SFC updates Frequently Asked Questions relating to Open-ended Fund Companies

April 2023

On 12 April 2023, the Securities and Futures Commission (‘SFC’) updated its ‘Frequently Asked Questions relating to Open-ended Fund Companies’ (‘OFCs’)’ (‘OFC FAQ’) to (1) explain the application for extended deadlines for publication and filing of annual reports for private OFCs, (2) include Thailand in the Mutual Recognition of Funds (‘MRF’) arrangements and (3) clarify rules on OFCs’ custodians.  

Application for extended deadlines for publication and filing of annual reports for private OFCs

In the updated FAQ, the SFC has added Question 21B to clarify under what circumstances and how a private OFC can apply for an extension of time for the publication and filing of its annual report:

1. Generally, the SFC may consider granting extension of deadlines where strict application of the requirement would be unduly burdensome or unnecessarily restrictive. For instance:
   • (i) where a private OFC involves a fund-of-funds structure and there is a difference in the financial accounts publication period between the underlying investment fund and that of the OFC, or
   • (ii) where there is other substantive difficulty in meeting the requirement.
2. A private OFC seeking to waive the periods required for publication and filing of annual report under the OFC code should (a) contact the relevant case officers for consultation in advance and (b) include detailed reasons of why such waiver is sought.

Inclusion of Thailand’s SEC under the MRF arrangements

In Question 20 of the updated FAQ, the Securities and Exchange Commission (‘SEC’) of Thailand was included as one of the financial regulators that has entered into the MRF arrangements with the SFC. Under the latest MRF arrangement between Thailand and Hong Kong SAR, Thai domiciled funds that are eligible for or have received SFC authorisation structured in the form of OFCs can enjoy a range of benefits including streamlined process of authorisation for offering to the public in Hong Kong SAR and exemption from certain of the SFC’s requirements.

Clarification around the rules on custodians

In Question 23, the SFC clarified that the appointment of a different custodian for each sub-fund is allowed and applications for registration of a private OFC and/or its sub-funds may include a proposed appointment of multiple custodians from time to time. The SFC also reiterated that the appointment of each custodian of an OFC is subject to the SFC’s approval and, if in doubt, applicants may contact the relevant case officers to seek further guidance from the SFC (especially where a public OFC would like to appoint multiple custodians).

In addition, the SFC reminded OFCs of their duties to:

• (i) in any case, ensure that no scheme property is left without custody; and
• (ii) where multiple custodians are to be appointed, include in its instrument of incorporation and/or custodian agreement provisions to
  • (a) ensure that all scheme property is duly entrusted to the custodian(s) of the OFC;
  • (b) demarcate the rights and liabilities of each custodian clearly as to the respective scheme property that each custodian is entrusted with and responsible for; and
  • (c) provide for a default mechanism to place into custody any scheme property potentially arising at the umbrella-level OFC (such as any assets which may be attributed to the umbrella due to accounting treatment, or otherwise arising) to a specified custodian of the OFC.

Similarly, the SFC mentioned that each custodian appointed by an OFC has duty to:

• (i) take reasonable care, skill and diligence to ensure the safe keeping of the scheme property of the OFC that is entrusted to it;
• (ii) ensure that it has sufficient experience, expertise and competence in safekeeping the asset types in which the OFC invests; and
• (iii) maintain adequate internal controls and systems commensurate with the custodial risks specific to the type and nature of assets in which the OFC invests.

Next steps

Without significantly changing the rules, the latest FAQ has only added one question and made minor modifications to the other two questions. Of note is that the new Question 21B has explicitly allowed the SFC to grant grace periods for private OFCs to publish and file annual reports when substantive difficulty in meeting the initial deadlines can be demonstrated.