On February 24, 2023, the Asset Management Association of China (“AMAC”) issued the updated rules on registration of private fund managers (“PFMs”) and filing of private funds (“New Rules”), which is an overhaul of its previous rules implemented in 2014 and supplemented a lot in recent years.
The New Rules will take effect on May 1, 2023.
We are happy to see that, as said by AMAC, many feedback comments on the consultation paper by the industry have been adopted by AMAC in the New Rules. At least we can say that most of our feedback comments have been considered and adopted by AMAC.
Among others, with the issuance of the New Rules, some unease of global investors caused by the previous consultation paper have been alleviated.
In this paper, we will summarize some important aspects that may be a concern by WFOE PFMs, QDLP WFOEs and their legal representatives (“Legal Rep”), chief compliance officers (“CCO”), chief investment officers (“CIO”) and other senior management personnel (“SMP”).
1.Financial activities in nature
PFM, although not categorized as financial institution in China, according to the statement by AMAC on the consultation paper, it was the first time that regulator expressed its view that fundraising and investment of private funds are financial activities in nature, so that regulatory rules of PFM shall be in more details.
2.Ongoing norms
The New Rules made it clear that PFMs should continue to meet the relevant requirements after registration with AMAC.
Existing WFOE PFMs and QDLP WFOEs need to take it into consideration, especially when considering change of SMP or other employees.
3.Improvement of some important definitions
The New Rules amended the definition of private funds in the previous rules, e.g., from “raising funds in a non-public way” to “raising funds in a non-public way in China”, and it further stipulated that private funds not regulated by the New Rules shall not be filed with AMAC.
For example, QFLP funds with foreign-invested managers and all foreign LPs do not meet the definition of private funds. It justified those QFLP funds not filed with AMAC in the past few years.
We are happy to see that the languages in the New Rules are more precise, consistent with the Securities Investment Funds Law of the PRC.
4.Shareholding by Legal Rep and CIO
The New Rules requires both Legal Rep and CIO to hold some shares in the PFM. As an exception, among others, PFMs controlled by foreign institutions regulated by competent foreign financial regulators are not subject to such requirements.
Compared with the consultation paper, the New Rules changed “private securities investment fund managers with foreign shareholding ratio not less than 25%” to “PFMs controlled by foreign institutions regulated by competent foreign financial regulators”, so that in addition to WFOE PFM, QDLP WFOE got the exemption as well.
For QDLP WFOEs, the unease caused by the consultation paper was alleviated.
5.Stringent requirements on the track record of CIO
Track record requirements for private securities fund managers and private equity fund managers are different.
Taking private securities fund managers as an example, CIO shall have track record in relevant securities and futures investment (details not introduced here) for more than 2 consecutive years in the most recent 10 years, and the AUM of a single product shall not be less than RMB 20 million.
Therefore, it would be more challenging for WFOE PFMs and QDLP WFOEs to have an eligible CIO in place.
6.Dual-hatting and other staffing arrangement slightly modified
According to the New Rules, Legal Rep and SMP should ensure that they have sufficient time and energy to perform their duties, and one need justify itself if it is part-time jobs. The New Rules removed the existing requirement that the number of SMP working on dual-hatting arrangement shall not exceed 1/2 of all SMP.
CCO and employees other than Legal Rep and SMP shall not work on a part-time basis for other entities, provided that if such dual-hatting arrangement in two or more PFMs under the same control is allowed by future rules, such other provisions shall prevail.
Therefore, still there is room for the previous practice in Shanghai where WFOE PFM and QDLP WFOE under the same control shared relevant staff.
7.Number of staff
According to the New Rules, in principle the number of full-time employees shall not be less than 5.
It is clarified by the New Rules that full-time employees include certain foreign employees entering into service agreement (rather than labor contract) with PFMs, which is especially good news for WFOE PFM and QDLP WFOE.
8.Equity transfer
The shareholder of a WFOE PFM shall not transfer its equity in the WFOE PFM within 3 years after its registration with AMAC.
However, compared with the consultation paper, the New Rules allowed some exemptions. That is, such transfer is allowed if (i) it is transferred within entities under the same control, or (ii) it is made for the purpose of ESOP and the actual controller will remain unchanged.
The unease of some PFMs caused by the consultation paper was alleviated.
9.Initial AUM requirement
According to the New Rules, the AUM of a private securities fund and private equity fund at the time of initial filing with AMAC shall not be less than RMB 10 million. The threshold is RMB 5 million for a venture capital fund provided that the AUM (i.e., paid-in capital) of such fund shall be increased to RMB 10 million or more within 6 months.
Further, if a private fund invests to a single investment instrument, the initial AUM of such fund shall not be less than RMB 20 million. QDLP WFOE launching new QDLP funds with feeder-master deal structure may need to take it into consideration.
10.Differentiated treatment to different PFMs
Where, among others, the structure of private funds is complex, there is no precedent of any kind of fund, or the investment target is very special, AMAC may, depending on the circumstances, adopt measures to increase investor requirements, increase initial fund AUM requirements, and requiring PFMs to issue internal compliance opinions, submit external legal opinions, or related financial reports, etc.
Compared with the consultation paper, the unease of QDLP WFOE may be alleviated, because one key scenario triggering prudent treatment (i.e., overseas investment is involved) was removed.
11.Actual controller of WFOE PFM
The New Rules further confirmed the principle set by AMAC in 2018 that the actual controller of a WFOE PFM shall be traced to a financial institution regulated by a financial regulator that has signed MOU with CSRC.
12.Transitional period
Registration and filing before and after May 1, 2023 shall be subject to the original rules and the New Rules, respectively.
For an existing PFM, if it submits application for change of registration or filing after May 1, 2023, such changed areas shall be subject to the New Rules, provided that if it is change of actual controller, the PFM shall fully comply with the New Rules from all conceivable perspectives.
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