CSRC Updates Regulation on Mutual Recognition Funds

Early in July 2015, the China Securities Regulatory Commission (CSRC) and the Securities and Futures Commission of Hong Kong (SFC) respectively promulgated the Interim Administrative Provisions on the Mutual Recognition Funds (MRF) between Mainland and Hong Kong (“Interim Provisions”) and the Circular on Mutual Recognition of Funds (MRF) between the Mainland and Hong Kong to launch the MRF regime. This regime provides a framework for mutual recognition of publicly offered funds between the mainland and Hong Kong so that these duly recognized or licensed funds could be offered to the public in each other’s markets. On April 19, 2024, the CSRC introduced five measures to enhance cooperation between the capital markets of Chinese mainland and Hong Kong, one of which is to relax the distribution proportion limit and allow Hong Kong fund managers to delegate investment management functions to overseas asset management institutions within the same group. To implement these measures, the CSRC released the draft Administrative Provisions on Mutual Recognition Funds between Mainland and Hong Kong (the “Administrative Provisions”) for public comments in June and issued the final regulation on December 17, 2024. The Administrative Provisions incorporate the proposed optimization at the regulatory level and additionally allow for potential expansion of the eligible product scope to more effectively address the cross-border wealth management needs of investors in both jurisdictions. The Administrative Provisions will take effect on January 1, 2025.

We have summarized some of the key provisions of the Administrative Provisions below:

The Interim Provisions provide that a Hong Kong fund manager shall be registered and operate in Hong Kong and hold an asset management license in Hong Kong. The Administrative Provisions provide an exception to the restrictions on delegation of investment management functions by a Hong Kong fund manager compared to the Interim Provisions. This exception permits a Hong Kong fund manager to delegate its investment management functions to its overseas affiliates within the same group, which shall be incorporated in countries or regions where the securities regulatory authorities have signed a memorandum of understanding on regulatory cooperation with the CSRC and maintain effective regulatory cooperation relationships with the CSRC.

In comparison with the Interim Provisions, the Administrative Provisions relax the proportion of a Hong Kong fund to be distributed in Chinese mainland to the fund’s total assets, from the current 50% to 80%. Furthermore, the Administrative Provisions include a catch-all category for fund types, specifically ‘other types of funds recognized by the CSRC’, in addition to the existing fund types of stocks, bonds, hybrid fund and index fund (including ETF). This provision allows for the potential inclusion of additional conventional fund types within the MRF framework in the future.

Other requirements are consistent with the Interim Provisions. For example, a Hong Kong fund shall be a fund that is established and operated in Hong Kong pursuant to Hong Kong law and is approved by the SFC for public offering and regulated by the SFC. Additionally, a Hong Kong fund must have been established for more than one year, have assets of no less than RMB 200 million or the equivalent foreign currency, and shall not primarily invest in the mainland market.

Eligible Hong Kong funds may apply to register with the CSRC. The application documents include an application report, the fund contract or the articles of association, the fund prospectus and the key terms statement, the fund’s latest audited annual report, the fund agency (as defined below) and the agency agreement, documents certifying the eligibility of the fund and its manager, trustee, custodian, and agency, and a legal opinion issued by a law firm.

In terms of information disclosure, a Hong Kong manager should comply with SFC regulations, the fund contract and other fund legal documentations, and disclose required information through national newspapers, the fund agency’s website or other media that meets the conditions stipulated by the CSRC. The information disclosure materials and regulatory reports should be disclosed or reported simultaneously to the investors and the regulators in both markets. The fund prospectus and the key terms statement aimed at Chinese mainland shall contain special statements and risk disclosures in relation to the MRF arrangements.

A Hong Kong manager should give a mandate to a CSRC-approved public fund manager or securities investment fund custodian (“Fund Agency”) in Chinese mainland to handle Chinese mainland related matters, such as fund registration, information disclosure, distribution, data exchange, clearing of funds, regulatory reports, liaison, client services, and monitoring. It should be noted that the CSRC, taking into consideration the recent development of domestic public fund distribution regulations, has eliminated the requirement of prior filling of Hong Kong funds’ marketing and promotion materials as previously specified in Article 16 of the Interim Provisions. Instead, the Administrative Provisions provide that the fund agency or the fund distributor’s head of fund distribution business and the head of compliance and risk control (or the personnel responsible for compliance and risk control) should review Hong Kong funds’ marketing and promotional materials aimed at the mainland market, issue a compliance opinion, and keep files internally for future reference.

The optimization of the MRF regime enables Hong Kong managers to expand their distribution in Chinese mainland. It better meets the demands of Hong Kong managers and improves their flexibility and efficiency in performing fund management duties. This optimization may also help to bring in more international perspectives and professional management experience, leveraging the global investment management advantages of overseas asset managers.

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