On the last working day in 2022, AMAC issued the consultation paper (the “Consultation Paper”) with an aim to update its rules on registration of private fund managers (“PFMs”) and filing of private funds.
The deadline for public comments is January 10, 2023.
It is a major overhaul (rather than only adjustment) of existing rules, with a lot of changes. 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”).
PFM, although not categorized as financial institution in China, according to the Consultation Paper, it may be 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.
1.For the first time, it is clarified that the registration rules for PFMs are ongoing norms as well.
For PFMs, do the relevant requirements at the time of registration need to be continuously met after registration? In the past, there was no clear answer, but in some cases, AMAC said yes.
For example, according to a notice by AMAC in 2021, the total number of employees of a PFM should not be less than 5, and PFMs not meeting the requirements shall complete the rectification as soon as possible within 3 months, otherwise AMAC will take self-discipline measures against it.
The Consultation Paper 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.
2.Improvement of some important definitions helped clarify recent regulatory actions
The Consultation Paper amended the definition of private funds in the existing registration and filing 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 Consultation Paper shall not be filed with AMAC.
In the passing year, AMAC declined filing application of certain QFLP funds. Based on our observation, it is mainly because, with foreign-invested QFLP fund managers and all foreign LPs, there are onshore fundraising activities involved and such funds do not meet the definition of private funds in China.
So, the languages in the Consultation Paper are more precise, consistent with the Securities Investment Funds Law of the PRC.
3.Shareholding by Legal Rep and CIO
The Consultation Paper requires both Legal Rep and CIO to hold some shares in the PFM. As exceptions, PFMs controlled by financial institutions, PFMs invested and actually controlled by the government and its authorized institutions, private securities fund managers with a total foreign shareholding ratio of not less than 25%, and other eligible PFMs are not subject to such requirements.
WFOE PFMs definitely can be covered by the above exemption.
It remains to be seen whether QDLP WFOEs can enjoy such exemption. We think it is highly likely, as AMAC is likely to recognize PFMs controlled by either onshore or offshore financial institutions, or to deem QDLP WFOEs as “other eligible PFMs”.
4.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 securities and futures products that he or she managed as a portfolio manager or other roles in charge of investment decision-making for more than two consecutive years in the last five years, and the AUM of a single product shall not be less than RMB 20 million. If multiple people manage it together, specific materials should be provided to explain the scale of the products they are responsible for managing, respectively; if relevant materials cannot be provided, the average scale should be used for calculation.
Compared with existing rules, according to the Consultation Paper, AMAC will only accept the investment experience in the last five years, and AUM will be raised from RMB 10 million to RMB 20 million.
Therefore, it would be more challenging for WFOE PFMs to have an eligible CIO in place.
It remains to be seen how the above rules will be applied to QDLP WFOEs, which are allowed to set up both private equity funds and private securities funds.
According to our past project experience, QDLP WFOEs may refer to rules on either private securities funds or private equity funds, although in some cases with respect to some issues, AMAC had specific guidance.
5.Stringent eligibility requirements for Legal Rep and SMP
According to the Consultation Paper, depending on the type of PFMs, Legal Pep and SMP of private securities and private equity fund managers must respectively have "relevant work experience in securities, funds, and futures investment management" and "equity investment management or relevant industry management and other work experience", and the relevant work experience shall not be less than 5 years.
Taking private securities fund managers as an example, please refer to the below table for a summary of "relevant work experience" recognized by AMAC.
| Relevant work experience | |
|
(1)Working experience in financial institutions such as commercial banks, securities companies, public fund management companies (i.e., FMC), futures companies, trust companies, insurance companies and related asset management subsidiaries, and serving as portfolio managers, etc., or holding senior management positions or equivalent positions;
|
|
| Legal Rep and SMP (excluding CIO) | Meeting any one of the above work experiences is fine. |
| CIO | Meeting item (1) or (3) of the above. |
Compared with existing rules, the Consultation Paper has greatly improved the eligibility requirements. On the one hand, the number of years of relevant work experience has been increased from 3 years to 5 years; on the other hand, the standard of work experience listed in the Consultation Paper is relatively high, and many SMP of existing PFMs cannot meet such requirements.
CCO shall have work experience in investment-related laws, accounting, supervision or auditing, or work experience in compliance, risk control, supervision or self-discipline in the asset management industry, and the relevant work experience shall not be less than 3 years
Existing WFOE PFMs and QDLP WFOEs shall take it into consideration when changing any SMP.
6.Dual-hatting and other staffing arrangement slightly modified
According to the Consultation Paper, 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 Consultation Paper removed the existing requirement that the number of SMP working on dual-hatting arrangement shall not exceed 1/2 of all SMP.
CCO: internally, shall not be engaged in investment management business, and shall not concurrently hold positions that conflict with compliance and risk control responsibilities; and externally, shall not work on a part-time basis for other entities, provided that if such dual-hatting arrangement in two or more entities under the same control is allowed by future rules, such other provisions shall prevail.
Other employees other than Legal Rep and SMP shall not work on a part-time basis, provided that if such dual-hatting arrangement in two or more entities under the same control is allowed by future rules, such other provisions shall prevail.
It is noteworthy that the Consultation Paper has left room for dual-hatting arrangement for CCO and other employees in the future. In fact, in practice, such dual-hatting arrangement has been allowed by AMAC for some persons working for both WFOE PFM and QDLP WFOE under the same control in Shanghai.
7.Initial AUM requirement of private funds raised
According to the Consultation Paper, the AUM of private securities funds at the time of initial filing with AMAC shall not be less than RMB 10 million; private equity funds and venture capital funds shall not be less than RMB 20 million and RMB 10 million, respectively.
Previously, there were no clear regulations. In practice, taking a private securities fund as an example, usually a minimum AUM of RMB 2 million is enough for the purpose of successfully filing with AMAC.
8.Differentiated treatment to different PFMs
[Preferential treatment]
AMAC supports private funds to play an active role in serving national strategies, promoting innovation-driven development, and economic transformation and upgrading, and provides key services to private funds that undertake functions such as the implementation of major national strategies.
For PFMs with a sound governance structure, compliant business operations, stable continuous operations, effective risk control, professional management teams, and good integrity, AMAC may provide rapid filing services for qualified private funds managed by them.
The specific rules shall be formulated separately by AMAC.
[Prudent treatment]
Under any of the following circumstances, AMAC may, depending on the circumstances, adopt measures to increase investor requirements, increase fund AUM requirements, and requiring PFMs to issue internal compliance opinions, submit external legal opinions, or related financial reports, etc.:
(a)Private funds are involved in innovative businesses;
(b)The structure of private funds is complex;
(c)The types of investment objects of private funds are special or have relatively high risks;
(d)Investors of private funds are mainly natural persons and invest in a single target;
(e)Fund assets are mainly invested overseas;
(f)PFMs have relatively high risks and hidden dangers;
(g)The AUM of the PFM at the end of each quarter in the last two years is less than RMB 5 million;
(h)Other circumstances stipulated by CSRC and AMAC.
The specific implementation measures shall be separately formulated by AMAC.
For example, for QDLP funds, AMAC may request to raise the initial AUM when filing funds with AMAC accordingly.
9.Policies applicable to WFOE PFM
The Consultation Paper has included all provisions provided in the Q&A on Private Fund Registration and Filing (No. 10) issued by AMAC in 2016 (“Special Provisions”).
So, with respect to WFOE PFM, unless otherwise provided, it shall comply with both rules applicable to domestic PFMs and the Special Provisions.
According to the Consultation Paper, 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.
We believe that it is consistent with the rules on identifying the actual controller provided in the Registration and Filing Guidance to JV and WFOE PFM issued by AMAC in 2018. WFOE PFM registered before issuance of that guidance was once allowed to claim that it had no actual controller, if tracing to the up-level shareholding entity, there is disperse shareholding.
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