SFC Circulars on Preparation for Full Implementation of the UT Code and ILAS Code

Our Ref: B1/15C
G16/1C
17 May 2011
The Chief Executive
All Authorized Institutions
Dear Sir/ Madam,
Circulars Issued by the Securities and Futures Commission (“SFC”) Regarding Preparation for the full implementation of the Code on Unit Trusts and Mutual Funds (“UT Code”) and the Code on Investment-Linked Assurance Schemes (“ILAS Code”) I am writing to draw your attention to the two circulars attached, issued by the SFC on 13 May 2011 (“the SFC Circulars”). The SFC Circulars provide guidance to fund mangers of Existing Schemes1 and issuers of Existing ILAS Schemes2 that will continue to be marketed to the public in Hong Kong on or after 25 June 2011(“the relevant date”) and remind them of the need to produce (i) a product key facts statement (“KFS”) and (ii) a revised offering document to satisfy the disclosure requirements as contemplated in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Products (“ROD”). From the relevant date, any Existing Scheme/ Existing ILAS Scheme that does not have a KFS and/ or an ROD shall not continue to be marketed to the public in Hong Kong. Therefore, such funds/ ILAS Schemes shall not accept subscriptions/ premium from new investors3 from the relevant date regardless of the distribution or

1 “Existing Schemes” means (a) collective investment schemes which have been authorized by the SFC prior to 25 June 2010 and remain authorized on that date; and (b) collective investment schemes for which applications for authorization were submitted to the SFC before 25 June 2010, but which are authorized on or after 25 June 2010. 2 “Existing ILAS Schemes” means (a) ILAS Schemes which have been authorized by the SFC prior to 25 June 2010 and remain authorized on that date; and (b) ILAS Schemes for which applications for authorization were submitted to the SFC before 25 June 2010, but which are authorized on or after 25 June 2010. 3 For the avoidance of doubt, in the absence of marketing, these funds may continue to accept subscriptions from existing investors whether by way of a monthly investment plan or topping-up while these ILAS Schemes may continue to accept premium from existing investors of such schemes.

subscription channels used. It should be noted that for Existing Schemes, as long as the fund managers follow the SFC’s guidance and comments given and the SFC’s KFS templates, they need not submit their KFS and RODs for the SFC’s review. However, the KFS and the RODs of Existing ILAS Schemes need to be authorized by the SFC. If Authorized Institutions (AIs), as distributors, are in doubt about whether a fund/ an ILAS Scheme needs to have, and in fact has, a KFS and/ or an ROD from the relevant date, they should get clarification from the fund manager/ ILAS issuer, so as to ensure that they conduct their activities in compliance with the revised regulatory requirements. AIs are advised to have proper arrangements with the fund managers/ ILAS issuers to ensure that the latter will provide all the necessary and appropriate notice, clarification and training to front-line sales staff as soon as possible and preferably well before the relevant date. Yours faithfully, Meena Datwani Executive Director (Banking Conduct) Encl. c.c. SFC (Attn: Mr Stephen Po, Senior Director of Intermediaries Supervision and Ms Alice Law, Senior Director of Policy, China & Investment Products)

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Circular
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk 13 May 2011

Circular to management companies / product issuers of SFC-authorized schemes Preparation for the full implementation of the Code on Unit Trusts and Mutual Funds (“UT Code”) commencing 25 June 2011 Background

1. The purpose of this circular is to provide guidance to the fund managers of Existing
   Schemes1 who intend to continue to market such schemes to the public in Hong Kong on or after 25 June 2011.
2. Existing Schemes that continue to be marketed to the public in Hong Kong on or after
   25 June 2011 are required to produce (i) a product key facts statement (“KFS”) and (ii) a revised offering document to satisfy the other disclosure requirements2 as contemplated in the SFC Handbook (“Handbook”) for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (“ROD”).
3. To help them to meet these requirements, the Commission has held 8 briefing
   sessions to explain to the industry the new requirements under the revised UT Code, issued 9 FAQs and 2 circulars/letters to provide the industry with guidance and clarification and given directional comments on more than 140 draft KFS submitted by more than 60 fund houses. In addition, we have held numerous telephone discussions with fund houses to answer their questions and enquiries regarding the revised UT Code. These discussions are still ongoing.
4. As long as fund managers of Existing Schemes follow our guidance and comments
   given and our KFS templates, they need not submit their KFS and RODs for our review in order that they may be provided to investors. Existing Schemes that continue to be marketed to the public in Hong Kong
5. The Commission wishes to remind fund managers of Existing Schemes that
   commencing 25 June 2011, any Existing Scheme that does not have a KFS and/or

1
“Existing Schemes” means (a) collective investment schemes which have been authorized by the Commission prior to 25 June 2010 and remain authorized on that date; and (b) collective investment schemes for which applications for authorization were submitted to the Commission before 25 June 2010, but which are authorized on or after 25 June 2010. 2 As to the guidance on what falls within the scope of “other disclosure requirements” as contemplated in the Handbook, please refer to the FAQ no. 30 of the Frequently Asked Questions on the Code of Unit Trusts and Mutual Funds which can be found on the Commission’s website.

2
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk ROD shall not continue to be marketed to the public in Hong Kong. As such, these funds shall not accept subscriptions from new investors3 as from 25 June 2011 regardless of the distribution or subscription channels used. Fund managers should also ensure that they provide all necessary and appropriate notice, training and clarification to the front-line sales staff and their distributors as soon as possible and preferably well before 25 June 2011. Additional 11.1 Changes to offering documents of Existing Schemes
6. During our continuous discussions with the industry, some industry participants
advised us that for their own business reasons they would like to take this opportunity, as they prepare their ROD, to introduce other amendments to the structure or mechanics of their schemes such as change in investment objectives, policies and restrictions, fee structure and dealing and pricing arrangements (“Additional 11.1 Changes”). These Additional 11.1 Changes require the Commission’s prior approval pursuant to 11.1 of the UT Code.
7. We have over 2,000 SFC-authorized funds. As an ongoing part of our work, we
regularly receive applications for approval of changes to existing offering documents under 11.1 of the UT Code. These applications will be, and have all along been, processed according to our established procedures.
8. However, we understand that some fund houses would want us to approve their
applications for Additional 11.1 Changes before 25 June 2011 so that when they roll out their KFS and RODs, the RODs will include Additional 11.1 Changes. In our circular dated 16 December 2010, we strongly urged these fund managers to submit their applications by 1 March 2011 so that we could make all reasonable efforts to deal with these applications in order that when they continue to market on or after 25 June 2011, these fund houses could include in their RODs the Additional 11.1 Changes as well.
9. Responding to our request, 53 applications for Additional 11.1 Changes came in on
or before 1 March 2011. In respect of these 53 applications, 26 have been approved. We are making all reasonable efforts to have the remaining 27 applications processed in time. However, there may well be a number of applications that because of quality and other fundamental issues may not be in a position to satisfy all our requirements before 25 June 2011. We will contact the relevant fund managers individually with a view to helping them to resolve these issues.
10. If the Additional 11.1 Changes are not able to meet our requirements and receive our
approval by 25 June 2011, the fund managers still have an option not to proceed with the Additional 11.1 Changes until a later time but to nevertheless continue to market the relevant Existing Schemes to the public in Hong Kong with a KFS and a ROD. This will give them additional time to resolve the outstanding issues regarding Additional 11.1 Changes.

3
For the avoidance of doubt, in the absence of marketing, these funds may continue to accept subscriptions from existing investors whether by way of a monthly investment plan or topping-up.

3
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk Effect of breach of the Handbook
11. The Commission wishes to remind fund managers of Existing Schemes that
commencing 25 June 2011, it is a breach of the Handbook to continue to market, and accept subscriptions from new investors for, Existing Schemes that do not have KFS and/or ROD. There could be serious regulatory consequences for breach of the Handbook, including but not limited to causing the Commission to consider whether such failure might adversely impact the fitness and properness of persons licensed or registered under the Securities and Futures Ordinance and those set out in 1.6 of the Overarching Principles Section of the Handbook. The Commission therefore urges fund managers of Existing Schemes to act in a timely manner and devote sufficient resources to ensure compliance with the requirements in the revised regulatory regime.
12. The Commission would note that if distributors of Existing Schemes are in doubt
about whether a fund needs to have, and in fact has, a KFS and/or a ROD commencing 25 June 2011, they should get clarification from fund managers so as to ensure that they conduct their activities in compliance with the requirements in the revised regulatory regime.
13. Should you have any questions, please contact your case officer in charge.
Investment Products Department
Securities and Futures Commission

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Circular
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk 13 May 2011 Circular to issuers of SFC-authorized Investment-Linked Assurance Schemes (“ILAS Schemes”) Preparation for the full implementation of the Code on Investment-Linked Assurance Schemes (“ILAS Code”) commencing 25 June 2011 Background

1. The purpose of this circular is to provide guidance to the issuers of Existing ILAS
   Schemes 1 who intend to continue to market such schemes to the public in Hong Kong on or after 25 June 2011.
2. Existing ILAS Schemes that will continue to be marketed to the public in Hong Kong
   on or after 25 June 2011 are required to produce (i) a product key facts statement (“KFS”) and (ii) a revised offering document to satisfy the other disclosure requirements 2 as contemplated in the SFC Handbook (“Handbook”) for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products (“ROD”).
3. To help them meet these requirements, the Commission has held 3 briefing sessions
   to explain to the industry the new requirements under the revised ILAS Code, issued 5 FAQs and a circular in January 2011 regarding the streamlined procedures under the transitional arrangements in respect of the revised ILAS Code (“January Circular”). In addition, we have held numerous telephone discussions with ILAS issuers to answer their questions and enquiries regarding the revised ILAS Code. These discussions are still ongoing. Existing Schemes that continue to be marketed to the public in Hong Kong
4. We are pleased to announce that with the co-operation of the industry, the
   Commission has processed and authorized (subject to the filing of certain documents and confirmations) the KFS of all 103 Existing ILAS Schemes which ILAS issuers would like to continue to market to the public in Hong Kong on or after 25 June 2011. In addition to the KFS, the RODs also need to be authorized by the Commission. In March 2011, we agreed with the industry on a submission timetable so that we can

1
“Existing ILAS Schemes” means (a) ILAS Schemes which have been authorized by the Commission prior to 25 June 2010 and remain authorized on that date; and (b) ILAS Schemes for which applications for authorization were submitted to the Commission before 25 June 2010, but which are authorized on or after 25 June 2010. 2 As to the guidance on what falls within the scope of “other disclosure requirements” as contemplated in the Handbook, please refer to the FAQ no. 6 of section 2 of the Frequently Asked Questions relating to Investment￾linked Assurance Scheme which can be found on the Commission’s website.

2
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk make all reasonable efforts to process the ROD applications prior to 25 June 2011. At present, the Commission has authorized 34 sets of ROD.
5. We note some of the ILAS issuers have not submitted their RODs in accordance with
the agreed timetable. This could lead to the ROD applications not being processed in time to meet the deadline. We have discussed with the relevant ILAS issuers and have worked out and agreed with each of them individually revised deadlines for submission of their RODs. We would like ILAS issuers to understand that these are very special arrangements that we have made. We urge these ILAS issuers not to miss the revised deadlines as otherwise their ROD applications would not meet the deadline.
6. The Commission wishes to remind ILAS issuers that, commencing 25 June 2011, any
Existing ILAS Scheme that does not have an authorized KFS and a set of authorized ROD shall not continue to be marketed to the public in Hong Kong. As such, these ILAS Schemes shall not accept premium from new investors 3 as from 25 June 2011 regardless of the distribution or subscription channels used. ILAS issuers should also ensure that they provide all necessary and appropriate notice, training and clarification to the front-line sales staff and their distributors as soon as possible and preferably well before 25 June 2011. Additional 7.1 Changes to offering documents of Existing ILAS Schemes
7. In addition to the changes in product features as submitted by 17 Existing ILAS
Schemes further to the January Circular, some industry participants advised us that for their own business reasons they would like to take this opportunity, as they prepare their ROD, to introduce other amendments to the structure or mechanics of their schemes such as changes in constitutive documents (“Additional 7.1 Changes”). These Additional 7.1 Changes require the Commission’s prior approval pursuant to
7.1 of the ILAS Code.
8. We have over 240 SFC-authorized ILAS Schemes. As an ongoing part of our work,
we regularly receive applications for approval of changes to existing offering documents under 7.1 of the ILAS Code. These applications will be, and have all along been, processed according to our established procedures.
9. However, we understand that some ILAS issuers would want us to approve their
applications for Additional 7.1 Changes before 25 June 2011 so that when they roll out their KFS and RODs, the RODs will include Additional 7.1 Changes.
10. If the Additional 7.1 Changes are not able to meet our requirements and receive our
approval by 25 June 2011, the ILAS issuers still have an option not to proceed with the Additional 7.1 Changes until a later time but to nevertheless continue to market the relevant Existing ILAS Schemes to the public in Hong Kong with an authorized KFS and an authorized ROD without the Additional 7.1 Changes. This will give them additional time to resolve the outstanding issues regarding Additional 7.1 Changes.

3
For the avoidance of doubt, in the absence of marketing, these ILAS Schemes may continue to accept premium from existing investors of such schemes.

3
Tel: (852) 2840 9222 Fax: (852) 2877 0318 Website: www.sfc.hk Effect of breach of the Handbook
11. The Commission wishes to remind ILAS issuers that commencing 25 June 2011, it is
a breach of the Handbook to continue to market, and accept premium from new investors for, Existing ILAS Schemes that do not have an SFC-authorized KFS and/or an SFC-authorized ROD. There could be serious regulatory consequences for breach of the Handbook, including but not limited to causing the Commission to consider whether such failure adversely reflects on whether further products issued, managed and/or originated by such ILAS issuer, and/or offering documents and advertisements in relation to such products, should be granted authorization in the interest of the investing public as set out in 1.6 of the Overarching Principles Section of the Handbook. The Commission therefore urges the ILAS issuers to act in a timely manner and devote sufficient resources to ensure compliance with the requirements in the revised regulatory regime.
12. The Commission would note that if ILAS distributors are in doubt about whether an
ILAS Scheme needs to have, and in fact has, an SFC-authorized KFS and/or an SFC-authorized ROD commencing 25 June 2011, they should get clarification from ILAS issuers so as to ensure that they conduct their activities in compliance with the requirements in the revised regulatory regime.
13. Should you have any questions, please contact your case officer in charge.
Investment Products Department
Securities and Futures Commission