Technical Savings and Investments Information

Roles of the Various Parties of an Investment Fund

Pursuant to the “Securities and Futures Ordinance”, the SFC published the “Code on Unit Trusts and Mutual Funds” in April 2003 (subsequently amended in July 2008) which outlines the authorization criteria and on-going obligations in respect of authorized investment funds that are offered to the public in Hong Kong. Some of the major sections have been extracted as follows (Note: these have only been reproduced in a simplified version, for full details please refer to the Code):

(a) Role of Management Company
“Authorized” investment funds must appoint a management company acceptable to the SFC. A management company must be properly licensed or registered under Part V of the “Securities and Futures Ordinance” to carry on its regulated activities if it is incorporated in and/or operates from Hong Kong. It is responsible for investment management within the scope of the constituent documents. For this, a management company must:

(1) be engaged primarily in the business of fund management; 
(2) have sufficient financial resources 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 HKD1million or its equivalent in foreign currency; 
(3) not lend to a material extent;
(4) maintain at all times a positive net asset position; and
(5) be based in a jurisdiction with an inspection regime acceptable to the SFC.

The general obligations of the management company are that it must:

(1) manage the fund in accordance with the constitutive documents in the exclusive interest of the holders and to fulfill the duties imposed on it by the general law;
(2) maintain the books and records of the fund and prepare the fund’s accounts and reports. At least two reports must be published each financial year; and
(3) ensure that the constitutive documents are made available for inspection by the public.

(b) Role of Trustee/Custodian
Every “authorized” investment fund established as a unit trust or mutual fund must respectively appoint a trustee or custodian acceptable to the SFC.  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.
As outlined under the Code, an acceptable trustee/custodian should either:
(1) on an ongoing basis, be subject to regulatory supervision; or
(2) 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.

A trustee/custodian must be:
(1) a bank licensed under Section 16 of the “Banking Ordinance”; or
(2) a trust company which is a subsidiary of such a bank; or
(3) a trust company registered under Part VIII of the “Trustee Ordinance”; or
(4) a banking institution or trust company incorporated outside Hong Kong which is acceptable to the Commission.  Additionally, a trustee/custodian must be independently audited and have minimum issued and paid-up capital and non-distributable capital reserves of HKD10 million or its equivalent in foreign currency.

A. General obligations of Trustee/Custodian

The trustee/custodian must:

(1) take under its control all the property of the fund in trust for the holders in accordance with the provisions of the constitutive documents;
(2) register all assets in the name of the trustee/custodian; where borrowing is undertaken for the account of the fund, such assets may be registered in the lender’s name; (3) be liable for the acts of its agents in relation to assets forming part of the property of the fund; (4) take reasonable care to ensure that the sale and repurchase of units/shares are carried out in accordance with the constitutive documents;
(5) take reasonable care to ensure that the sale and repurchase prices are calculated in accordance with the constitutive documents;
(6) carry out the instructions of the management company unless they are in conflict with the provisions of the constitutive documents or the Code;
(7) take reasonable care to ensure that the investment and borrowing limitations set out in the constitutive documents are complied with;
(8) issue a report to the holders on whether the management company has managed the fund in accordance with the provisions of the constitutive documents; if not, the steps which the trustee/custodian has taken; and
(9) take reasonable care to ensure that unit/share certificates are not issued until subscription moneys have been paid.

B. Independence of Trustee/Custodian and the Management Company

The trustee/custodian and the management company must be persons who are independent of each other. In case the trustee/custodian and the management company have the same ultimate holding company, they are deemed to be independent of each other if:

(1) they are both subsidiaries of a substantial financial institution;
(2) neither the trustee/custodian nor the management company is a subsidiary of the other;
(3) no person is a director of both the trustee/custodian and the management company; and
(4) both the trustee/custodian and the management company sign an undertaking that they will act independently of each other; or
(5) the fund is established in a jurisdiction where the trustee/custodian and the management company are required by law to act independently of one another.

(c) Role of Auditor
The management company or the directors of a mutual fund corporation must, at the outset and upon any vacancy, appoint an auditor for the scheme.

The auditor must be independent of the management company, the trustee/custodian and, in the case of a mutual fund corporation, the directors.  The management company must cause the fund’s annual report to be audited by the auditor.

(d) Role of Registrar
The fund, or in the case of a unit trust the trustee, or the person so appointed by the trustee must maintain a register of holder. The Commission must be advised on request of the address where the register is kept.