2023.03.06 XIE, Qing (Natasha)、ZHANG, Chi (Austin)、LUO, Danchen、ZHANG, Lin
After considering comments received from public consultation, the Asset Management Association of China (“AMAC”) formally issued the Measures for Private Fund Manager Registration and Private Fund Filing (the “Measures”) and the ancillary guidelines on February 24, 2023. We have summarized and highlighted below some of the key points for foreign-invested private fund managers in respect of private fund manager (“PFM”) registration and private fund filing.
I. Foreign-invested PFM Registration
The Measures and the ancillary guidelines further optimize the PFM registration regime, improve the rules and standards for PFM registration, and provide requirements on key aspects of PFMs such as “personnel”, “capital”, and “facilities”.
1. Direct or Indirect Shareholders
1.1 The overseas shareholder of a wholly-foreign-owned securities-type PFM (usually referred to as “WFOE PFM”) shall be a financial institution approved or licensed by the financial regulator of the country or region where it is located, and the securities regulatory authority in the country or region where it is located has entered into a memorandum of understanding on securities regulatory cooperation with the China Securities Regulatory Commission (“CSRC”) or any other organizations recognized by the CSRC. Such provisions are consistent with the earlier rules issued by the AMAC, i.e., No.10 Q&As on Relevant Issues on Private Fund Manager Registration and Private Fund Filing and the Filing Instructions to Private Fund Manager Registration and Private Fund Filing of Wholly Foreign-owned and Joint Venture Private Securities Investment Fund Managers.
1.2 By contrast, relevant provisions do not require the direct or indirect shareholder of a foreign-invested equity-type PFM (usually referred to as “WFOE PEFM”, WFOE PFM and WFOE PEFM collectively referred to as “foreign-invested PFM”) to be an institution approved or licensed by the financial regulator of the country or region where it is located.
It is worth noting that Article 8 of the Measures provides that a PFM’s legal representative, executive partner or its appointed representative, and senior management personnel in charge of investment management shall collectively hold a certain proportion of equity interest or property shares of the PFM directly or indirectly, but PFMs controlled by institutions regulated by overseas financial regulators, among others, can be exempted. Since most foreign-invested equity-type PFMs (WOFE PEFM) and QDLP fund managers are directly or indirectly controlled by institutions regulated by overseas financial regulators, they can be exempt from the above compulsory employee shareholding requirement.
2. Determination of the De Facto Controller
According to the Measures and Article 11 of the Guidelines No. 2 for the Registration of Private Fund Managers: Shareholders, Partners and De Facto Controllers, a de facto controller refers to a natural person, legal person or any other organization that can direct the operation of a PFM through investments, agreements, or other arrangements. The de facto controller of a PFM shall be traced up to a natural person, state-owned enterprise, listed company, financial institution approved by the financial administration departments, public institution such as a university or research institute, social organization with a nature of the legal person, or an institution regulated by overseas financial regulators, and shall be determined based on the following criteria in sequence: (1) holding 50% or more equity interests; (2) exercising a majority of shareholders’ voting rights by virtue of an acting-in-concert agreement; (3) by exercising voting rights, being able to appoint half or more members of the board of directors or being able to appoint the executive director.
Pursuant to the Measures, the de facto controller of a WFOE PFM shall be an overseas financial institution, which is consistent with the current rules that the de facto controller of a WFOE PFM must be traced up to the overseas financial institution approved or licensed by overseas financial regulators.
While for a foreign-invested equity-type PFM (WFOE PEFM) or an other-type PFM such as QDLP fund manager, if the de facto controller is a natural person, they shall have at least 5 years’ relevant experience in operation and management, or in asset management, investment, or related industries. Furthermore, unless otherwise provided, they shall take the position of a director, supervisor, senior officer, or executive partner or its appointed representative in the PFM under their control.
The Measures provide more detailed rules on PFMs within the same group. If the same controlling shareholder or de facto controller controls two or more PFMs, the following requirements must be satisfied:
(1) Having sufficient reason and necessity; the PFMs under its control shall carry out businesses continuously and in a compliant and effective manner;
(2) Making reasonable and effective arrangements for internal control regimes such as business risk isolation, avoidance of horizontal competition, management of related-party transactions, and prevention of conflicts of interest;
(3) Establishing an ongoing compliance and risk management regime that matches the management scale and business operation status of the PFMs under its control.
We understand that the above provisions apply to foreign managers wishing to carry out private securities fund management business, private equity fund management business and QDLP fund management business concurrently within the territory of China.
3. Qualifications for Senior Management Personnel
The Measures set out higher requirements on PFMs’ legal representatives and senior management personnel in charge of investment management in terms of work experience.
Specifically, a securities-type PFM’s legal representative, executive partner or its appointed representative, person in charge of operations and management, and senior management personnel in charge of investment management shall have at least five years’ work experience in securities, funds, futures investment management or other related work experience.
An equity-type PFM’s legal representative, executive partner or its appointed representative, person in charge of operations and management, and senior management personnel in charge of investment management shall have at least five years' work experience in equity investment management or related industry management.
The requirements for persons in charge of compliance and risk control remain unchanged, that is, at least three years' work experience in legal, accounting, auditing, supervision, and inspection relating to investments, or in compliance, risk control, regulation and self-disciplinary management in the asset management industry.
The Measures and the Guidelines No. 3 for Registration of Private Fund Managers: Legal Representatives, Senior Management Personnel and Executive Partners and Appointed Representatives (the “Guidelines No. 3”) clarify specific requirements of the investment management’s track record on PFMs’ senior management personnel in charge of investment management. A securities-type PFM’s senior management personnel in charge of investment management shall have more than two consecutive years’ investment track record within the last ten years, and the management scale of a single product or a single account shall be at least RMB 20 million. An equity-type PFM’s senior management personnel in charge of investment management shall have experience in leading at least two investments in the equities of non-listed enterprises within the last ten years, with a total investment amount of not less than RMB 30 million, and at least one of which shall have exited through an initial public offering, equity-related merger and acquisition, or equity transfer, or they shall have other investment management track record that meets relevant requirements. These requirements set a higher threshold for the experience of senior management personnel in charge of investment management, which means in any case foreign managers would have to spend longer time and higher cost than their local peers to recruit local staff to build up their own senior management and investment teams.
The Measures and Guidelines No. 3 exclude some unqualified persons from being a PFM’s senior officer and clarify the specific criteria of securities/equity-related work experience, and foreign managers are advised to proceed with care when recruiting their local teams. In addition, although after the resignation of a senior officer, a PFM may appoint a qualified person to perform their duties temporarily, managers should note that they must employ a qualified senior officer within six months.
4. Minimum Number of Staff and Dual-Hatting Restrictions
The Measures provide that a PFM shall have at least five full-time employees. The Guidelines No. 1 for the Registration of Private Fund Managers: Basic Operational Requirements (the “Guidelines No. 1”) clarify that full-time employees includes not only those employees who have signed labor contracts with a PFM and the PFM pays social security for them, but also foreign employees who have signed labor contracts or service contracts with the PFM, which is good news for foreign-invested PFMs. The Measures are generally consistent with the earlier rules in terms of the dual-hatting restrictions and provide that it must be justifiable if PFM’s senior management personnel take any concurrent positions and they shall not concurrently hold a position in an institution with a conflict of interest, such as a non-affiliated PFM, or an institution whose business has a conflict of interest, and the person-in-charge of compliance and risk control, in particular, shall not concurrently hold a position in any other profit-making institution. We note that the Measures and the ancillary guidelines no longer have the current restriction that the number of dual-hatted senior management personnel shall not exceed 50% of the total number of senior management personnel.
Notably, the Measures and the Guidelines No. 3 provide exceptions on the minimum number of full-time employees and dual-hatting restrictions on senior management personnel, that is, if there are provisions on PFMs otherwise provided in Article 17 (i.e., PFMs within the same group) of the Measures, such provisions shall prevail. We understand these exceptions leave room for senior management personnel in WFOE PFMs to hold a post concurrently in their QDLP subsidiaries.
5. Requirements on Paid-in Capital
The Measures, being consistent with the consultation paper, specify the minimum paid-in capital of a PFM, i.e., a PFM’s paid-in monetary capital shall not be less than RMB 10 million or its equivalent.
6. Requirements on Business Premises
According to the Measures and Article 8 of the Guidelines No. 1, PFMs shall have an independent and stable business premise, and shall not use shared office space or other premises of insufficient stability as the business premise, nor shall PFMs share offices with their shareholders, partners, de facto controllers, or affiliates. If the PFM rents a business premise, the remaining lease term shall not be less than 12 months starting from the date of submitting the application for PFM registration, unless there are reasonable grounds. Though it is not unusual in practice that a PFM’s registered office is inconsistent with its business premises, the PFM must justify such arrangements and state the reasons to the AMAC.
II. Private Fund Filing
The Measures for the first time set out requirements on the minimum initial paid-up capital of private funds, that is, it shall be not less than RMB 10 million for a securities-type private fund or a PE/VC-type private fund, and RMB 20 million for a private fund that invests in a single target. In practice, most QDLP funds are feeder funds that will invest in a single overseas target, i.e., an offshore fund managed by the QDLP fund manager’s overseas shareholders or its affiliates. QDLP funds under this structure would possibly be considered as private funds investing in a single target and therefore subject to the RMB 20 million minimum requirement. It is important to note that the AMAC may consider local QDLP pilot rules on the minimum subscribed capital/initial fundraising amount of QDLP funds, for example, the local QDLP pilot rules may provide that the minimum subscribed capital/initial fundraising amount of a QDLP fund shall be not less than RMB 30 million or its equivalent.
In the consultation paper of the Measures, Article 44 once expressly enumerated specific circumstances where the AMAC may take prudent measures to handle private funds filing. We noted that these specific circumstances are no longer specified in the Measures to leave certain flexibility in the application of Article 44. If a PFM involves major potential risks, a private fund involves major matters without precedent, or the fund structure is complex or the investment targets are special, the AMAC may impose additional requirements on the relevant private funds to be filed, including imposing higher requirements on investors, raising requirements for the fund size, requiring mandatory custody of the fund assets and requiring the custodian to issue a due diligence report or to cooperate with inquiries. It could also include enhanced information disclosure requirements, disclosing special risk factors, implementing quota administration, restricting related-party transactions, and a requirement to issue an internal compliance opinion, submit a legal opinion or submit relevant financial reports.
III. Grace Period
The Measures and the ancillary guidelines will take effect from May 1, 2023. Current rules will apply to applications for PFM registration, fund filing, and the change of information submitted before the implementation of the Measures. While for those have been submitted before the implementation of the Measures but not yet completed as of May 1, 2023, as well as those to be submitted after the implementation of the Measures, the Measures and the ancillary guidelines will apply.
IV. Our Observations
The Measures and the ancillary guidelines improve the current self-disciplinary regimes of PFM registration and private fund filing and lay a foundation for the subsequent implementation rules. We expect the AMAC may update the checklists for PFM registration and private fund filing as well as other ancillary rules according to the Measures and the ancillary guidelines. We will continue to monitor the latest practice and feedback in the market upon the implementation of these new rules and keep our clients apprised of the latest developments.