The Securities and Futures Commission (the "SFC") has recently released its consultation conclusions on proposed enhancements to the Open-ended Fund Companies ("OFC") regime, and gazetted the revised Code on Open-ended Fund Companies incorporating the proposed enhancements under the said consultation conclusions ("Revised OFC Code") on 11 September 2020.

The three major changes made to the OFC regime include (1) removal of all investment restrictions for private OFCs, (2) allowing intermediaries licensed or registered for Type 1 regulated activity to act as custodians for private OFCs, and (3) introducing a statutory mechanism for the re-domiciliation of overseas corporate funds to Hong Kong. We shall walk you through the details of the said major changes and their implications to market players in this article.

Major changes made to the prior OFC Regime

(I) Removal of all investment restrictions for private OFCs

Under the prior OFC regime, at least 90% of the gross asset value of a private OFC must consist of (1) those types of assets the management of which would constitute a Type 9 regulated activity (asset management), and/or (2) cash, bank deposits, certificates of deposit, foreign currencies and foreign exchange contracts. A private OFC may not invest more than 10% of its gross asset value in other asset classes ("10% de minimis limit").

Having regard to the wide scope of regulatory powers available to the SFC in the regulation of OFCs which cover activities that may not amount to regulated activities, the SFC relaxed the investment scope of private OFCs by removing the 10% de minimis limit. This significant move renders Hong Kong OFC regime more appealing to the market players as all investment restrictions on private OFCs are removed. Hong Kong OFCs can now manage a portfolio of assets at their own discretion, ranging from securities and futures contracts to real estates and shares of private companies, etc.

(II) Allowing intermediaries licensed to carry on Type 1 Activity to act as custodians for private OFCs

For private OFCs, under the prior OFC regime, only those who met the eligibility requirements as set out under the Code on Unit Trusts and Mutual Funds (the "UT Code") (including a licensed bank and a trust company of a registered scheme under the Mandatory Provident Fund Schemes Ordinance, Cap. 485) can be a custodian. Alongside with the changes made under the Revised OFC Code, an intermediary licensed or registered for Type 1 regulated activity (dealing in securities) ("RA1") will now be allowed to act as a custodian of a private OFC provided that it meet certain requirements, including (i) its SFC licence is not subject to the condition that it shall not hold client assets, (ii) it shall maintain paid-up share capital of not less than HKD10 million and liquid capital of not less than HKD3 million, (iii) the private OFC is, and remains at all times, a client of such licensed corporation or registered institution in respect of its business in RA1, (iv) it has at least one responsible officer or executive officer responsible for overall management and supervision of its custodian function, and (v) be independent of the investment manager.

Moreover, the SFC has also clarified that more than one custodian may be appointed by an OFC and custodians can delegate their custody tasks to one or more sub-custodians.

The Revised OFC Code further requires the custodians to have sufficient expertise and experience in safekeeping the asset classes in which such OFC invests. There are also enhanced risk disclosure requirement in offering documents and record keeping requirement imposed on the OFC and the custodian. A better quality of asset safekeeping will thus be achieved.

(III) Introducing a statutory mechanism for the re-domiciliation of overseas corporate funds to Hong Kong

A re-domiciliation mechanism which enables an overseas corporate fund to re-domicile to Hong Kong is proposed by SFC and will take effect upon completion of the relevant legislative process of adding new provisions to Part IVA of the Securities and Futures Ordinance, Cap 571 (the "SFO") and making ancillary amendments to the Securities and Futures (Open-ended Fund Companies) Rules, Cap 571AQ (the "OFC Rules").

Under the proposed re-domiciliation mechanism, an overseas corporate fund can generally be re-domiciled to Hong Kong as an OFC if it satisfies the basic requirements for the registration of an OFC currently applicable to newly established OFCs under the SFO and the OFC Rules, including without limitation the appointment of investment managers, custodians and directors who fulfil the eligibility requirements under the SFO, OFC Rules and Revised OFC Code. For any changes to an overseas fund's structure which would not affect its ability to meet the aforesaid basic requirements, the changes can be effected after re-domiciliation.

One of the major incentives for overseas corporate funds to re-domicile to Hong Kong is tax benefit. As there will be no change in the legal personality of the corporate fund (i.e. based on the assumption that a statutory re-domiciliation mechanism is in place which allows the continuity of the legal personality of the corporate fund), there will be no transfer of assets from one legal person to another when the fund migrates to Hong Kong using the new OFC regime, no stamp duty will arise. In addition, an OFC may enjoy tax exemption on its profits derived from transactions in certain assets as prescribed by the Inland Revenue Ordinance, Cap. 112.

Other changes

To protect the investors, additional minimum requirements which all custodians should comply with for safekeeping of the private OFC scheme property are set out under Appendix A of the Revised OFC Code. In response to the market players' concern, there will be a six-month transition period for existing private OFC custodians to comply with the new safekeeping requirements.


With the expansion of investment scope and eligibility requirements of custodian for private OFCs and the introduction of re-domiciliation mechanism, we expect that setting up of a private OFC in Hong Kong will become more attractive to the market players in the world. With the recent series of reform to both limited partnership fund and private OFCs in Hong Kong, we believe that the competitiveness of Hong Kong as an asset management hub will be greatly enhanced. To explore the opportunities brought by the recent reform to Hong Kong private fund, please do not hesitate to contact us!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.