investor’s interest in the scheme.
Description
Disclosure to investors
Detailed requirements for initial and ongoing disclosure are set out in the UTC. Offering documents
UTC 6.1 provides that a scheme must issue an up-to-date offering document, which should contain the information necessary for investors to be able to make an informed judgement of the investment proposed to them, and, in particular, should contain information listed in UTC Appendix C.
UTC Appendix C requires that an offering document must set out, among other things, the investment objectives and risks, restrictions or investment and borrowing, fees and charges, procedures for application and redemption, frequency of valuation and dealing (including dealing days) and proper warning statements. Offering documents must disclose the rights of
investors and the method of valuation of property and assets, and pricing of scheme units. Appendix C2 provides that if the nature of the investment policy so dictates, the offering document should include a warning that investment in the scheme is subject to abnormal risks, a description of the risks involved, and where appropriate, the risk management policy in place. This applies, for example, to extensive use of financial derivative instruments for
investment purposes and to specialized schemes such as HFs, index funds, guaranteed funds, etc. under Chapter 8 of the UTC).
Offering documents must be authorized by the SFC before they may be issued to the public (section 105 of the SFO). At least two staff members are involved in the review process for the disclosure documents.
UTC 6.6 provides that constitutive documents of a scheme should contain the information listed in UTC Appendix D. UTC Appendix D (D8) requires the constitutive documents to contain the rules on valuation of property and pricing. By UTC 10.1, a scheme must be valued and priced in accordance with the provisions of its offering and constitutive documents and the provisions of Chapter 6 of the UTC. UTC Appendix C requires offering document to disclose a list of constitutive documents and an address in Hong Kong where the constitutive documents can be inspected free of charge or purchased at a reasonable price.
OPs 3.4 and 6.1 of the Products Handbook provide that disclosure must be complete, accurate and fair, and be written and presented in a clear, concise and effective manner as to be readily understood by the investing public.
UTC 6.2A provides that a scheme must issue a KFS which is deemed to form part of the offering document and must contain information that enables investors to comprehend the key features and risks of the scheme. OP 6.7 also provides that KFS must highlight key information to investors in a clear, concise and effective manner and be prepared in a format that facilitates comparison with other products. In particular, illustrative templates for KFS (which are published on the SFC’s website) require a scheme to disclose the frequency of calculating and publishing a scheme’s NAV.
UTC 6.3 requires the offering document to be accompanied by the schemes’ most recent audited annual report and accounts together with its semi-annual report if published after the annual report.
Periodic reports
UTC 5.17 and 11.6 requires a scheme to publish at least two reports each financial year – an annual report and a half yearly report. The annual report must be audited by the auditor for the scheme. The minimum requirements of financial reports are set out in the UTC Appendix E. They include disclosure requirements in areas such as the financial statements, connected persons transactions and the investment portfolios held by the scheme. UTC Appendix E contains provisions requiring standard formats in periodic reports in order to facilitate comparison
H, these quarterly reports should be filed to the SFC and distributed to holders within one month of the end of the relevant period, except for authorized fund of HFs (FoHFs) where the timeframe for filing and distribution to holders is within six weeks of the end of the relevant period.
UTC 11.6 provides that a scheme must publish its interim reports within two months of the end of the period, and its annual reports within four months after year-end.
Material event reporting
Holders of interests in CIS must be notified of material changes affecting the scheme. As well as in relation to major changes to scheme arrangements that require the approval of the SFC (see under Principle 25), the management company must inform holders as soon as
reasonably practicable of any material adverse change in the financial conditions or business of the key counterparties to a scheme that it is aware of. ‘Key counterparties’ include the management company, guarantor (where relevant), trustee/custodian and swap counterparty of the fund (UTC 11.1(b).
Regulator’s powers
Section 103 of the SFO requires a scheme offered to the public in Hong Kong to obtain SFC’s prior authorization, unless an exemption applies.
If the SFC finds that the documentation contains misleading information, the SFC can require the scheme and the scheme operator to stop distributing the documentation and to amend the documentation as appropriate.
Section 106(1)(a) of the SFO gives the SFC power to withdraw an authorization of the scheme if it decides that any information provided to the SFC in respect of application for
authorization of fund was at the time it was provided false or misleading in a material particular.
Documentation that is inaccurate, misleading or false may have civil and criminal
consequences under the SFO (for example, under sections 107, 277, 298, 383 or 384), and may call into question the issuer’s fitness to hold a license (sections 194 and 196).
Under section 108 of the SFO investors have a private right of action to recover losses resulting from reliance on fraudulent, reckless or negligent misrepresentation.
Many of the SFC powers of discipline and intervention (described under Principle 11) can also be used in response to misleading or inaccurate disclosure.
Advertising
UTC 11.11 provides that advertisements and other invitations to invest in a scheme must comply with the Advertising Guidelines Applicable to CIS Authorized under the Product Codes (Advertising Guidelines). All advertisements must be submitted to the SFC for authorization prior to their issue or publication in Hong Kong pursuant to section 105 of the SFO, unless
exempted under section 103 of the SFO. Offers exclusively to professional investors are one of the exemptions.
When the SFC grants authorization to any scheme, it can and routinely does impose an authorization condition that the fund and/or its management company should cease and/or use their best endeavourers to procure their agents to cease issuing any advertisements of the scheme upon the request of the SFC.
OPs 6.9 and 6.10 and General Principle 1 of the Advertising Guidelines provides that all advertisements for a product shall:
a. not be false, biased, misleading or deceptive;
b. be clear, fair and present a balanced picture of the product with adequate and prominent risk disclosures; and
c. contain information that is timely and consistent with its offering document
Advertisements may also breach the prohibition on fraudulently or recklessly inducing others to invest money under section 107 of the SFO.
The SFC conducts regular checks on advertisements by choosing a date in a month and reviewing all fund-related advertisements on that date.
Accounting standards
Financial reports for SFC-authorized funds domiciled in Hong Kong are required to be prepared in accordance with the applicable requirements under Hong Kong Accounting Standards and HKFRS. Reports for funds domiciled in recognized jurisdictions must be prepared in accordance with the applicable laws, regulations and accounting standards acceptable in their home jurisdictions (e.g. UK GAAP). In practice this means that financial reports are prepared in accordance with IFRS standards.
UTC Appendix E sets out detailed requirements for the content of financial reports. Power to ensure compliance with investment policies
UTC 5.10 provides that the management company must manage the scheme in accordance with the scheme’s constitutive documents in the best interest of the holders. UTC 4.5(d) provides that the trustee/custodian must carry out instructions of the management company in respect of investments unless they are in conflict with the provisions of the offering or constitutive documents or the UTC.
UTC 4.5(f) provides that the trustee/custodian must issue a report to the holders to be included in the annual report on whether in the trustee/custodian's opinion:
a. the management company has in all material respects managed the scheme in accordance with the provisions of the constitutive documents; and
b. if the management company has not done so, the respects in which it has not done so and the steps which the trustee/custodian has taken.
the Products Handbook, it is open to the SFC to conclude that they are no longer a fit and proper person for licensing purposes. This gives the SFC power to conduct an investigation under section 182 of the SFO and to impose sanctions under sections 194 and 196 of the SFO, such as revocation or suspension of the intermediary’s licence or registration, as well as fine (maximum of $10 million) and public reprimand the intermediary.
Assessment Fully implemented Comments
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the