On 27 September 2019, the Securities and Futures Commission (SFC) issued a consultation paper on the proposed regulatory regime for depositaries of SFC authorised collective investment schemes (the Proposals).
The Proposals, which are part of the SFC’s strategy to strengthen Hong Kong as an international, full service asset management centre and to enhance the regulation of public funds, would see the introduction of a new regulated activity under the Securities and Futures Ordinance (the SFO) for acting as a depositary of an SFC authorised collective investment scheme.
It is intended that the scope of the Proposals, and accordingly the definition of a depositary, will cover top-level trustees and custodians which, in the context of a unit trust, would be the trustee and, in the context of any other collective investment scheme, will be the global custodian.
The practical effect of the Proposals would be compliance with the following requirements:
- Licensing requirement: Any corporation carrying on a business as a depositary would be required to be licensed by or registered with the SFC. This requirement would extend to individuals performing any regulated function in relation to the corporation’s business of acting as a depositary, including any staff members who perform more than a clerical role in a business function directly relating to the depositary’s discharge of its regulatory obligations.
- Financial resources requirements: Corporations licensed to carry on a business as a depositary would be required to maintain adequate financial resources, the level of which is currently proposed to be a minimum paid-up share capital of HK$10m and a minimum liquid capital of HK$3m.
- Professional indemnity insurance requirement: Corporations licensed to carry on a business as a depositary would be required to maintain a professional indemnity insurance policy which provides adequate coverage for claims for liability arising from breaches or duty in the course of carrying on its business as a depositary.
- Conduct and internal controls requirements: Corporations licensed to carry out business as a depositary would be required to comply with the applicable legal and regulatory requirements such as the SFO and the SFC’s codes and guidelines. In addition to this, they would also be required to continue to meet the existing provisions of the Code on Unit Trusts and Mutual Funds, the Code on Real Estate Investment Trusts, the Code on Pooled Retirement Funds and the Code on Open-Ended Fund Companies which apply to trustees and custodians.
The consultation is now open until 31 December 2019 and the public may submit their comments to the SFC until then. A copy of the consultation paper on the Proposals can be accessed here.