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A Brief Commentary on the Impact on Foreign-Invested Private Fund Managers of the Measures for Private Fund Manager Registration and Private Fund Filing (Draft for Comment)

2023.01.20 XIE, Qing (Natasha)ZHANG, Chi (Austin)、LUO, Danchen、ZHANG, Lin

On December 30, 2022, the Asset Management Association of China (“AMAC”) announced that it is soliciting public comments on the Measures for Private Fund Manager Registration and Private Fund Filing (Draft for Comments) (the “Measures”) and the ancillary guidelines. The Measures aim to formulate rules to uniformly govern PFM registration and fund filing in addition to the Instructions on Filing of Private Investment Funds (2019 Version), the checklists for private fund manager registration (the “PFM Registration”) and private fund filing (the “Fund Filing” - updated by the AMAC in June 2022) and in consideration of the most recent regulatory practice of the AMAC. We have summarized below some of the key points of most concern to foreign-invested PFMs:

I. Requirements on Paid-in Capital

Article 8 of the Measures stipulate that the paid-in monetary capital of a PFM shall not be less than RMB 10 million and most existing foreign-invested PFMs can meet this paid-in monetary capital requirement. In practice, some local governments may have “soft requirements” on the minimum registered capital of newly established PFMs. It is generally believed, however, that capital thresholds are mainly set for licensed financial institutions, while for PFMs, the focus should be primarily on their investment management capabilities rather than their capital capabilities. We understand the regulatory intention is to raise the entry threshold for PFMs and to subject PFMs to regulations similar to that of financial institutions. However, such an excessively high paid-in monetary capital requirement may place a heavy regulatory burden on managers, which may be disadvantageous for practitioners in the industry to establish new PFMs. In this regard, the regulators may evaluate and decide whether to impose such a requirement in view of the long-term impact on the development of the industry. In addition, the current QDLP (qualified domestic limited partner) pilot program permits a QDLP subsidiary established in Shanghai to share registered capital with its WFOE PFM parent to qualify as a PFM. At present, the common practice for registered capital of those QDLP subsidiaries is RMB 2 million. Clarification needs to be made if this is still treated as an exception exempting QDLP subsidiaries from this requirement.

II. Exemption of Shareholding for Senior Management Personnel

Pursuant to Article 8 of the Measures and Article 6 of the Guidelines No. 1 for Registration of Private Fund Manager: Basic Operational Requirements (Draft for Comments) (the “Guidelines No. 1”), a PFM’s legal representative, executive partner and its appointed representative, and senior management personnel in charge of investment management shall collectively hold a certain percentage of equity interest or property shares in the PFM, and their total paid-in capital shall not be less than 20% of the PFM’s paid-in capital or not less than 20% of the minimum paid-in monetary capital of the PFM (i.e., RMB 2 million). The Measures further clarify that these requirements do not apply to WFOE PFMs with a total foreign shareholding of no less than 25% and other PFMs that meet the relevant requirements. We understand that, in addition to the afore-mentioned WFOE PFMs with a total foreign shareholding of no less than 25%, there are foreign-invested equity-type PFMs (such as equity-type PFMs that have obtained the QFLP/QDIE pilot qualifications and raise capital in China) and foreign-invested other-type PFMs that have obtained the QDLP pilot qualifications. In this respect, if those foreign-invested equity-type PFMs and other-type PFMs have a total foreign shareholding of no less than 25%, it is unclear whether they would be regarded as “other PFMs that meet the relevant requirements” as provided in the Measures and therefore their senior management personnel could also be exempted from the shareholding requirement. It is our observation that many well-known global managers may have no need or may not wish for their local management team to hold shares in the onshore PFM subsidiaries. Therefore, we suggest that the Measures, in the final version after the formal promulgation, clarify that the same shareholding exemption would apply to QFLP and QDLP fund managers, as well as other foreign-invested private equity fund managers with a total foreign shareholding of no less than 25%.

III. Work Experience of Senior Management Personnel

In the checklist for equity-type and securities-type PFM registration released by the AMAC in June 2022, the AMAC explicitly requires that the senior management personnel of an applicant shall have at least 3 years relevant work experience in securities investment/equity investment, investment banking, funds, futures, economic and financial management, law, accounting, research in the relevant industry of the proposed investment field, or other related work experience, and shall have management experience and operation and management capabilities that match the proposed position. The Measures provide that a PFM’s legal representative, executive partner and its appointed representative, and the senior management personnel in charge of investment management shall have at least 5 years relevant work experience (i.e., work experience in securities, funds or futures investment management, equity investment management, relevant industry management, or other relevant work experience). The details of the work experience requirements are further set out in the Guidelines No. 3 for Registration of Private Fund Manager: Legal Representative, Senior Management Personnel and Executive Partner and Its Appointed Representative (Draft for Comments) (the “Guidelines No. 3”). In other words, the Measures further increase the length of work experience of PFM’s senior management personnel, and we note that Guidelines No. 3 also set forth relatively high work experience standards, which further narrows down the potential local candidates that foreign-invested PFMs may recruit as their local senior management personnel. The requirements also set a higher threshold on local practitioners who wish to take senior management positions.

IV. Exemption of Look-Through Up to Ultimate Investors

According to paragraph 4 of Article 27 of the Measures, unless otherwise provided, if non-legal persons such as partnership enterprises invest in private funds, PFMs and fund distribution agencies shall look-through up to verify whether the ultimate investors are qualified investors and calculate the number of investors on a consolidated basis. The Interim Measures for Supervision and Administration for Private Investment Funds have explicitly set out such looking-through requirements and have further specified the circumstances whereby the requirement of verifying if the ultimate investors are qualified investors and calculating the number of investors on a consolidated basis can be exempted (e.g., investment plans manufactured pursuant to the law and filed with the AMAC will be exempted from such looking-through requirements). However, the Measures are silent on the exemption of looking-through requirements. In addition, some PFMs and fund distribution agencies raise funds from ultimate investors through setting up a trust plan or insurance asset management plan between the private fund and the ultimate investors. These trust plans or insurance asset management plans are not filed with the AMAC but are filed with the China Trust Registration Co., Ltd. or the China Insurance Asset Registration and Trading System Co., Ltd.. Currently, neither the law nor the AMAC rules have clarified whether trust plans or insurance asset management plans could be exempted from the looking-through requirement if investing in private funds. Based on our observations, trust plans and insurance asset management plans are deemed as qualified investors, and thus there is no need to look-through to verify the ultimate investors and calculate the number of investors on a consolidated basis. We suggest the Measures exempt trust plans and insurance asset management plans from the looking-through requirement to stay consistent with the current regulatory practice. 

V. Impact on QDLP Fund Managers and QDLP Funds

Article 11 of the Measures provide details on the dual-hatting restrictions on senior management personnel. It stipulates that it must be reasonable for a PFM’s legal representative, senior management personnel, executive partner and its appointed representative to take any concurrent positions, while a PFM’s compliance officer is prohibited from holding concurrent positions unless otherwise provided for PFMs within the same group, as stated in Article 17 of the Measures. In addition, pursuant to Article 8 of the Guidelines No. 1, PFMs shall have independent and stable business premises, and shall not use shared office space or other premises of insufficient stability as business premises, nor shall PFMs share offices with their shareholders, partners, de facto controllers, or related parties. WFOE PFMs approved in Shanghai are allowed to share staff and business premises with their QDLP subsidiaries. This is a long-established exemption which we hope will continue after the promulgation of the Measures and the ancillary guidelines.

If private fund assets will be mainly invested in overseas markets, the AMAC may, according to the authorization under Article 44 of the Measures, adopt additional filing requirements on the relevant private funds. This could include 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. It could also include enhancing information disclosure requirements, disclosing special risk factors, implementing quota administration, restricting related-party transactions, and requiring to issue an internal compliance opinion, submit a legal opinion or to submit relevant financial reports. These so called “prudential filing” requirements will apply to all QDLP funds and QDIE funds as they mainly invest in overseas markets. In practice, QDLP fund managers generally cooperate with domestic distribution agencies to raise capital. If QDLP funds with offshore assets underlying are subject to the prudential filing requirements, both QDLP fund managers and domestic distribution agencies may face a higher compliance burden for internal risk control, which may adversely affect the existing distribution model of QDLP funds which currently prevails. 

Our Observations

Whether the Measures, upon formal promulgation, will have a retrospective effect as well as a grace period on the existing PFMs and private funds is not spelled out. Considering that the promulgation of the Measures will have a profound and lasting impact on the whole private fund industry, we suggest that the AMAC provide more clarification on the relevant issues to address the concerns of foreign-invested institutions. We will continue to monitor the situation and keep our clients apprised of the latest developments.

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