The CSRC has issued a Q&A on 22 May 2015 in connection with the Mutual Recognition of Funds initiative, explaining the scheme and mentions the requirements for Hong Kong funds to be eligible for approval by CSRC for retail distribution in Mainland China.
Besides a basic premise that the funds are established and operating under Hong Kong law, approved by the Hong Kong SFC for public offer in Hong Kong and regulated by the SFC, the manager should be established and operating in Hong Kong, licensed by the SFC to conduct asset management activities in Hong Kong and it shall not delegate its investment management function outside of Hong Kong.
Eligible funds must have been established for at least one year, with assets-under-management of not less than RMB200 million (or the equivalent in foreign currency). The fund must not be primarily investing in the Mainland, and its distribution in the Mainland shall not exceed 50% of the fund’s total assets. Plain vanilla funds, balanced funds, fixed income funds and index funds (including exchange-traded funds) are permitted.
According to the CSRC Q&A, there are currently approximately 100 Hong Kong funds (as at end of 2014) that fulfil the afore-said requirements. Besides the said eligibility requirements, funds are also required to appoint a CSRC-approved manager or custodian of retail funds, as the Mainland representative for handling fund distribution and administration matters including sales and settlement, information disclosure, customer services, compliance and regulatory reporting.
Appointed representatives may organise registration of the eligible funds with the CSRC and thereafter the funds may be distributed and available to retail investors in the same manner as domestic retail funds.
An observation as we review and compare the requirements for mutual recognition of funds in Hong Kong and China – whilst the eligibility requirements and key criteria for recognition seem largely aligned for both jurisdictions respectively, eligible funds may be registered with CSRC for retail distribution in China, whereas Mainland China funds are required to undergo review and approval by the Hong Kong SFC, due to the different regulatory process as it now stands in the two jurisdictions.
Mainland funds shall prepare a Hong Kong covering document that meet SFC requirements, and shall seek SFC authorisation under what the regulators announced would be a stream-lined process. (For details, please refer to our earlier article on the initiative and requirements for Mainland funds.) For Hong Kong funds to prepare for registration in China to distribute to retail investors, the most important step may be the detailed arrangement to be agreed with the proposed China representative.
However, it may be a necessary and sensible difference in the regulatory process between the two, considering that some 850 Mainland funds (as at end of first quarter 2015) are said to meet the eligible requirements for recognition in Hong Kong. Having said that, we will still need to wait to tell the actual application and approval process, and the relative ease of registration.
