the first agreement between Hong Kong and a member of the European Union which establishes the regulatory framework for distribution of eligible Hong Kong and French funds, which currently include general equity funds, bond funds and mixed funds. The MoU allows eligible Hong Kong funds and French UCITS funds to be distributed to retail investors in France and the public in Hong Kong respectively, through a streamlined authorisation process of one month, which may be extended to two months should additional information be required by the AMF or the SFC (as the case may be). With the one-month authorisation period, it is expected that SFC authorisation for Covered Funds will be quicker than the processing time for applications under the previous mutual recognition of funds arrangements entered into by the SFC. The SFC previously entered into mutual recognition arrangements with the Financial Market Supervisory Authority of Switzerland in December 2016 and the China Securities Regulatory Commission in 2015. Prior to this there have also been memoranda of understanding with reciprocal arrangements for certain funds with Australia, Malaysia and Taiwan. The MoU also stipulates a mechanism for regular dialogue and regulatory cooperation between the SFC and the AMF. Cooperation includes, amongst other things, exchange of information, cross-border supervisory on-site visits of Covered Management Companies and matters of mutual supervisory interest, such as regulatory developments. However, the MoU specifies that the scope of cooperation does not include enforcement actions which are covered by the International Organisation of Securities Commissions' Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. Each of the SFC and the AMF has published a circular (the SFC Circular and the AMF Circular respectively), attached to the MoU, regarding the requirements for French and Hong Kong originated Covered Funds and the application process for authorisation in the respective jurisdictions. 1
Requirements for French Covered Funds seeking SFC authorisation General principles In respect of a Covered Fund that has been authorised by the AMF and is seeking or has received authorisation to be offered, marketed and distributed to the public in Hong Kong, the following general principles apply: The French Covered Fund has to meet certain eligibility requirements, as described below. The French Covered Fund has to remain authorised by the AMF in France and is allowed to be offered, marketed and distributed to retail investors within France. The French Covered Fund has to operate and be managed in accordance with the relevant laws and regulations in France and its constitutive documents. The sale and distribution of the French Covered Fund in Hong Kong has to comply with the applicable laws and regulations in Hong Kong. The French Covered Fund and the French Covered Management Company has to comply with the additional rules released by the SFC governing the authorisation, post authorisation and ongoing compliance in the context of the offering, marketing and distribution of the French Covered Fund to the public in Hong Kong. Please refer to SFC requirements on French Covered Funds below. The French Covered Management Company of the French Covered Fund shall ensure holders in both France and Hong Kong receive fair treatment, including in respect of investor protection, exercise of rights, compensation and disclosure of information. Eligibility requirements French Covered Fund The MoU allows eligible French Covered Funds to be distributed to the public in Hong Kong through a streamlined authorisation process of one month (from the date the SFC confirms that it has received, to its satisfaction, the application documents), which may be extended to two months should the SFC require additional information. The MoU specifies that a French Covered Fund must meet the following requirements in order to enjoy the streamlined process: The French Covered Fund must be established, domiciled and managed in accordance with French laws and regulations and its constitutive documents. The French Covered Fund must be an undertaking for collective investment in transferable securities authorised in accordance with Article 5 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferrable securities which is authorised by the AMF for offering, marketing and distribution to retail investors in France under Article L. 214-3 of the French Monetary and Financial Code and Article 411-3 of the General Regulation of the AMF. At least 20% of the French Covered Fund s net asset value must be attributable to investors in France. The French Covered Fund must be a general equity fund, bond fund or mixed fund. The French Covered Fund must not use leverage exceeding 100% of its net asset value as calculated under the UCITS commitment approach provided by Article 42 of the Directive 2010/43/EU. The French Covered Fund must not invest in (i) physical commodities including precious metals or commodity based investments or real estate, or (ii) certificates representing them. The French Covered Fund must not be a money market fund, an exchange traded fund, an index fund, or a structured fund. The French Covered Fund must not have any share class with hedging arrangement other than currency hedging. The French Covered Fund must not pay any unreasonable turnover fees or percentage-based transaction fees to the French Covered Management Company or any of its connected persons. Should the French Covered Fund charge a performance fee, the fee: can only be payable no more frequently than annually; must be clearly disclosed in offering documents; and must be calculated: either against a benchmark, which is consistent with the risk and reward profile of the fund; or on a high-on-high principle (i.e. the fee can only be payable if the net asset value per unit/share exceeds the net asset value per unit/share on which the performance fee was last calculated and paid). In such case, if a performance fee is levied on the share class(es) offered to the investors in Hong Kong by the French Covered Fund, the reference to which the performance fee (commonly known as high water mark) is calculated must not be reset after SFC authorisation of the French Covered Fund. 2
Eligibility requirements French Covered Management Company A French Covered Management Company must meet the following requirements: The French Covered Management Company must be domiciled in France and authorised by the AMF to manage collective investment scheme in accordance with Article L. 532-9,II, 1 of the French Monetary and Financial Code, and Article 312-2 and Article 313-48 of the General Regulation of the AMF. The French Covered Management Company and its accountable director(s) (within the meaning of Article L. 532-9, II, 4 of the French Monetary and Financial Code) have not been subject to any of the following disciplinary actions taken by the AMF, in the past 3 years or since the date of the establishment of the French Covered Management Company if it has been established for less than 3 years: with respect to the French Covered Management Company: a withdrawal of its license by the AMF (in accordance with Article L.532-10 of the French Monetary and Financial Code); a temporary or permanent ban on providing some or all of the services previously provided (in accordance with Article L. 621-15, III, a of the French Monetary and Financial Code); or with respect to the accountable director(s) of the French Covered Management Company, a temporary or permanent ban on conducting some or all of their business activities (in accordance with Article L. 621-15, III, b of the French Monetary and Financial Code). Where the French Covered Management Company delegates the investment management decisions to another entity authorised to manage collective investment schemes in accordance with 313-77 of the General Regulation of the AMF, such entity is operating in one of the acceptable inspection regimes recognised under 5.1 of the UT Code. Eligibility requirements French Custodian The custodian appointed by the French Covered Fund should be a credit institution or an investment firm complying with the requirements set out in Article L. 214-10-1 of the French Monetary and Financial Code, in its version in force at the date of the entry into force of the MoU. SFC requirements applicable to French Covered Funds On the basis of the general principles discussed above, if a French Covered Fund complies with the relevant French laws and regulations, it is generally deemed to have complied in substance with the relevant SFC requirements and will enjoy a streamlined process of authorisation for offering to the public in Hong Kong. In the SFC Circular, the SFC states that, in view of the differences between the Hong Kong and French regulatory regimes, to ensure proper investor protection and consistency with existing Hong Kong SFC-authorised funds, there will be additional requirements with which a French Covered Fund has to comply when applying for SFC authorisation for offering, marketing and distribution to the public in Hong Kong under the mutual recognition, as well as other requirements which a French Covered Fund has to observe after obtaining SFC authorisation. These include: certain requirements under relevant SFC guidance including the SFC Handbook for Unit Trusts and Mutual Funds, InvestmentLinked Assurance Schemes and Unlisted Structured Investment Products, the Code on Unit Trusts and Mutual Funds (UT Code) and frequently asked questions issued by the SFC (a list of requirements is set out in an Annex to the SFC Circular); the appointment of a firm in Hong Kong as the representative of the French Covered Fund in compliance with Chapter 9 and 11.1(b) of the UT Code; operational and ongoing requirements, including reporting obligations; the French Covered Management Company shall ensure and procure its distributors to ensure that Hong Kong investors are able to bring actions concerning the French Covered Fund and the French Covered Management Company in the courts of Hong Kong; requirements on changes to the French Covered Funds, including notification requirements to the SFC and Hong Kong investors; requirements in the event of a breach of French laws and regulations or the requirements in the SFC Circular; requirements on the withdrawal of authorisation by the SFC and termination of the French Covered Fund; requirements regarding sale / distribution, offering documents, ongoing disclosure and advertisements. In particular, it is stated in the SFC Circular that a French Covered Fund may utilise the prospectus authorised by the AMF. In addition, the AMF-authorised prospectus may be supplemented by a Hong Kong covering document to comply with the disclosure requirements set out in the SFC Circular and to disclose any other information which may have a material impact on investors in Hong Kong; requirements on the language of offering documents, notices to Hong Kong investors, constitutive documents and financial reports of the French Covered Fund; and 3
requirements regarding advertisements and marketing materials of the French Covered Fund issued in Hong Kong. In particular, they shall comply with the Advertising Guidelines Applicable to CIS Authorized under the Product Codes. Requirements for Hong Kong Covered Funds seeking AMF authorisation General principles In respect of a Hong Kong Covered Fund that has been authorised by the SFC and is seeking or has received authorisation to be offered, marketed and distributed in France to investors that do not meet the criteria set out in art. D. 533-11 of the French Monetary and Financial Code, i.e. retail investors, the following requirements must be satisfied to enjoy the streamlined authorisation process: The Hong Kong Covered Fund has to meet certain eligibility requirements, as described below. The Hong Kong Covered Fund has to remain authorised by the SFC in Hong Kong and is allowed to be offered, marketed and distributed to the public within Hong Kong. The Hong Kong Covered Fund has to operate and be managed in accordance with the relevant laws and regulations in Hong Kong and its constitutive documents. The sale and distribution of the Hong Kong Covered Fund in France has to comply with the applicable laws and regulations in France. The Hong Kong Covered Fund and the Hong Kong Covered Management Company has to comply with the additional rules released by the AMF governing the authorisation, post authorisation and ongoing compliance in the context of the offering, marketing and distribution of the Hong Kong Covered Fund to retail investors in France. Please refer to AMF requirements on Hong Kong Covered Funds below. The Hong Kong Covered Management Company of the Hong Kong Covered Fund has to ensure holders in both Hong Kong and France receive fair treatment, including in respect of investor protection, exercise of rights, compensation and disclosure of information. Eligibility Requirements Hong Kong Covered Fund A Hong Kong Covered Fund must meet the following requirements: The Hong Kong Covered Fund must be established, domiciled and managed in accordance with Hong Kong laws and regulations and its constitutive documents and authorised by the SFC under section 104 of the SFO for public offering in Hong Kong. At least 20% of the Hong Kong Covered Fund s net asset value must be attributable to investors in Hong Kong. The Hong Kong Covered Fund must be a general equity fund, bond fund or mixed fund. The Hong Kong Covered Fund must not use leverage exceeding 100% of the fund s net asset value as calculated under the commitment approach provided under 8.9(b) of the UT Code. The Hong Kong Covered Fund must not invest in (i) physical commodities including precious metals or commodity based investments or real estate, or (ii) certificates representing them. The Hong Kong Covered Fund must not be a money market fund, an exchange traded fund, an index fund, or a structured fund. The Hong Kong Covered Fund must not have share class with hedging arrangement other than currency hedging. The Hong Kong Covered Fund must have at least one dealing day for redemption every two weeks. Should a Hong Kong Covered Fund charge a performance fee, the fee: can only be payable no more frequently than annually; must be clearly disclosed in offering documents; and must be calculated: either, against a benchmark, which is consistent with the risk and reward profile of the fund; or on a high-on-high principle (i.e. the fee can only be payable if the net asset value per unit/share exceeds the net asset value per unit/share on which the performance fee was last calculated and paid). In such case, if a performance fee is levied on the share class(es) offered to the investors in France by the Hong Kong Covered Fund, the reference to which the performance fee (commonly known as high water mark) is calculated must not be reset after AMF authorisation of the Hong Kong Covered Fund. 4
Eligibility Requirements Hong Kong Covered Management Company A Hong Kong Covered Management Company must meet the following requirements: The Hong Kong Covered Management Company must be domiciled in Hong Kong and licensed by the SFC for Type 9 (asset management) regulated activity in accordance with Part V of the SFO. The Hong Kong Covered Management Company and its responsible officers (as defined in Part 1 of Schedule 1 to the SFO) who are licensed for Type 9 (asset management) regulated activity have not been subject to any of the following disciplinary actions taken by the SFC, in the past 3 years or since the date of the establishment of the Hong Kong Covered Management Company if it has been established for less than 3 years: with respect to the Hong Kong Covered Management Company, a revocation or suspension of its licence by the SFC pursuant to section 194 of the SFO; and with respect to the responsible officers of the Hong Kong Covered Management Company, a revocation or suspension of their licences by the SFC pursuant to section 194 of the SFO. Where the Hong Kong Covered Management Company delegates the investment management decisions to another entity authorised to manage collective investment schemes, such entity is operating in one of the acceptable inspection regimes recognised under 5.1 of the UT Code. Eligibility Requirements Hong Kong Custodian The custodian/trustee appointed by the Hong Kong Covered Fund must be a bank licensed under section 16 of the Banking Ordinance; or a subsidiary of such a bank; or a trust company approved by the Mandatory Provident Fund Schemes Authority. AMF requirements on Hong Kong Covered Funds To ensure proper investor protection and consistency with existing French authorised funds, there will be additional requirements with which a Hong Kong Covered Fund has to comply when applying for AMF authorisation for offering, marketing and distribution to retail investors in France under the mutual recognition, as well as other requirements which a Hong Kong Covered Fund has to observe after obtaining AMF authorisation. These include: the Hong Kong Covered Management Company is required to comply with the remuneration rules provided under Articles 14a and 14b of the Directive 2009/65/EC of the European Parliament and of the Council of 13 July 200 on the coordination of laws, regulations and administrative provisions if the total amount of assets under management (AUM) distributed in France represents more than 50% of the global amount of AUM; the Hong Kong Covered Fund must appoint a firm in France as its representative in compliance with article 421-27 of the General Regulation of the AMF; operational and ongoing requirements, including reporting obligations; the Hong Kong Covered Management Company shall ensure and procure its distributors to ensure that French investors are able to bring actions concerning the Hong Kong Covered Fund and the Hong Kong Covered Management Company in the courts of France; requirements on changes to the Hong Kong Covered Funds, including notification requirements to the AMF and French investors; requirements in the event of a breach of Hong Kong laws and regulations or the requirements in the AMF Circular; requirements on the withdrawal of authorisation by the AMF and termination of the Hong Kong Covered Fund; requirements regarding sale / distribution, offering documents, ongoing disclosure and advertisements. In particular, it is stated in the AMF Circular that a Hong Kong Covered Fund may utilise the prospectus authorised by the SFC. In addition, the SFCauthorised prospectus may be supplemented by a French covering document to comply with the disclosure requirements set out in the AMF Circular and to disclose any other information which may have a material impact on investors in France; requirements on the language of offering documents, notices to French investors, constitutive documents and financial reports of the Hong Kong Covered Fund; and requirements regarding advertisements and marketing materials of the Hong Kong Covered Fund issued in France. In particular, they shall comply with the advertising French laws and regulations. 5
Conclusion Following the mutual recognition of funds scheme between Hong Kong and Mainland China and Switzerland respectively, the mutual recognition between France and Hong Kong adds to the limited number of jurisdictions with which Hong Kong has a form of reciprocity in authorisation of collective investment schemes. According to the SFC s, figures, over 60% of funds authorised by the SFC are Luxembourg or Irish UCITS. Whilst the number of Hong Kong domiciled umbrella platforms have generally been increasing over the years, the number of French UCITS funds authorised by the SFC is not significant. The MoU may assist French domiciled funds increase their share of the Hong Kong market. It remains to be seen whether this mutual recognition arrangement will be used by Hong Kong s home grown fund management and if it can contribute to Hong Kong s continuous development as an international asset management centre. The opportunity for Hong Kong funds to be sold in the European Union may help stimulate Hong Kong domiciled funds, be these established as unit trusts or the new open-ended fund companies to be launched this year. 6
To find out more, contact: Hong Kong Paris Rolfe Hayden T +852 2583 8302 E rolfe.hayden@simmons-simmons.com I an Rogers T +33153291622 E ian.rogers@simmons-simmons.com Gaven Cheong T +852 2583 8323 E gaven.cheong@simmons-simmons.com Emilien Bernard-Alzias T +33153291652 E Emilien.Bernard-Alzias@simmons-simmons.com Eva Chan T +852 2583 8216 E eva.chan@simmons-simmons.com Stéphanie Zribi T +33153291697 E Stephanie.Zribi@simmons-simmons.com I vy Yam T +852 2583 8415 E ivy.yam@simmons-simmons.com Esther Lee T +852 2583 8292 E esther.lee@simmons-simmons.com Natalie Kong T +852 2583 8230 E natalie.kong@simmons-simmons.com Stella Wai T +852 2583 8375 E stella.wai@simmons-simmons.com elexica.com is the award winning online legal resource of Simmons & Simmons Simmons & Simmons LLP 2017. All rights reserved, and all moral rights are asserted and reserved. This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmons-simmons.com/legalresp Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC352713 and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. B_LIVE_EMEA1:4472721v1