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On July 9, 2023, the State Council promulgated the Regulations on the Supervision and Administration of Private Investment Funds (the "Private Funds Regulations"), which will come into force on September 1, 2023. On the same day, responsible persons of the Ministry of Justice and the China Securities Regulatory Commission (“CSRC”) answered questions from reporters on issues related to the Private Funds Regulations (the "Official Q&A").

 

Given that the Securities Investment Funds Law of the People's Republic of China (the "Funds Law") is only applicable to retail funds and private securities investment funds, the Private Funds Regulations has become the highest level of legislation that comprehensively regulates various private funds. Therefore, it is particularly significant.

 

This article is to briefly analyze some important contents of the Private Funds Regulations by the means of Q&A.

 

Q: As the Private Funds Regulations basically followed the existing regulatory rules, there is no need to pay special attention?

 

As a high-level legislation such as the administrative regulations issued by the State Council (second only to the laws issued by the National People's Congress, top legislature in China or its Standing Committee), the main function of the Private Funds Regulations is to make the top-level system design for private funds regulation, without involving too much regulatory details, which is normal.

 

Although some regulations are the same as or similar to the current rules, it is of great significance to upgrade them from the regulatory documents of CSRC or the self-discipline rules of the Asset Management Association of China (“AMAC”) to the administrative regulations of the State Council. For example:

 

• The consequences of related violations of laws and regulations are obviously more serious. Taking the penalties stipulated in the Private Funds Regulations as an example, the penalty amount is significantly higher than the those provided in the Interim Measures for the Supervision and Administration of Private Investment Funds (the “Interim Measures”) previously issued by CSRC.
• The Funds Law clearly stipulates the fund assets independence of retail funds and private securities investment funds, while for private equity and venture capital funds (“PE&VC funds”), only the regulatory documents of CSRC have some similar expressions (for example, the Interim Measures requires managers not to mix fund assets with their proprietary funds), and it is obviously not strong enough to argue when faced with such laws as the Bankruptcy Law adopted by top legislator in China. The Private Funds Regulations make up for this deficiency.

 

These are examples showing the significance of the top-level system design.

 

Q: Then why is it said that the Private Funds Regulations is so important?

 

In our opinion, the greatest significance of the Private Funds Regulations is: (1) the Funds Law is only applicable to retail funds and private securities investment funds, and the Private Funds Regulations well positioned the legal status of PE&VC funds, and (2) from the perspective of administrative regulations, CSRC has been granted the authority to regulate PE&VC funds by the Private Funds Regulations. Previously, the basis for the regulation on PE/VC funds by CSRC was mainly based on two notices issued by the State Commission Office of Public Sectors Reform.

 

Compared with private securities investment funds, the Private Funds Regulations is more important for PE&VC funds.

 

Q: Since the Private Funds Regulations is so important, but it mainly focused on the top-level system design, what is to watch in the future?

 

The Official Q&A mentioned that in order to implement the Private Funds Regulations, CSRC will improve regulatory documents and self-discipline rules. The Interim Measures will be revised according to the Private Funds Regulations to further refine the relevant requirements, and gradually improve the relevant systems of private funds fundraising, investment operations, and information disclosure, and CSRC will implement differentiated supervision based on the business categories, AUM, ongoing compliance status, risk control capabilities, client service capabilities, etc., and improve the regulatory system. At the same time, CSRC will guide AMAC to complete self-regulatory rules such as registration and filing, fund contract guidance, and information submission in accordance with the Private Funds Regulations and the regulatory rules of CSRC.

 

Therefore, a series of subsequent legislation (including amendments) by CSRC and AMAC deserves close attention.

 

Q: What is the impact of the Private Funds Regulations on foreign invested fund managers (including WFOE PFM and QFLP)?

 

At present, the administrative measures for foreign-invested private securities investment fund managers (including WFOE PFM) are issued by AMAC (i.e., the Private Funds Registration and Filing Q&A NO. 10), as guided by CSRC; the administrative measures for foreign-invested PE/VC fund managers (QFLP) are formulated by relevant local governmental authorities in each QFLP pilot areas (please refer to our publication for more details: Annual Review and Outlook: QFLP and QDLP as Cross-border Investment Funds (2022-2023)).

 

The Private Funds Regulations stipulates that "the administrative measures for foreign-invested private fund managers shall be formulated by CSRC in conjunction with relevant governmental authorities under the State Council in accordance with foreign investment laws, administrative regulations and the Private Funds Regulations." According to this article, CSRC and relevant governmental authorities (e.g., SAFE and MOFCOM, etc.) will jointly issue relevant administrative measures for foreign-invested fund managers in the future.

 

In addition, the Private Funds Regulations defines a private fund as "within the territory of the People's Republic of China, raising funds in a non-public manner, establishing...", which means, following the Interim Measures issued by CSRC, the Private Funds Regulations provides a higher level of legislative support for the AMAC's practice of "not accepting the filing of QFLP funds not involving domestic fundraising activities".

 

Q: What impact will the Private Funds Regulations has on QDII, QDLP, QDIE and other licensed institutions?

 

The Private Funds Regulations stipulates that "overseas institutions shall not directly raise funds from domestic investors to establish private funds, unless otherwise stipulated by the State." We often receive similar inquiries from overseas clients, and the Private Funds Regulations actually has confirmed our previous replies.

 

As for the said exceptions, national sovereignty funds (CIC, SAFE, National Social Security Fund, etc.) and qualified foreign institutional investors (QDII, RQDII, etc.) are clearly among them.

 

As for QDLP and QDIE pilot institutions, the relevant regulatory policies are issued by the pilot regions at local level, but the foreign exchange quotas related to QDLP and QDIE business are all approved by SAFE. Therefore, to some extent, it can also be regarded as national regulations. It remains to be further confirmed by the relevant governmental authorities.