What is "authorisation" and why is it necessary?
Unit trusts must be authorised by the SFC before they can be marketed in Hong Kong. They must meet the requirements of the Code on Unit Trusts and Mutual Funds.
This covers investment restrictions, the eligibility of the fund manager / custodian / trustee, information disclosure and operational policy. Any person selling unauthorised unit trusts to the general public could be liable to fines and imprisonment. However, SFC authorisation is not an official recommendation of a fund, nor does it guarantee good return.
For the SFC to authorise a fund, the fund should meet the following criteria:
- Clear and full disclosure in English and Chinese:
This aims to ensure that investors are given adequate information in relation to the fund before making an investment decision. Every authorised fund must provide an offer document, in both English and Chinese. It should set out important information such as the operators, investment policy and objectives, and investment details. No application form can be distributed without the accompaniment of an offer document. - Appropriate safeguards:
The fund must appoint an independent and qualified trustee or custodian that holds the fund's assets in trust for investors, and monitors the investments made by the fund managers. The SFC will also check the background of the fund manager to ensure that he / she has the necessary expertise, experience, and is "fit and proper" to manage the unit trusts. - Presence of a Hong Kong representative:
If a fund is promoted or managed by an overseas fund manager, it must appoint a Hong Kong representative with whom Hong Kong investors can deal. - Diversified investment policy :
To receive authorisation, a fund must adhere to certain investment restrictions and guidelines. The basic principle is that a fund must be liquid and diversified. - Accurate adverts and marketing materials:
All adverts and marketing materials must be vetted by the SFC before publication. The SFC will ensure that such materials do not contain false, biased, or misleading information. - Other structural requirements:
There are other structural and operational requirements imposed on a fund, such as the preparation of semi-annual and audited annual financial reports, and limitations on the types of fees that may be charged to a fund.
- Clear and full disclosure in English and Chinese:
Is it illegal to buy unauthorised unit trusts?
In general, unit trusts selling to the Hong Kong public require SFC's authorisation. Unauthorised unit trusts can be placed with private clients, but the promoter must ensure that laws are not contravened.
A buyer does not break the law by buying into an unauthorised fund. However, an unauthorised fund is not subject to the regulations of the SFC, and the fund's structure and operations may not be governed by any rules or regulations in Hong Kong. It is also likely that the offering document may not have been vetted by Hong Kong authorities. The fund, however, may be regulated by a foreign regulator. Therefore, before an investor subscribes to an unauthorised fund, he / she should first check to determine whether or not the fund is regulated by an overseas jurisdiction and what investor protection measures, if any, have been adopted by that regime.
The majority of the above information is sourced from the InvestEd website operated by the Securities and Futures Commission and Hong Kong Investment Funds Association.
