What is an open-ended fund company?
Hong Kong is an established fund market and there are more than 2,000 publicly offered funds including both local and overseas domiciled funds. There are two common types of fund structures, namely the trust (i.e. unit trusts) and corporate (e.g. mutual funds) forms. Unit trusts and mutual funds are both pooled investment vehicle but with different formation structures.
From an international perspective, the corporate structure is popular and widely used in overseas fund markets, e.g. US, UK, Luxembourg, Ireland etc. Therefore quite a number of overseas funds authorized by the SFC for public offering in Hong Kong are in corporate structure. But funds set up in Hong Kong are generally established in unit trust structure only but not corporate form because of the restrictions on capital reduction and distribution out of capital under the Companies Ordinance.
A new structure for Hong Kong domiciled funds
In 2018, a new fund structure named “open-ended fund company” (OFC) was introduced under the Securities and Futures Ordinance to provide a corporate fund structure in addition to the existing available unit trust structure for investment funds domiciled in Hong Kong. The new OFC regime came into effect on 30 July 2018.
OFC is an investment fund in corporate form domiciled in Hong Kong. It is different from unit trusts in that it is a separate legal person/entity and has a board of directors. The directors owe a fiduciary duty and statutory duty of care, skill and diligence to the OFC. The OFC’s assets will be segregated and entrusted to the custodian for safekeeping. An OFC must have an investment manager who is licenced or registered with the SFC for conducting Type 9 (asset management) regulated activity.
An OFC may have sub-funds and each sub-fund will be subject to a “protected cell” regime, i.e. generally, the assets and liabilities of each sub-fund will only belong to that sub-fund. The purpose of the “protected cell” feature is to minimize the risk of an insolvency of a sub-fund affecting other sub-funds. However, as the “protected cell” concept is relatively new, there is a risk that overseas courts may not give effect to such segregation of liability feature of an OFC, this would depend on the overseas jurisdiction in question.
The shares of the OFC owned by the shareholders will be evidenced by entry of the shareholders’ name and shareholdings in the OFC register of shareholders, which is available for inspection free of charge by the relevant shareholders.
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