2020.05.12 WU, Man、QIN, Tianyu、XIE, Qing (Natasha)、FANG, Hao
The China Securities Regulatory Commission (CSRC) recently issued the Administrative Measures for Securities and Fund Investment Advisory Businesses (Consultation Paper) (“Administrative Measures”), proposing to formulate comprehensive and unified rules on institutions conducting securities and fund investment advisory businesses (“investment advisory businesses”).
The Administrative Measures mainly regulate three kinds of businesses conducted in China, namely, securities investment advisory business, fund investment advisory business, and the business of issuing securities research reports. These businesses are defined separately based on different underlying investment types and business models.
Among the three, securities investment advisory business is providing clients (upon their entrustment and in accordance with the terms of their agreements) with investment recommendations on securities and their derivatives in order to assist clients in making investment decisions. Fund investment advisory business is providing clients (upon their entrustment and in accordance with the terms of their agreements) with investment recommendations for securities investment funds and other investment products approved by the CSRC in order to assist clients in making investment decisions or in executing trades on behalf of clients subject to the applicable provisions. The business of issuing securities research reports is mainly providing clients with analysis and opinions on market trends, the value of the underlying investment targets but without giving any specific investment recommendations.
In terms of the underlying investment types, securities investment advisory business only targets securities and their derivatives, excluding commodity derivatives such as commodity futures. Fund investment advisory business only targets securities investment funds and other investment products recognized by the CSRC. We expect that the CSRC may formulate rules on the commodity futures investment advisory business separately.
Notably the clients of these three kinds of investment advisory businesses can target either public or private asset management products (AMPs), as well as institutional clients or individual clients. Specifically, public or private AMPs shall include both the AMPs regulated by the CSRC and those regulated by the China Banking and Insurance Regulatory Commission.
An institution engaged in securities investment advisory business or providing securities research reports shall be approved by the CSRC. An institution conducting fund investment advisory business and providing investment recommendations for public securities investment funds shall be registered with the CSRC.
The Administrative Measures apply to securities and fund investment advisory institutions approved by or registered with the CSRC to engage in securities and fund investment advisory businesses, as well as other institutions conducting securities and fund investment advisory businesses according to law. We believe this reflects a “function-oriented” regulatory approach taken by the CSRC, namely, to impose the same regulatory requirements on the businesses of the same nature, as distinguished from an “institution-oriented” regulatory approach, namely, to impose different regulatory requirements on various types of licensed institutions purely based on institutional types.
For example, the Administrative Measures stipulate the circumstances where an institution is engaged in investment advisory businesses in particular situations or within a particular scope:
(1) Securities companies or public fund distribution agencies providing ancillary investment advisory services to their clients;
(2) Securities and futures business institutions providing investment advisory services for AMPs;
(3) Securities companies, fund management companies (FMCs), futures companies, commercial banks, insurance companies, and other financial institutions recognized by the CSRC (“Other Financial Institutions”) engaging in investment advisory businesses;
(4) Private fund managers (PFMs) providing investment advisory services for AMPs or qualified foreign investors that have an actual controlling relationship with such PFMs or are controlled by the same controller.
The Administrative Measures clearly prescribe to what extent the Administrative Measures shall apply under each of the abovementioned circumstances.
For securities companies or public fund distribution agencies providing ancillary investment advisory services: they are exempted from the approval or registration requirement, provided that they do not separately enter into agreements with clients and charge for such services; they shall not provide discretionary investment advisory services to clients; they shall comply with relevant requirements under the Administrative Measures when engaging in the investment advisory activities.
For securities and futures business institutions providing investment advisory services for AMPs: they are exempted from the approval or registration requirement, provided that they report to the local bureaus of the CSRC in their places of domicile within five working days after they conduct the aforesaid business for the first time and abide by relevant requirements under the Administrative Measures. Notably, securities and futures business institutions are exempted from the approval or registration requirement only to the extent that they provide investment advisory services for AMPs. They still need to be licensed if they directly offer investment advisory services to institutional or individual clients.
Under the Administrative Measures, Other Financial Institutions engaging in investment advisory businesses are exempted from the requirements regarding shareholders, corporate governance and internal control compliance, set-up of branches, withdrawal of risk reserve, management of records and extensions for business permits. Meanwhile, they shall abide by laws, administrative regulations and other rules prescribed by financial regulatory authorities.
For PFMs, the Administrative Measures specify that if the CSRC has formulated separate rules, such separate rules shall apply. We understand “separate rules” here may refer to the following circumstances:
(a) PFMs providing investment advisory services for AMPs shall satisfy the “3+3+1” requirement in accordance with the Administrative Provisions on the Operation of Private Asset Management Plans by Securities and Futures Business Institutions and the Interim Administrative Provisions on the Operation of Private Asset Management Business of Securities and Futures Business Institutions;
(b) PFMs serving as sub-managers of MOM products shall meet relevant qualification requirements (pursuant to the Guidelines for Manager of Managers’ (MOM) Products for Securities and Futures Business Institutions (Consultation Paper), a sub-manager for a public MOM product shall also obtain the FMC license);
(c) After the Provisions on Issues Concerning the Implementation of the Administrative Measures on Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) (“Implementing Provisions”, collectively with the Administrative Measures on Domestic Securities and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors (Consultation Paper) as “QFII/RQFII New Regulations”) are officially released and implemented, PFMs providing investment advisory services for QFII/RQFIIs that have an actual controlling relationship with such PFMs or controlled by the same controller shall comply with the Implementing Provisions.
We understand that although the Administrative Measures include the aforesaid services provided by PFMs within its scope of regulation on investment advisory businesses, pursuant to paragraph three, Article 34 of the Administrative Measures, namely, “if the CSRC has formulated separate rules, such separate rules shall apply”, PFMs providing investment advisory services in accordance with the Guiding Opinions on Regulating Asset Management Business of Financial Institutions and its implementing rules, or in accordance with the QFII/RQFII New Regulations which may come out soon, will not be impacted by the Administrative Measures. It is worth noting that if PFMs offer investment advisory services to individual or institutional clients other than AMPs or special targets, they are still subject to the provisions of the Administrative Measures or separate rules on PFMs that may be promulgated in the future, if applicable.
The Administrative Measures expand the scope of institutions that may engage in the three kinds of investment advisory businesses. Theoretically speaking, except the business of issuing securities research reports, which may be conducted only by securities companies or their subsidiaries that specialize in securities investment advisory business, the other two kinds of investment advisory businesses can be engaged by all types of institutions that meet the qualification requirements stipulated under the Administrative Measures.
The Administrative Measures strengthen the regulation of securities and fund investment advisory institutions in the following regards:
(1) The Administrative Measures significantly increase the requirements for securities and fund investment advisory institutions by imposing unified standards on institutions that propose to be approved or licensed in terms of net assets (not less than 100 million RMB), shareholding structure, senior management personnel and employees, business premises and facilities, internal control, compliance and risk control systems, compliance of laws and regulations, and encourage institutions with compliant corporate governance, adaptability to regulation and strong capital strength to engage in such businesses.
(2) The Administrative Measures require securities and fund investment advisory institutions to establish internal control, compliance, and risk mitigation systems by strictly conforming to the relevant rules on securities companies and FMCs and increase the relevant operation and violation costs, so as to form a business landscape where only a few high-quality and compliant institutions may engage in securities and fund investment advisory businesses;
(3) The Administrative Measures explicitly list out prohibited activities for securities and fund investment advisory institutions by reference to typical cases of violations in the past and the most serious problems in the industry. For example, the Administrative Measures prohibit securities and fund investment advisory institutions from making misleading statements, leasing or transferring securities and fund investment advisory business qualifications to others, guaranteeing returns in violation of relevant laws and regulations, reaching agreements with clients to share investment returns in violation of relevant laws and regulations, interest tunneling, advising clients to conduct unnecessary transactions and facilitating securities and fund business activities that violate laws or regulations or intentionally circumvent regulations.
(4) The Administrative Measures also strengthen post supervision and crack down on violations, establish a three-year business license review and extension system for newly established securities fund investment advisory institutions, and hand in business licenses for those who do not carry out investment advisory business for three consecutive months without justifiable reasons, so as to prevent illegal transfer of business permits.
Although at the current stage the Administrative Measures are still open to public comments, we believe the changes in legislative spirit and regulatory approach as reflected in the consultation paper will have a profound impact on the future of business development and industry ecology of securities and fund investment advisory institutions.
1. Impact on FMCs and Fund Distribution Agencies
With the release of the Administrative Measures, one most remarkable impact is that the Administrative Measures, which is superior to the previously issued Notice on Investment Advisory Business Pilot Program for Public Securities Investment Funds (“Notice on Pilot Program”), provide a clear statutory basis for fund investment advisory business. Article 7 of the Administrative Measures provides that an institution engaging in fund investment advisory businesses may offer discretionary investment advisory services to clients and execute trades on behalf of clients within the scope of the clients’ authorization, which leaves more flexibility for such business models.
One related issue is how the Administrative Measures would regulate institutions that have engaged in fund investment advisory business in accordance with the Notice on Pilot Programs (“pilot institutions”). Pursuant to the Notice on Pilot Programs, currently pilot institutions obtain pilot qualifications through an application process, whereas the Administrative Measures require institutions providing public fund investment advisory services to register with the competent authority. Thus, how a pilot institution could complete the registration formalities remains to be clarified by the CSRC.
2. Impact on Securities Companies
Generally speaking, the Administrative Measures does not have any material impact on the current business mode of securities companies carrying out securities investment advisory business and issuing securities research reports. Nevertheless, they still need to fully comply with the new requirements regarding the compliance of business operation as stipulated under the Administrative Measures. At the same time, securities companies may evaluate the opportunities to participate in the fund investment advisory business.
3. Impact on Securities Investment Advisory Institutions
According to the List of Securities Investment Advisory Institutions published on the official website of the CSRC , as of March 2020, there are in total 83 licensed securities investment advisory institutions. We anticipate that after the official release of the Administrative Measures, the securities investment advisory industry will be reshaped. New licenses for securities investment advisory institutions, which have been suspended for several years, will be issued. Moreover, since the Administrative Measures significantly raises the thresholds for the shareholders of securities investment advisory institutions and increases relevant compliance costs, the existing securities investment advisory institutions and their shareholders may need to evaluate whether to continue conducting such business. In addition, the traditional securities recommendation protocol adopted by existing securities investment advisory institutions, where securities recommendations are made to ordinary investors in the name of each individual practitioner, also needs to be gradually upgraded so securities recommendations are mainly made to professional investors in the name of the licensed institution instead of individual practitioners, which poses new challenges for the existing securities investment advisory institutions.
We expect that in the near future high-quality investment advisory institutions may emerge through competition while poor-quality institutions may be forced to exit, allowing a new and benign industry ecology to gradually take shape.
We will continue to monitor the situation and keep our clients apprised of any important developments.
1. Namely, (1) being a member of the AMAC that has registered with the AMAC for at least one year, with no major violations of laws or regulations during its operation; and (2) having at least three investment management personnel who have at least three years of continuous and traceable performance in securities and futures investment management, with no bad employment records in the past three years.