Hong Kong and Netherlands MoU
The Hong Kong Securities and Futures Commission has been very active over the past couple of years in defining new privileged relationships with regulatory authorities across Europe and foster mutual recognition of funds with the authorities of those countries. By securing international agreements with UK, France and now the Netherlands, Hong Kong continues its pursuit to be an established international hub for finance.
In this brief post we will talk about a few of the relevant points of the Hong Kong and Netherlands MoU on mutual recognition of funds dated 15 May 2019 as well as break down the general principles as well as essential requirements of the recognition process.
A few words on the International Agreements
We got used with Brexit to look at cross-border regulatory interactions from a very narrow perspective, the one of equivalence. As if without equivalence there would be no meaningful and fruitful way any longer for the UK to deal with the EU. In the current international finance environment, however, cross-border interactions between regulatory authorities take different shapes and few other models have emerged already, tried and tested for quite some time now, as viable alternative approaches. The model of the international agreement is amongst one of those. As part of this model, two jurisdictions agree to rely on each other’s regulation and supervision in order to reduce overlaps in those areas when dealing with respective market participants. This way, zooming down to investment funds as in the case of the Hong Kong and Netherlands MoU, access to respective markets is made easier and so the ability to offer new products and retain competitivity provided that the main principles of the memorandum of understanding and the home state rules are complied with.
The Hong Kong and Netherlands MoU for mutual recognition of funds operates on some basic principles. In essence, the recognised fund – be it Dutch or from Hong Kong – approved and authorised by its home state authority and seeking authorisation by the national authorities of the host state shall i) meet the eligibility requirements imposed by the applicable MoU; ii) remain approved and authorised for offer in its home state by its home authority; iii) be operated and managed in accordance of the relevant laws and regulation of its home state; iv) comply with the rules of its host state for the sales and distribution of its unit and shares in their territory; v) comply with the additional local rules of the host state governing authorisation, approval, ongoing compliance, sale and distribution; vi) ensure investor protection; and vi) disclose at the same time information to investors in the home state and the host state.
In essence, the principle underpinning the whole infrastructure of the Hong Kong and Netherlands MoU is reliance on the regulation and supervision of the respective national competent authorities that are parties to the agreement. As a consequence, compliance with both the applicable home state regulation and the additional requirements imposed with the Hong Kong and Netherlands MoU will amount to full compliance with the host state requirements and will grant access to the ensuing streamlined process for authorisation to offer funds so recognised in the host state.
Initial and Ongoing Requirements
Of course, the Hong Kong and Netherlands MoU contains a very comprehensive list of initial and ongoing requirements imposed for the mutual recognition. This said, we will concentrate on some of the most important ones.
Local Representative and Jurisdiction of local courts
It is imposed that a representative is appointed in the host state domicile and that local investors in the host state can bring action against the recognised fund in the courts of their home state. Of course, a significant level of commitment is imposed to the host state jurisdiction in order to benefit from the streamlined process of authorisation and distribution in the host state. The requirement to have a local representative is very much common in the dynamic of cross-border distribution, however the ability for local investors to have recourse in the local courts against the recognised fund not as common.
Changes to recognised funds, disclosure and language, distribution
Changes to a recognised fund shall not take place merely on the basis of the rules and procedures of the home state of the fund, but also in accordance with the rules of the host state as well as the additional principles imposed by the Hong Kong and Netherlands MoU. So, for argument sake, if a particular change requires prior approval in the host state, for instance, such change can be implemented only after this approval has been sought and obtained by the authorities of the host state.
Also, whilst typically recognised funds can make use of their prospectus or other offering documentation as regulated by their home state rules, there will be a need to provide for additional disclosure through a country supplement. For Hong Kong recognised funds, it is necessary to provide fund documentation translated in Dutch, whist for Dutch recognised funds both in English and Chinese.
Offer and distribution will be carried out in accordance with the rules and regulations of the host state and will be carried out by locally authorised and regulated financial intermediaries.
Link to the official versions and more
Please find the HK version of the memorandum here and the Dutch version here for further detailed information. This documentation will also contain a reference to the application forms to be used for the recognition, the timing for approval as well as additional detailed information on the documentation to attach to the relevant applications.