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Advertising Guidelines for Retail Funds Amended

Introduction

Under the Securities and Futures Ordinance (SFO), it is an offence to issue any advertisement with regard to a collective investment

scheme to the public unless the advertisement is either approved by the Securities and Futures Commission (SFC) or within an

exemption. In practice, the SFC will only allow advertisements in respect of any collective investment scheme if that fund has been

authorised by the SFC under the SFO in accordance with the SFC’s Code on Unit Trusts and Mutual Funds (UT Code). Under the UT

Code, advertisements do not necessarily need to be vetted by the SFC. However all advertisements relating to SFC authorised funds to

be issued in Hong Kong must comply with the requirements of the SFC’s Advertising Guidelines Applicable to Collective Investment

Schemes Authorised under the Product Codes (Advertising Guidelines).

On 18 September 2017, the SFC issued a new FAQ34A to its Frequently Asked Questions on Advertising Materials of Collective

Investment Schemes Authorised under the Product Codes (FAQs) in relation to the use of performance information of funds that are

not authorised by the SFC (Unauthorised Schemes) in advertisements of SFC authorised funds (Authorised Schemes).

This Oversight summarises the changes introduced by the SFC’s new FAQ34A and analyses the practical implications for managers of

Authorised Schemes.

Background

Paragraph 22 of the Advertising Guidelines provides that:

“Reference to past performance of an unauthorized scheme to indicate the management company’s past track record can only beused in the following circumstances:

(a) the authorized scheme is newly launched with a past track record of less than 6 months;

(b) the investment objectives of the unauthorized scheme are substantially the same as the authorized scheme, managed by thesame management team with similar investment policies and strategies and thus subject to similar level of risk; and

(c) the advertisement makes clear that (i) the performance figures quoted are not those of the authorized scheme; (ii) whetherthe unauthorized scheme is subject to any significantly different terms (e.g. different/lower fees and charges); and (iii) theunauthorized scheme is not authorized by the Commission in Hong Kong and not available to the public of Hong Kong.”

Oversight

January 2018simmons-simmons.comelexica.com

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Pursuant to paragraph 22(a) of the Advertising Guidelines, the use of past performance information of an Unauthorised Scheme toindicate the management company’s past track record is permitted only for an Authorised Scheme that has a track record for less than6 months and if the other conditions in paragraph 22 of the Advertising Guidelines are satisfied. Prior to the introduction of FAQ 34A,once the Authorised Scheme had been launched for more than 6 months, the inclusion of past performance information of anyUnauthorised Schemes in advertisements to show the management company’s track record was not permitted.

This was often an issue with overseas fund managers and their Authorised Funds to Hong Kong investors. Such managers would oftenwant to provide investors with more information about their fund management experience by including past performance informationof other funds they have been managing outside of Hong Kong in advertising materials relating to their SFC Authorised Schemes. Thisis permitted in certain other jurisdictions.

In Singapore, for example, the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 allowsa comparison of the past performance of an authorised or recognised scheme with that of another collective investment schemeprovided that certain conditions are met, including (a) such other collective investment scheme must have investment objectives andan investment focus which are similar to those of the first-mentioned scheme; and (b) the comparison must be made on an offer-to-bid basis and that basis shall be stated in the prospectus, advertisement or publication.

Any comparison of the past performance of a collective investment scheme in Singapore with that of another collective investmentscheme has to be based on a period of at least one year, except where the first-mentioned scheme has been constituted for less than12 months, in which case, any such comparison must be based on a period commencing from the inception of the first-mentionedscheme.

Certain other jurisdictions also allow the use of past performance information of unathorised funds managed by the samemanagement company group, for example by “stitching” past performance information of the unauthorized fund with that of anauthorised fund. Notably, in such jurisdictions there is no prohibition on the use of past performance information of unauthorisedschemes even if the relevant authorised scheme has been launched for 6 months or more.

By contrast, the SFC’s approach to the use of past performance information of Unauthorised Schemes in advertisements in Hong Konghas been more stringent and restrictive than many jurisdictions as paragraph 22 of the Advertising Guidelines would prohibit the use oftrack record of any Unauthorised Schemes, even if such schemes are managed by the same manager and are substantially similar tothat of the Authorised Scheme, if the Authorised Scheme has a track record of more than 6 months.

For those managers who seek SFC authorization of an existing fund that has been established outside of Hong Kong or whose newlylaunched fund has attained a track record of over 6 months, this means that they would be unable to use past performanceinformation of any Unauthorised Schemes in advertising materials relating to their SFC Authorised Schemes.

Whilst the SFC seemed to be concerned with the provision of potentially misleading information relating to Unauthorised Schemes inthe advertising materials of Authorised Schemes, some fund managers have argued that the prohibition on the use of pastperformance information of Unauthorised Schemes, in particular those managed by the same manager or management group andwhich have substantially the same investment objective, strategy, features and risk profiles, is unfair to Hong Kong investors, asinvestors of the same Authorised Scheme in other jurisdictions may have access to such information. In addition, some fundmanagers are of the view that providing past performance information of Unauthorised Schemes (both the good and bad) to investorsmay facilitate them in making informed investment decisions about the Authorised Scheme.

FAQ 34A

FAQ 34A supplements the Advertising Guidelines by allowing for the use of past performance information of Unauthorised Schemes inthe advertisements of Authorised Schemes that have been launched and which have a track record for more than 6 months, subject tocertain conditions. Pursuant to FAQ34A, where an Authorised Scheme has attained a track record of 6 months, the managementcompany may continue to use the past performance information of an Unauthorised Scheme in advertisements provided that thefollowing requirements can be fulfilled:

The Unauthorised Scheme must be managed by the same fund management group and must have the same investment strategy,restrictions and risk profile as the Authorised Scheme;

Past performance information of the Unauthorised Scheme must cover a minimum of 5 years (or the period since its launch ifshorter) immediately preceding the launch of the Authorised Scheme;

Presentation of performance information of the Unauthorised Scheme pertaining to the period after the launch date of theAuthorised Scheme is not allowed;

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Where the fees and charges of the Unauthorised Scheme were lower than the Authorised Scheme during the period presented,the past performance information of the Unauthorised Scheme must be adjusted downward to reflect the differences in allrelevant fees and charges between the two schemes. However, upward adjustments are not allowed if the fees and charges of theUnauthorised Scheme were higher than the SFC-authorised scheme;

The performance information of the Authorised Scheme must be presented in a more prominent manner and on a stand-aloneformat from the Unauthorised Scheme;

Once the Unauthorised Scheme has been selected for presentation in the advertisements, it should be consistently applied in theadvertisements where the investment experience of the fund management group is presented;

The name of the Unauthorised Scheme should not be disclosed in the advertisements;

The advertisements should contain adequate warning statements or notes (if applicable) in addition to the applicable warningstatements as stated the Advertising Guidelines.

The SFC has also issued a set of illustrative examples to provide guidance to fund managers on how to present past performanceinformation of Unauthorised Schemes in advertising materials of Authorised Schemes. FAQ34A is only applicable to AuthorisedSchemes that have attained a track record period of 6 months or more. After this period, the manager can only present the pastperformance information of the Unauthorized Scheme covering a minimum of 5 years (or the period since launch if shorter)immediately preceding the launch of the Authorised Scheme and any performance information of the Unauthorized Scheme attainedafter the launch date of the Authorised Scheme is not allowed.

An important point to note is that the past performance information to be used once an Authorised Scheme has attained 6 monthstrack record must be that of an Unauthorised Scheme managed by the same fund management group and with the same investmentstrategy, restrictions and risk profile as the Authorised Scheme. This is in contrast with the position under paragraph 22 of theAdvertising Guidelines, which permits the use of past performance information of Unauthorised Schemes whose investment objectivesare substantially the same as the Authorized Scheme, managed by the same management team with similar investment policies andstrategies and thus subject to similar level of risk.

Practically, FAQ34A will apply only to Authorised Schemes which are essentially a replica of another existing fund established in anotherjurisdiction. For example, a fund manager may have been offering a fund (US fund) in the United States for a certain period of timeand believes that such fund is suitable for investors in Hong Kong as well. For regulatory and tax reasons, the fund manager thenestablishes a new fund as a UCITS for offer to Hong Kong investors. This Authorised Scheme may have the same investmentobjective, strategy and management team as that of the US fund. When the Hong Kong fund attains a track record of more than 6months, FAQ 34A now allows the fund manager to use past performance information of the US fund in advertising materials to HongKong investors, provided that the relevant requirements under FAQ34A are satisfied.

Conclusion

The introduction of FAQ 34A is a positive step forward in aligning Hong Kong’s regulations on the use of past performance informationof Unauthorised Schemes in advertising materials to those in other jurisdictions. Whilst it is understandable that the SFC may want toavoid the use of potentially misleading past performance information of Unauthorised Schemes, the SFC requirements are still morestringent than that of other jurisdictions (such as Singapore) and there is arguably room to extend the scope of FAQ 34A.

For example, FAQ 34A may be extended to permit the use of past performance information of Unauthorised Schemes whoseinvestment objectives are substantially the same as the Authorized Scheme, managed by the same management team with similarinvestment policies and strategies and thus subject to similar level of risk. As long as adequate disclosure and risk warnings are included,the provision of such information may furnish potential investors with more information necessary to evaluate the capabilities of themanagement company of the SFC-authorised fund, thus allowing then to arrive at a fully-informed investment decision.

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To find out more, contact:

Hong KongRolfe HaydenT +852 2583 8302E rolfe.hayden@simmons-simmons.com

Gaven CheongT +852 2583 8323E gaven.cheong@simmons-simmons.com

Eva ChanT +852 2583 8216E eva.chan@simmons-simmons.com

I vy YamT +852 2583 8415E ivy.yam@simmons-simmons.com

Esther LeeT +852 2583 8292E esther.lee@simmons-simmons.com

Natalie KongT +852 2583 8230E natalie.kong@simmons-simmons.com

Stella WaiT +852 2583 8375E stella.wai@simmons-simmons.com

Louise MaTel:+852 2583 8406E louise.ma@simmons-simmons.com

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elexica.com is the award winning online legal resource of Simmons & Simmons© Simmons & Simmons LLP 2018. All rights reserved, and all moral rights are asserted and reserved.This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP.Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the otherpartnerships and other entities or practices authorised to use the name “Simmons & Simmons” or one or more of those practices as the context requires. The word “partner” refers to a member of Simmons & Simmons LLP oran employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP’s affiliated practices. For further information on the international entities andpractices, refer to simmons-simmons.com/legalresp

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