Open-ended fund company directors and investment managers

An OFC is a corporate fund structure with variable share capital. The board, investment manager, custodian and other service providers have distinct responsibilities; exam questions often test whether a delegated task is confused with ultimate oversight.

Board role

The directors oversee the OFC and are responsible for ensuring that it is properly managed in accordance with the Securities and Futures Ordinance, the OFC Rules, the Code on Open-ended Fund Companies and the fund's constitutive documents. The board may appoint service providers, but should maintain appropriate oversight, controls and records.

Investment manager role

The investment manager conducts portfolio management in line with the mandate, investment restrictions and disclosures. It must be appropriately appointed and satisfy applicable SFC licensing or registration and competence requirements for its activities. The manager's authority comes from the governing documents and appointment, not from a transfer of every board duty.

How to separate responsibilities

• Board: governance, oversight, proper appointment and monitoring of service providers, and compliance responsibility under the applicable framework.
• Investment manager: portfolio decisions within the investment mandate and restrictions.
• Custodian: safekeeping and oversight functions assigned under the OFC regime and agreement.
• Shareholders: rights described in the OFC's constitutive and offering documents; they do not manage daily investment decisions by default.

Practical exam method

1. Identify whether the question concerns corporate governance or portfolio execution.
2. Read the OFC Code and governing documents for the exact responsibility.
3. Check whether a regulated activity requires the manager to be licensed or registered.
4. Do not assume delegation removes board oversight or makes the manager responsible for every corporate duty.

Board governance is not portfolio execution

An OFC is a company, so its directors oversee the company’s operations and governance. The investment manager is responsible for managing scheme property under a written investment management agreement. The delegation should identify the functions transferred, including investment management and, under the OFC Code, valuation and pricing responsibilities. The board does not select each security as a matter of course, but it remains responsible for oversight of the delegate and the OFC’s regulatory compliance.

Director composition and independence

An OFC must have at least two individual directors and at least one independent director. The independent director cannot be a director or employee of the custodian. Directors must meet the applicable fitness, qualification and experience standards. Independence reduces the risk that oversight of custody and investment management is merely self-review, but it does not make the independent director solely responsible for governance. The board acts collectively subject to each director’s duties.

Manager eligibility and conduct

The OFC must appoint an investment manager eligible under the framework, generally licensed or registered for Type 9 asset management and fit and proper. The manager must act in the OFC’s and shareholders’ interests and comply with the constitutive documents, investment management agreement and relevant SFC standards. An appointment does not authorize the manager to disregard investment restrictions or outsource all responsibility without oversight.

Reasonable care, skill and diligence

The OFC Code expects directors to use reasonable care, skill and diligence in overseeing the investment manager and custodian as part of the board’s oversight of the OFC. Effective oversight includes reviewing risk, valuation, conflicts, compliance reports, service-provider performance and material incidents. Directors should ask questions when reports show unexplained breaks or exceptions. A formal board minute without substantive challenge may not demonstrate meaningful oversight.

When delegation goes wrong

Suppose the manager breaches an investment limit and the custodian processes the trade. The manager may be responsible for portfolio control; the custodian’s role depends on its duties and what it should detect; and the directors must assess whether their monitoring framework was adequate and how they responded. Do not allocate all fault to the board just because it has ultimate oversight, nor assume delegation removes board responsibility. Analyze each actor’s duty and information.

Conflicts and related-party activity

The board should ensure that conflicts are identified, disclosed and managed under the OFC Code, offering documents and applicable conduct obligations. A manager affiliated with a service provider or transacting with a related party may require additional review, independent approval or disclosure. The exact requirement depends on the nature of the conflict and the fund documents. Record how the board assessed fairness and investor interests rather than treating disclosure alone as a cure.

Escalation and replacement planning

If the manager fails, loses eligibility or cannot continue, the OFC needs a process for replacing it and maintaining lawful management of scheme property. The SFC’s post-registration procedures cover changes to key OFC appointments. The board should assess continuity, investor communication, asset protection and required approvals or notifications. A manager’s resignation does not mean the directors can casually assume a regulated Type 9 portfolio role.

Exam method

Classify each function: directors govern and oversee; the investment manager makes delegated portfolio and valuation decisions; the custodian safeguards scheme property and performs its own oversight duties. Then apply the facts to the relevant agreement, Code and legal requirement. Explain that delegation allocates work, while board oversight and each provider’s independent duties continue.

Board papers that support real oversight

Board reporting should include portfolio and liquidity risks, valuation exceptions, breaches, conflicts, custody reconciliations, service-provider incidents and investor complaints. Reports need enough detail for directors to challenge the manager and custodian, with action owners and deadlines. Repeatedly accepting an unexplained exception can undermine the board’s ability to show reasonable care, skill and diligence.

Sub-funds need clear responsibility

For an umbrella OFC, determine whether a decision, asset or liability belongs to a particular sub-fund and how it is recorded. The manager should apply each sub-fund’s objective and restrictions, while the board oversees the arrangement at OFC level. Confusion between portfolios can create allocation or segregation problems. Follow the instrument, offering documents and current OFC Rules.

Exam takeaway

The board governs and oversees; the appointed manager invests within the mandate. Delegation allocates work but does not erase statutory duties, licensing requirements or monitoring responsibilities.