Following the official implementation of the Measures for Private Fund Manager Registration and Private Fund Filing (the "Measures") and Guidelines No.1-3 for the Registration of Private Fund Managers in May 2023, the Asset Management Association of China ("AMAC") issued Guidelines No.1 for the Filing of Private Funds — Private Securities Investment Funds (the "Guidelines No.1"), Guidelines No.2 for the Filing of Private Funds — Private Equity and Venture Capital Funds, and Guidelines No.3 for the Filing of Private Funds — Change of Manager of Private Investment Funds, as well as ancillary checklists for fund filing (collectively, the "New Fund Filing Rules") on September 28, 2023.
In this briefing, we will highlight the key points of the New Fund Filing Rules and the implications for private securities investment funds.
I. The Impact on Fund Contracts
1.1 Strengthening the Management of Subscriptions, Redemptions and Ad Hoc Opening Days for Private Securities Investment Funds
Pursuant to Article 5.2 of the Guidelines No.1, fund managers should ensure that the relevant private securities investment funds have completed capital raising when filing with AMAC. It is prohibited to circumvent requirements such as minimum capital contributions and the completion of capital raising by the redemption of fund shares within a short term after the disguised completion of fund filing. Considering the need for frequent purchases and redemptions of open-ended private securities investment funds, fund managers may stipulate a lock-up period in the fund contract to ensure that there is a reasonable amount of time between the completion of fund filing and the first redemption. It remains to be seen whether AMAC will require a lock-up period of no less than six months in accordance with the Guidelines for the Operation of Private Securities Investment Funds (Draft for Comments) that were issued in April 2023.
With respect to open-ended private securities investment funds, the Guidelines No.1 require fund managers to specify in the fund contract the relevant fixed opening days and any time, frequency, procedure, and restrictions on subscriptions (purchases) and redemptions. Without obtaining the consent of investors according to the fund contract, fund managers should not change the time, frequency, procedure, or restrictions of subscriptions (purchases) and redemptions as agreed in the fund contract. These provisions restrict the exercising of discretion by fund managers under fund contracts. In addition, if ad hoc opening days are set for private securities investment funds, the fund contracts shall specify that the ad hoc opening days shall only be triggered by circumstances such as amendments to laws, administrative regulations, or regulatory policies, or a change or termination of contracts, and subscriptions are not allowed on such ad hoc opening days. Fund managers shall notify all investors two trading days before the relevant ad hoc opening day. Compared with Article 7 of the Guidelines for the Operation of Private Securities Investment Funds (Draft for Comments), which provides that "ad hoc opening days shall be triggered only by circumstances such as amendments to laws, regulations or regulatory policies, or a significant change in circumstances, or a change or termination of contracts", a “significant change in circumstances” is no longer listed by the Guidelines No.1 as a triggering condition for ad hoc opening days.
The Guidelines No.1 explicitly state that a fund manager should specify in the fund contract the ad hoc opening days for investors to redeem fund shares in case of any change to the portfolio manager, an adjustment of the investment scope or investment percentage limit, or any change to certain information of a private securities investment fund.
1.2 Adding New Rules for the Setup of Different Classes of Fund Shares
Without prejudice to the principle of fair treatment for all fund unit holders, the Guidelines No.1 provide that fund managers shall expressly specify in the fund contract the standards for setting up different classes of fund shares. These different classes of fund shares may be subject to differentiated subscription (purchase) fees, redemption fees, management fees, sales service fees, and the proportion of performance fees, while it is not permitted to set differentiated opening days, closed periods, lock-up periods, or benchmarks for the accrual of performance fees. In addition, fund managers shall not (1) set up any investment units or sub-fund shares for a single private securities investment fund, which are invested by different investors and will be invested into different assets; (2) adjust the income or loss of a fund by setting capital replenishment mechanism or by refunding fees, nor set an investor risk compensation mechanism by firstly having the fund shares subscribed by a fund manager’s own proprietary capital to bear losses.
1.3 Revising Relevant Rules on the Accrual of Performance Fees
The current Instructions for Private Investment Fund Filing and the Key Points for the Filing of Private Investment Funds state that performance fees for private securities investment funds may be accrued at most once every three months, and fund managers are encouraged to adopt an interval of no less than six months to calculate performance fees. The Guidelines No.1 explicitly require the interval of time between two consecutive accruements of performance fees for private securities investment funds to be no less than six months, except where investors redeem fund shares or where the private securities investment fund is liquidated. In addition, the Guidelines No.1 reiterate that a single private securities investment fund can adopt only one method for the accrual of performance fees, and the proportion of the performance fee shall not exceed 60% of the investment income in excess of the benchmark for the accrual of the performance fee.
AMAC encourages fund managers to calculate performance fees based on the net value at the time when investors redeem fund shares or the fund is liquidated, instead of calculating and withdrawing performance fees during the period when investors hold fund shares. The Guidelines No.1 provide that a fund manager may, according to the fund contract, calculate and withdraw performance fees from the investment income in excess of the benchmark for the accrual of performance fees only if investors have received positive returns, unless the following conditions are simultaneously satisfied: (1) in order to obtain an index-based excess return, the fund sets the relevant index as the benchmark for the accrual of performance fees and adopts an investment strategy of tracking such an index; (2) the performance fees shall be calculated and withdrawn only at the time when investors redeem fund shares or when the fund is liquidated; and (3) it is prominently stated in the marketing materials and the fund contract that the performance fees may be calculated and withdrawn even when investors suffer losses.
II. Impact on Fund Filing
We note that AMAC has codified the current Instructions for Private Investment Fund Filing and the Key Points for the Filing of Private Investment Funds as the New Fund Filing Rules and simplified the legal framework for fund filing. This provides clear and unified guidelines for fund filing and facilitates the filing process.
2.1 Highlights of Fund Managers' Information Disclosure Obligations
Both the current Measures and the Updates of Private Fund Filing (which are shared by AMAC to fund managers from time to time) highlight that fund managers should perform their information disclosure obligations towards investors in a timely manner. We note that the New Fund Filing Rules have followed this regulatory principle and set forth more detailed requirements for fund managers with respect to fund filing. For example, fund managers are required to clearly state in the fund marketing materials important information such as the management team, investment scope, investment strategies, investment structures, fund structures, fund custody, relevant fees, and the principles of income distribution, as well as risk profiles such as investment, operation and liquidity risks. Fund managers should make detailed disclosures and provide explanations in the fund marketing materials if there is more than one portfolio manager, or if an investment advisory institution is entrusted to provide securities investment advisory services, or if the fund shares are subject to any structured arrangement, or in other such circumstances.
2.2 Specification of the Relevant Exemptions for Special Qualified Investors
The Guidelines No.1 exempt pension funds, social welfare funds, and private fund managers and their staff members who invest in the private securities funds under their management from the minimum capital contribution requirement of qualified investors. It should be noted that asset management products launched by financial institutions and private funds filed with AMAC shall also be exempted from the minimum capital contribution requirement in accordance with the Measures for Administration of Fundraising Activities of Private Investment Funds. Hence, though not being explicitly mentioned in the Guidelines No.1, we believe such asset management products and private funds should fall within the catch-all provision of "other investors specified by CSRC and AMAC" as provided by the Guidelines No.1. In addition, special qualified investors such as institutions that are regulated by the financial regulatory authorities of the state council, pension funds and social welfare funds, asset management products and private funds, qualified foreign institutional investors and RMB qualified foreign institutional investors (QFII/RQFII), private fund managers and their staff members who invest in the private securities funds under their management, as well as other investors as prescribed by the China Securities Regulatory Commission (“CSRC”) are exempt from signing risk disclosure statements, questionnaires, and other materials.
2.3 New Rules on Special Matters
Pursuant to the Guidelines No.1, QDLP funds and other private securities investment funds specified by CSRC shall be subject to the rules otherwise provided by AMAC, and the Guidelines No.1 will apply if no express provisions are provided thereunder. In addition, we note that three additional documents are now required for fund filing according to the Checklist for Filing of Private Securities Investment Funds, if applicable, i.e., a Letter of Commitment concerning the Localization of Information Technology Systems and Trading Decision Making Processes of WFOE PFMs, an Explanatory Statement on Abnormal Situations of Fund Managers, and an Explanatory Statement on Special Situations of Private Funds. In practice, WFOE PFMs are already required to submit a Letter of Commitment concerning the Localization of Information Technology Systems and Trading Decision Making Processes, while the latter two explanatory statements are now required according to the Measures.
III. Our Observations
The New Fund Filing Rules are important to the supervision of the private fund industry by improving market transparency, protecting investors’ interests, and promoting the healthy development of the industry. They enhance the supervision of the private fund industry and support its sustainable development.
We will continue to monitor the situation and keep our clients apprised of the latest developments and regulatory updates.