2023.05.18 XIE, Qing (Natasha)、ZHANG, Chi (Austin)、ZHANG, Lin
On April 28, 2023, the Asset Management Association of China (“AMAC”) solicited public comments on the Guidelines for the Operation of Private Securities Investment Funds (Draft for Comments) (the “Guidelines”). The Guidelines aim to regulate the fundraising, investment, operation and management of private securities investment funds, and clarify some bottom-line regulatory requirements. The Guidelines are in addition to the current Measures for Private Fund Manager Registration and Private Fund Filing and the ancillary guidelines as well as other existing laws and regulations for private securities investment funds and aim to improve the regulatory regime for the operation of private securities investment funds. We have summarized below some of the key points of the Guidelines for foreign-owned private fund managers:
I.Requirements on Fundraising
Provisions of the Guidelines
Relevant Rules
Article 5 [Fundraising and Conditions for Liquidation] The initial paid-up capital of a private securities investment fund shall not be less than RMB 10 million. It shall be clearly agreed in the fund contract that if the net asset value of the fund is less than RMB 10 million for 60 consecutive trading days, unless it is caused by market fluctuation, the fund must be liquidated. The fund custodian shall urge the PFM to perform the relevant information disclosure obligations and to liquidate the fund in accordance with the fund contract.
Administrative Measures on Operation of Publicly Offered Securities Investment Funds
Article 41.1 For an open-ended fund formed in accordance with Article 12.1 of these Measures, after the fund contract enters into force, if the number of fund unit holders is less than 200 or the net asset value of the fund is less than RMB 50 million for 20 consecutive working days, the fund manager shall disclose the same in the periodic reports; if any of the aforementioned circumstances lasts for 60 consecutive working days, the fund manager shall report to the CSRC and propose a solution, such as switching the operation mode, merging the fund with other fund(s), or terminating the fund contract, and convene a general meeting of fund unit holders to decide by voting.
Highlights:
Article 5 of the Guidelines sets out a condition for the compulsory liquidation of a private securities investment fund, i.e., if the net asset value of a private securities investment fund is less than RMB 10 million for 60 consecutive trading days, unless it is caused by market fluctuations, the fund must be liquidated. Similarly, for public funds, the Administrative Measures for the Operation of Publicly Offered Securities Investment Funds provide that if the net asset value of a public fund is lower than a certain amount for 60 consecutive working days, the fund manager shall report to the China Securities Regulatory Commission (“CSRC”) and propose a solution, such as switching the operation mode, merging the fund with other fund(s), or terminating the fund contract, and convene a general meeting of fund unit holders to decide by voting. This however does not mandate that the public fund be liquidated. We understand that Article 5 of the Guidelines mimics the relevant rules for public funds. However, compared with the multiple options available for public funds, this article provides less flexibility by requiring private funds to be liquidated without other options. Given that most private securities investment funds are contractual-type funds, the fund contracts between the private securities-type fund manager (“PFM”), the fund custodian and fund investors should be respected, including their agreements on the early termination of the funds. We suggest that the final version of the Guidelines give more flexibility to PFMs and fund unit holders to decide on the existence or liquidation of the fund at their discretion.
Provisions of the Guidelines
Relevant Rules
Article 6 [Suitability Requirements for Special Investment Targets] The risk level of private securities investment funds shall match the risk and return characteristics. The risk tolerance level of fund investors shall not be lower than the risk level of the private securities investment fund if the fund primarily invests in less liquid assets, derivatives, or offshore assets.
Administrative Measures for the Suitability of Securities and Futures Investors
Article 19 After a business operating institution has notified an investor that a particular product or service is not suitable for it, if the investor voluntarily requests to purchase the product or service with a risk level higher than its risk tolerance level, the business operating institution shall, upon confirming that the investor is not at the lowest risk tolerance level, give the investor a special written risk warning that the risk level of the product or service is higher than the investor’s risk tolerance level; if the investor still insists on purchasing the product or service, the business operating institution may sell the product or provide relevant services to the investor.
Highlights:
Article 6 of the Guidelines requires that the risk tolerance level of a fund investor shall not be lower than the risk level of the fund, if the fund primarily invests in less liquid assets, derivatives, or offshore assets. That means, investors classified as C4 will not be allowed to invest in a private securities investment fund that is at the risk level of R5 and primarily invests in less liquid assets, derivatives, or offshore assets. As QDLP funds primarily invest in offshore assets, this provision narrows the scope of eligible investors for QDLP funds, which may affect the fundraising of QDLP funds.
There is an inconsistency between Article 6 of the Guidelines and the Administrative Measures for the Suitability of Securities and Futures Investors previously issued by the CSRC. According to Article 19 of the Administrative Measures for the Suitability of Securities and Futures Investors, if an investor voluntarily requests to purchase a product or service with a risk level higher than the investor’s risk tolerance level, and the investor still insists on purchasing the product or service after the securities/futures business operating institution has given the investor a written special risk warning that the risk level of the product or service is higher than the investor’s risk tolerance level, the business operating institution may sell the product or provide relevant services to the investor. If the foregoing CSRC provisions apply, investors with a lower risk tolerance level still have a chance to purchase private securities investment funds with a higher risk level. Therefore, whether the Guidelines have the authorization to set a stricter restriction than the foregoing CSRC provision needs further consideration.
Provisions of the Guidelines
Article 7 [Regulation on Purchase and Redemption Management] Considering the liquidity of investment targets, investment strategy, investors’ demands and other factors of private securities investment funds, PFMs may choose to form open-ended private securities investment funds which can be open for purchase and redemption throughout the duration of the fund, and close-ended private securities investment funds which cannot be open for purchase and redemption throughout the duration of the fund.
The procedures, time, frequency, and restrictions on investors’ purchases and redemptions for open-ended private securities investment funds shall be clearly provided. Open-ended private securities investment funds may be open for purchase and redemption of fund units at most once a month.
The funds that raise capital only from the following investors can be exempted from the above restrictions on the frequency of opening for purchase and redemption:
(1) pension funds such as social security funds and enterprise annuities, and social welfare funds such as charity funds;
(2) financial institutions that are regulated by the financial supervision and administration authorities of the State Council, and the asset management products offered by such financial institutions;
(3) private funds that are filed with the AMAC; and
(4) other investors as stipulated by the CSRC and the AMAC.
Private securities investment funds may set ad hoc dealing days. It shall be clearly stipulated in the fund contract that ad hoc dealing days are set only due to adjustments to laws, regulations or regulatory policies, significant change in circumstances, amendment or termination of contracts, or other circumstances. Purchase of fund units is not allowed on ad hoc dealing days. PFMs shall notify all fund investors two trading days prior to the ad hoc dealing days.
Article 8 [Lock-up Period] PFMs shall establish and improve product liquidity risk management policies. A lock-up period of no less than six months shall be stipulated in the fund contract according to the product type, investment strategy, risk characteristics and other factors. The funds that raise capital only from the investors enumerated in Article 7.3 of the Guidelines can be exempted from the foregoing restrictions.
Where a PFM and its employees using their proprietary funds to invest in private securities investment funds managed by the PFM, the lock-up period shall not be less than twelve months.
Highlights:
The Guidelines, for the first time, stipulate the frequency of open days for purchase and redemption of open-ended private securities investment funds and the lock-up period of private securities investment funds. According to the Guidelines, open-ended private securities investment funds may be open for purchase and redemption of fund units at most once a month. A lock-up period of no less than six months shall be stipulated in the fund contract of a private securities investment fund according to the product type, investment strategy, risk characteristics and other factors. The funds that raise capital only from the following investors can be exempted from the foregoing restrictions on the frequency of open days for purchase and redemption and the minimum lock-up period: 1) pension funds such as social security funds and enterprise annuities, and social welfare funds such as charity funds; 2) financial institutions that are regulated by the financial supervision and administration authorities of the State Council, and the asset management products offered by such financial institutions; 3) private funds that are filed with the AMAC; 4) other investors as stipulated by the CSRC and the AMAC.
Article 7 of the Guidelines provides for the first time that private securities investment funds may set ad hoc dealing days only in the event of adjustments to laws, regulations or regulatory policies, significant change in circumstances, amendment or termination of contracts, or other circumstances. Currently, it may stipulate in the fund contract that PFM may, at its sole discretion, set ad hoc dealing days when it determines that an ad hoc dealing day fits the fund operation needs or satisfies the rights and interests of the fund or fund unit holders. In this regard, Article 7 of the Guidelines limits the flexibility for PFMs to set ad hoc dealing days at their sole discretion.
II.Requirements on Investment
Provisions of the Guidelines
Relevant Rules
Article 12 [Portfolio Investment] Private securities investment funds shall invest in portfolios. The funds invested in the same asset shall not exceed 25% of the net asset value of a private securities investment fund; and the funds invested in the same asset by all private securities investment funds managed by the same PFM shall not exceed 25% of such asset, except for investments in demand deposits, treasury bonds, central bank notes, policy bank bonds, local government bonds, public funds and other investment varieties recognized by the CSRC and the AMAC.
The foregoing portfolio investment restrictions shall not apply if any one of the following conditions is met:
(1) close-ended private securities investment funds that participate in strategic placements, non-public shares offering by listed companies or other specific investment projects, and the names of investment projects and proposed investment percentage are explicitly stipulated in the fund contract;
(2) for a private securities investment fund, it is explicitly agreed in the fund contract to invest 90% or more of the fund assets exclusively in a single fund that meet the portfolio investment restrictions stipulated in the first paragraph of this article;
(3) other circumstances as stipulated by the CSRC and the AMAC.
Article 15 [Percentage Restrictions on Investments in Listed Companies’ Shares] A listed company’s shares held by proprietary funds of securities-type PFMs under the same de facto control, all the private securities investment funds under their management, and asset management products to which they act as investment advisors, shall not exceed 30% of the outstanding shares of the listed company in aggregate, unless otherwise provided by the CSRC and the AMAC.
Administrative Provisions on the Operation of Private Asset Management Plans by Securities and Futures Business Operating Institutions:
Article 15 The funds invested in the same asset shall not exceed 25% of a collective asset management plan (AMP)’s net asset value. The funds invested in the same asset by all collective AMPs managed by the same securities and futures business operating institution shall not exceed 25% of such asset, except for AMPs formed for the purpose of company acquisition and AMPs specializing in investment in the equity of unlisted enterprises. Investment in demand deposits, treasury bonds, central bank notes, policy bank bonds, local government bonds and other investment varieties recognized by the CSRC can be exempted from the foregoing restrictions.
The following AMPs shall not be subject to the restrictions stipulated in the preceding paragraph: 1) a close-ended collective AMP, of which all investors are professional investors that satisfy the requirements of the CSRC and each investor invests no less than RMB 10 million in such AMP; 2) an AMP with securities investment portfolios that fully match the components of relevant indices; and 3) other collective AMPs recognized by the CSRC.
A listed company’s shares held by all AMPs and publicly offered securities investment funds (“public funds") managed by the same securities and futures business operating institution shall not exceed 30% of the outstanding shares of the listed company in aggregate. AMPs and public funds with securities investment portfolios that fully match the components of relevant indices and other investment portfolios recognized by the CSRC can be exempted from the foregoing investment percentage restrictions.
Highlights:
Article 12 of the Guidelines provides the requirements on portfolio investments for private securities investment funds, which echoes the similar provisions in the Administrative Provisions on the Operation of Private Asset Management Plans of Securities and Futures Business Operating Institutions previously issued by the CSRC. In terms of investment concentration requirements, the Guidelines stipulate that the funds invested in the same asset shall not exceed 25% of the net asset value of a single private securities investment fund; and the funds invested in the same asset by all private securities investment funds managed by the same PFM shall not exceed 25% of such asset, except for investments in demand deposits, treasury bonds, central bank notes, policy bank bonds, local government bonds, public funds and other investment varieties recognized by the CSRC and the AMAC. It should be noted that this article exempts from the above portfolio investment restrictions private securities investment funds that explicitly agree in the fund contract to invest 90% or more of the fund assets exclusively in a single fund. Such an exemption can be read to mean that QDLP funds that adopt a master-feeder fund structure should not be subject to the portfolio investment restrictions.
Provisions of the Guidelines
Relevant Rules
Article 13 [Prohibition of Multi-level Nesting] Private securities investment funds shall be constructed clearly and transparently, and shall not circumvent regulatory requirements through complex structures or multi-level nesting.
If a private securities investment fund invests in other private securities investment funds or AMPs offered by financial institutions, it shall be explicitly agreed that the private securities investment funds or AMPs to be invested by the funds will not invest in any other private securities investment funds or AMPs, except for public funds.
It does not constitute a multi-level nesting prohibited by the preceding paragraph if a private securities investment fund, which is invested in by a product specified in Article 12.2(2) of these Guidelines, invests in another private securities investment fund, provided that all funds at each layer shall not be managed by the same PFM nor its affiliates.
Administrative Provisions on the Operation of Private Asset Management Plans by Securities and Futures Business Operating Institutions:
Article 15.2 The following AMPs shall not be subject to the investment restrictions stipulated in the preceding paragraph: 1) a close-ended collective AMP, of which all investors are professional investors that satisfy the requirements of the CSRC and each investor invests no less than RMB 10 million in such AMP; 2) an AMP with securities investment portfolios that fully match the components of relevant indices; and 3) other collective AMPs recognized by the CSRC.
Highlights:
Pursuant to the exception stipulated by Article 13 of the Guidelines, it does not constitute a multi-level nesting prohibited by this article if a private securities investment fund, which stipulates in the fund contract to invest 90% or more fund assets exclusively in a single fund, invests in another private securities investment fund, provided that all funds at each layer shall not be managed by the same PFM nor its affiliates. As onshore QDLP funds invest in offshore assets, we understand that, subject to relevant laws, regulations and business rules governing cross-border investments, neither the offshore master funds invested by onshore QDLP funds nor the relevant offshore fund structures should be subject to the domestic regulatory restrictions on multi-level nesting.
Provisions of the Guidelines
Relevant Rules
Article 17 [Derivatives Trading] For the purposes of risk management and asset allocation, private securities investment funds that engage in derivatives trading shall, trade with derivatives business operating institutions that are recognized by the CSRC, and shall meet the following requirements:
(1) during the derivatives trading, the net asset value of the fund shall not be less than RMB 50 million, unless it is caused by market fluctuations;
(2) the margin paid to a single counterparty shall not exceed 20% of the fund’s net assets;
(3) the aggregated notional principal of derivatives transactions shall not exceed 200% of the fund’s net assets, except where the fund contract expressly stipulates that the margin paid for derivatives trading shall not exceed 50% of the fund’s net assets; and
(4) it is prohibited to use derivatives transactions as leveraged financing instruments for exchange-traded products such as stocks and bonds, to provide channel services for fund distributors to sell derivatives with specialized structure to natural persons, nor to provide channel services of derivatives trading to unqualified investors.
Guiding Opinions on Regulating Asset Management Business of Financial Institutions:
Article 4.2 Asset management products shall be classified into four types depending on the nature of investment, i.e., fixed-income type products, equity type products, commodity and financial derivatives type products, and hybrid type products. A fixed-income type product shall invest no less than 80% of its assets in deposits, bonds, and other debt assets. An equity type product shall invest no less than 80% of its assets in stocks, equity of unlisted companies and other equity assets. A commodity and financial derivatives type product shall invest no less than 80% of its assets in commodity derivatives and financial derivatives. A hybrid type product may concurrently invest in debt assets, equity assets, and commodity and financial derivatives assets, while the proportion of investment in each of these three types of assets does not reach 80%.……
Article 20 An upper limit of liabilities ratio (i.e., total assets/net assets) shall be set for asset management products, and the same type of products shall be subject to the same upper limit of liabilities ratio. The total assets of an open-ended publicly offered product shall not exceed 140% of its net assets. The total assets of a close-ended publicly offered product or a privately offered product shall not exceed 200% of its net assets respectively. The total assets of a product shall be calculated, according to the principle of “looking through”, in aggregation with the assets of all the asset management products it invests in.
Highlights:
Article 17 of the Guidelines provides for the first time that, when participating in derivatives trading, private securities investment funds shall trade with derivatives business operating institutions that are recognized by the CSRC and shall meet all of the following requirements: 1) during the derivatives trading, the net asset value of the fund shall not be less than RMB 50 million; and 2) the margin paid to a single counterparty shall not exceed 20% of the fund’s net assets. Given that the Guidelines explicitly restrict the counterparties of private securities investment funds in derivatives trading to derivatives business operating institutions recognized by the CSRC, the possibility of conducting derivatives transactions between private securities investment funds is ruled out. In addition, the restriction of “20% margin” paid to a single counterparty may further limit the fund’s choice in allocating its remaining exposures to other liquid counterparties; 3) the Guidelines specify that private securities investment funds shall conduct derivatives trading for the purposes of risk management and asset allocation and shall not use derivatives transactions as leveraged financing instruments for stocks, bonds and other exchange-traded products, nor provide channel services of derivatives trading to unqualified investors, and set out requirements on investment concentration and leverage ratio.
III.Requirements on Operation and Management
Provisions of the Guidelines
Relevant Rules
Article 4 [Prohibition of Channel Business] PFMs shall conduct compliance review of the source of investors’ funds. Investors or any third parties designated by them are not allowed to give investment instructions or conduct investment operation by themselves. PFMs shall not provide channel services for financial institutions, other PFMs, asset management products offered by financial institutions or other private funds to circumvent investment scope, leverage ratio restrictions, investor thresholds or other regulatory restrictions.
Administrative Measures for the Privately Offered Asset Management Business of Securities and Futures Business Operating Institutions:
Article 47 A securities and futures business operating institution shall perform its discretionary management duty, and the following activities shall be prohibited:
(1) providing channel services for other institutions, individuals or asset management products to circumvent investment scope, leverage ratio restrictions or other regulatory restrictions;
(2) delegating the responsibilities of due diligence or investment operation to principals or any third parties designated by them;
(3) allowing principals or any third parties designated by them to give investment instructions or substantive investment recommendations such as specific investment targets;
(4) exercising the rights of the securities held by AMPs according to the opinions of the principals or any third parties designated by them;
(5) other activities prohibited by laws, administrative regulations and the CSRC.
Highlights:
Article 4 of the Guidelines reiterates that PFMs are prohibited from conducting channel business, and investors or any third parties designated by them are not allowed to give investment instructions or conduct investment operation by themselves.
Provisions of the Guidelines
Article 19 [Private Quantitative Funds] To engage in quantitative trading, private securities investment funds shall meet the following requirements:
(1) The PFM shall have a sound risk control mechanism and emergency management policy to ensure the trading system security and data security, and shall establish mechanisms for internal decision-making, management, implementation and supervision, and ensure that the cybersecurity and information security management capabilities, risk control capabilities, software and hardware equipment, and staffing support are in line with its trading strategies, business scale and business complexity;
(2) The PFM shall establish and improve an internal management mechanism for business processes including research and development, testing, verification and launch of trading strategies;
(3) The PFM shall establish and effectively implement internal management policies for prevention of abnormal trading risks such as self-trades, reverse trading, and breaching of shareholding limits;
(4) The PFM is required to maintain records of transactions, source code of strategies, written descriptions of algorithms or strategies, and any other pertinent information for a period of not less than 20 years;
(5) If the fund name contains "quantitative", the specific investment strategies shall be specified in the fund contract, prospectus and other documents; and
(6) Other requirements as stipulated by the CSRC and the AMAC.
Highlights:
Article 19 of the Guidelines provides regulatory principles for private securities investment funds engaging in quantitative trading in relation to PFMs’ trading system security, abnormal trading monitoring, internal management, data retention, product naming and other aspects.
Provisions of the Guidelines
Relevant Rules
Article 20 [Performance Fees] If a private securities investment fund adopts performance fee mechanism, the calculation method, payment frequency and performance fee rate shall be reasonably determined and specified in the fund contract, and performance fees shall be linked to the fund’s performance. PFMs’ interests shall be in line with investors’ interests and PFMs shall not include unfair or inappropriate terms related to performance fees in the fund contract, nor calculate performance fees in a manner that is obviously favorable to, or provides an excessive incentive to, the PFMs.
A private securities investment fund may only adopt one performance fee calculation method, which shall be based on the overall returns on fund units to ensure to treat investors fairly. Performance fees of private securities investment funds shall only be accrued when the fund units realize positive returns, unless otherwise provided.
Administrative Provisions on the Operation of Private Asset Management Plans by Securities and Futures Business Operating Institutions:
Article 41 Securities and futures business operating institutions may agree in asset management contracts with investors on the accrual of performance fees, which shall be included in the management fees.
Securities and futures business operating institutions shall adhere to the principles of treating investors fairly, long-term performance orientation and appropriate incentives, and shall reasonably determine the payment frequency and performance fee rate as well as the upper limit of management fees (including performance fees), to ensure that the accrual of performance fees is in line with the duration term, profits distribution and investment operation characteristics of AMPs.
Performance fees shall be accrued from dividends, redemption proceeds or liquidation proceeds, and the performance fees may be accrued from dividends at most once every six months. The proportion of performance fee shall not exceed 60% of the investment returns above the benchmark for the accrual of the performance fee.
Highlights:
Pursuant to Article 20 of the Guidelines, PFMs shall not calculate performance fees in a manner that is obviously favorable to or provides an excessive incentive to themselves. On a related note, the Administrative Provisions on the Operation of Private Asset Management Plans of Securities and Futures Business Operating Institutions provide that the proportion of performance fee shall not exceed 60% of the investment returns above the benchmark for the accrual of the performance fee. We believe that the application of Article 20 of the Guidelines is likely to refer to the foregoing criteria stipulated in the Administrative Provisions on the Operation of Private Asset Management Plans of Securities and Futures Business Operating Institutions.
Provisions of the Guidelines
Article 25 [Stress Tests] Securities-type PFMs under the same de facto control with an aggregated AUM of RMB 2 billion or more at the end of the preceding year shall establish and improve risk management policies for the monitoring, early warning and emergency resolutions of liquidity risk and alarm mechanisms and stop-loss mechanisms, and shall conduct stress tests at least once a quarter. PFMs shall, taking into account the market conditions and their management capabilities, formulate and continuously update the liquidity risk emergency plan, and specify the triggering scenarios of the plan, contingency procedures and measures.
Article 28 [Risk Reserves] Securities-type PFMs under the same de facto control with an aggregated AUM of RMB 2 billion or more at the end of the preceding year shall allocate risk reserves from fund management fees (including performance fees) as of the current year. Such risk reserves shall be mainly used to cover for the losses suffered by the private securities investment funds or the investors due to the private fund manager’s violation of laws or regulations, breach of contract, operational errors, or technical failures. The Guidelines encourage other PFMs to establish risk reserve management policies based on their own characteristics.
Highlights:
Articles 25 and 28 of the Guidelines require for the first time that PFMs under the same de facto control with an aggregated asset under management (AUM) of RMB 2 billion or more at the end of the preceding year shall (i) conduct stress tests on a regular basis, and formulate and continuously update the liquidity risk emergency plan, and (ii) establish a risk reserve policy and allocate risk reserves from fund management fees (including performance fees) as of the current year. Such risk reserves shall be mainly used to cover the losses suffered by the private securities investment funds or the investors due to the PFM’s violation of laws or regulations, breach of contract, operational errors, or technical failures. We recommend that PFMs that have reached the aforementioned AUM threshold pay attention to these requirements and make appropriate modifications to their relevant internal control policies.
Provisions of the Guidelines
Relevant Rules
Article 27 [Information Reporting Requirements] PFMs shall report information to the AMAC in accordance with the following requirements:
(1) PFMs shall report information regarding fundraising, investment operation and investors of the private securities investment funds, related parties of the PFMs and other information on a quarterly basis; securities-type PFMs under the same de facto control with an aggregated AUM of RMB 2 billion or more at the end of the preceding year shall report the aforementioned information on a monthly basis as of the current year;
(2) PFMs shall report to the AMAC in a timely manner if a private securities investment fund triggers Article 26.2(3) of the Guidelines;
(3) Private securities investment funds with a net asset value of RMB 100 million or more at the end of the current year shall, within four months from the end of each fiscal year, submit to the AMAC an annual financial report audited by a qualified accounting firm, and the financial report shall include special statements on related-party transactions. For private securities investment funds with a net asset value of RMB 1 billion or more at the end of the current year, the annual financial report shall be audited by accounting firms that have filed with the CSRC;
(4) PFMs shall submit audited financial reports on PFMs on an annual basis, and the financial reports shall include special statements on related-party transactions. For securities-type PFMs under the same de facto control with an aggregated AUM of RMB 5 billion or more at the end of the preceding year, the annual financial reports shall, from the current fiscal year, be audited by accounting firms that have filed with CSRC; and
(5) PFMs shall submit interim reports regarding investment arrangements, liquidity, leverage, alarm mechanisms, stop-loss mechanisms, stress tests and other information as required by the AMAC.
Measures for Private Fund Manager Registration and Private Fund Filing:
Article 61 PFMs shall report the following information in accordance with relevant provisions:
(1) within four months from the end of each fiscal year, PFMs’ relevant financial and operation information, as well as an annual financial report audited by a qualified accounting firm; for PFMs with an AUM exceeding certain scale and PFMs under Article 17 of these Measures, the annual financial report shall be audited by accounting firms that have filed with the CSRC;
(2) the investment operation of the private funds under the PFMs’ management;
(3) within six months from the end of each fiscal year, private equity-type funds’ relevant financial information and annual financial report audited by a qualified accounting firm; where the fund size exceeds a certain amount or the number of investors exceeds a certain number, the annual financial report of such private funds shall be audited by accounting firms that have filed with the CSRC; and
(4) interim reports and other information required by the CSRC and the AMAC.
……
Highlights:
Article 27 of the Guidelines requires for the first time that PFMs under the same de facto control with an aggregated AUM of RMB 2 billion or more at the end of the preceding year shall report information regarding fundraising, investment operation and investors of the private securities investment funds, related parties of the PFMs and other information on a monthly basis as of the current year. In addition, if a private securities investment fund investing in a listed company’s shares triggers announcement or reporting obligations under Article 63 of the Securities Law, the PFM shall disclose the same to fund investors and report to the AMAC in a timely manner. This article provides more details on the information reporting obligations as specified in the Measures for Private Fund Manager Registration and Private Fund Filing. For private securities investment funds with a net asset value of RMB 1 billion or more at the end of the current year, the annual financial report shall be audited by accounting firms that have filed with the CSRC. Additionally, PFMs shall also submit interim reports regarding investment arrangements, liquidity, leverage, alarm mechanisms, stop-loss mechanisms, stress tests and other information as required by the AMAC.
Provisions of the Guidelines
Article 29 [Investment Advisory Business] PFMs that carry out securities investment advisory business shall comply with the Guidelines and shall not circumvent the relevant requirements of the Guidelines by virtue of acting as investment advisors.
Highlights:
According to Article 29 of the Guidelines, PFMs that carry out securities investment advisory business shall also comply with the Guidelines and shall not circumvent the relevant requirements of the Guidelines by virtue of acting as investment advisors.
Provisions of the Guidelines
Article 32 [Implementation Date] The Guidelines shall come into effect on [MM/DD] of 2023.
If private securities investment funds that have already filed with AMAC prior to the implementation of the Guidelines fail to meet the requirements set out in the Guidelines, they shall be subject to the following requirements:
(1) Existing funds that fail to meet the requirements set out by Articles 4, 5, 9 and 24 of the Guidelines shall not expand their fundraising size nor admit new investors, nor shall they extend the term of the funds. Any new investment activities conducted by the funds shall comply with the requirements of the Guidelines, and the funds shall be liquidated upon expiration of the fund contract;
(2) Existing funds that fail to meet the requirements set out by Articles 12 to 14, 16 and 17 of the Guidelines, will be given a grace period of twelve months since the implementation date of the Guidelines to make rectifications. Those funds that still fail to meet the requirements set out by the foregoing articles after the twelve-month grace period expires shall not expand their fundraising size or admit new investors nor extend the fund term. Any new investment activities conducted by the funds shall comply with the requirements of the Guidelines, and the funds shall be liquidated upon expiration of the fund contract;
(3) New investors of existing funds shall meet the requirements set out by Article 8 of the Guidelines;
(4) If any change to the clauses of the fund contract involves the requirements of the Guidelines, the amended clauses shall comply with the requirements of the Guidelines. In the event of any change to the term of the fund contract, the fund contract shall be amended in accordance with the Guidelines. Fund contracts for any existing private securities investment funds without a fixed duration term shall be amended within twelve months upon the implementation date of the Guidelines in accordance with the requirements of the Guidelines and the AMAC.
Highlights:
New private securities investment funds applying for filing after the implementation of the Guidelines shall be subject to the requirements of the Guidelines. In the meantime, to limit the possibility of new and existing funds benefitting from different rules, the Guidelines, taking in to account the regulatory requirements and the market demands, set out differentiated requirements for the existing funds to make correction within a grace period as stipulated in Article 32 of the Guidelines.
(1)Existing funds that engage in channel business or fail to meet the minimum capital size for the fund to survive, or do not meet any other bottom-line requirements, shall not expand their fundraising size or admit new investors after the implementation of the Guidelines, nor shall they extend the term of such funds. Any new investment activities conducted by such funds shall comply with the requirements of the Guidelines, and the funds shall be liquidated upon expiration of the fund contract.
(2)Existing funds that fail to meet the requirements regarding investment concentration, multi-level nesting prohibitions, leverage ratio restrictions, bonds and derivatives trading, or other investment requirements as stipulated by the Guidelines, are given a grace period of twelve months to make rectifications. This article doesn’t seem to require the fund contract of such funds to be modified. However, funds that fail to rectify within the grace period shall not expand their fundraising size or extend the fund term. Additionally, any new investment activities conducted by such funds shall comply with the requirements of the Guidelines, and the funds shall be liquidated upon expiration of the fund contract.
(3)Following the implementation of the Guidelines, existing funds will be required to specify a lock-up period of no less than six months in the fund contract for new investors.
(4)In the event of any change to the fund contract, including a change to the term of the fund contract, the fund contract shall be amended in compliance with the Guidelines. The fund contracts for any existing funds without a fixed duration term shall be amended within twelve months and the amended fund contract shall fully comply with the requirements of the Guidelines.
Our Observations
Following the official implementation of the Measures for Private Fund Manager Registration and Private Fund Filing, the AMAC issued these Guidelines to update the current Instructions for Private Investment Fund Filing. Compared with the Instructions for Private Investment Fund Filing that mainly regulate private fund filing matters, the Guidelines provide more detailed requirements on securities-type PFMs in terms of prudent operation, well-defined internal policies, clear strategies, risk control, the prevention of insider trading and interest tunneling. PFMs are required to ensure that their business activities are in line with their capital strength, investment management capacity and risk control level, which reflects the AMAC’s regulatory principle of “prior filing and ongoing supervision afterwards”. The balance between tightening regulations for the private fund industry, and market dynamics and industry innovation, needs further consideration and assessment by the regulators. The Guidelines only govern securities-type private funds. We expect guidelines for the operation of private equity-type funds to follow shortly.
