Understanding the difference between authorized funds
and unauthorized funds

Becoming a good investor

Funds must be authorized by the Securities and Futures Commission (SFC) before they can be marketed to the public in Hong Kong. It is an offence to offer unauthorized funds to the public unless an exemption applies.

What is an authorized fund?

Fund authorization is one of the key measures of the SFC to protect investors. By authorization, the SFC seeks to ensure that investment products (including funds) meet the regulatory requirements and provide adequate information in the product offering document for investors to make informed investment decisions.

To obtain SFC's authorization, funds have to comply with the requirements contemplated in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products. These include a proper structure, well-defined investment guidelines and restrictions, ongoing disclosure requirements and other requirements related to the fund's daily administration. The fund management company and the trustee/custodian also need to comply with the relevant requirements. However, SFC authorization is not an official recommendation of a fund nor does it guarantee a good return.

What is an unauthorized fund?

An unauthorized fund, as the title implies, is a fund that has not been authorized by the SFC. Unauthorized funds cannot be marketed to the public but they can be placed privately, offered to professional investors or offered in circumstances where an exemption applies. But the onus is on the fund manager to ensure that laws are not contravened.

What are the risks associated with unauthorized funds?

You have to be very cautious if you are asked to buy a fund that is not authorized by the SFC. Unauthorized funds are not subject to the regulation of the SFC, thus, their structure and operations and their offering document may not be governed by any rules or regulations in Hong Kong.

For example, an authorized fund must appoint a trustee/custodian to hold custody of the fund's asset. If the fund manager is in financial trouble or is no longer appropriate to manage the fund, the trustee should dismiss the fund manager and reappoint another one. The SFC should immediately be notified of the change and monitor the appointment of a new fund manager. However, there may not be similar safeguards for an unauthorized fund as it is not regulated by the SFC. So, when investors consider buying an unauthorized fund, they should check if it is regulated in an overseas jurisdiction and the investor protection measures adopted by that regime.

Make sure you understand the features and risks of the product. There may not be any protection and may involve high risk if you put your hard-earned money into unauthorized products. You should verify whether a fund is authorized before making an investment decision. You can check with the intermediary or the SFC, or check the "List of Investment Products" on the SFC website.