AMAC’s further notice on private fund filing

Background

Further to the Notice on Filing of Privately Offered Investment Funds (Fund Filing Guidance) that was issued on in December 2019 and will take effect on 1 April 2020, the Asset Management Association of China (AMAC) issued the Notice on Checklists of Application Materials for Filing of Privately Offered Investment Funds (Notice on Checklists) to provide market participants with greater transparency, clarity and guidance on the requirements for filing of privately offered investment funds. (Refer here for our client alert on the AMAC Fund Filing Guidance).

The Notice on Checklists provides for three checklists, each setting out a list of application materials required under a specified situation, i.e. (i) initial filing of non-securities investment funds (including private equity fund and venture capital fund), (ii) initial filing of securities investment funds, and (iii) filing of major changes in the fund concerned (eg change of fund manager or service providers) and fund liquidation (together, the Checklists). AMAC stresses that, no new filing requirements have been put in place through those Checklists; the filing requirements in the Checklists are a mere consolidation of the existing filing requirements under the relevant laws and regulations and the Fund Filing Guidance.

The Checklists are aimed to facilitate the preparation of filing application materials by the fund managers. To achieve this goal, one new function will be added to the AMBERS System through which the fund managers file relevant documents to the AMAC, ie, the system will pre-check the completeness of the documents before these documents are filed to the AMAC officers for review.

Key issues

The requirements for each application material stipulated under the Checklist for non-securities investment funds are largely similar to those of the Checklist for securities investment funds. We summarize below some key requirements for an initial fund filing that had not previously been adequately addressed.

A. Marketing documents

As previously mentioned in the Fund Filing Guidance, the Checklists emphasize that the content of marketing documents shall be materially consistent with the fund contract. This aims to avoid the confusion, mis-communication and mis-representation that may be caused by the two common scenarios that we have observed in the market, specifically (1) that some fund managers will prepare the marketing document of the relevant fund concerned (such as the PPM) based on a general and uniform template without modifying the template to suit the characteristics of the particular fund, resulting in inconsistencies or contradictions between the market document and the fund contract, and (2) where material changes were made to the key terms of the fund, some fund managers would neglect to update the marketing document accordingly, not even when the fund is open-ended and constantly being marketed to external investors. This results in an inaccurate and outdated marketing document being distributed to investors, thereby causing investors to have received and relied on inaccurate information at the time of signing of the fund contract.

The Checklists’ emphasis on material consistency between the marketing documents and the fund contract means that fund managers shall exercise greater effort and vigilance in preparing the marketing documents and keeping investors informed with any material changes to the fund contract by updating the marketing documents accordingly.

B. Risk disclosures

The Checklists require fund managers to include a “detailed, specific and complete” disclosure of the special risks that may be involved in the fund, including but not limited to risks where fund distributors and the fund manager are related parties, the risks of other related-party transactions, the risks of single portfolio investment, the risks of using an SPV and the risks relating to fund managers holding fund units under a nominee arrangement for beneficiaries etc.

The Checklists do not specify the standard of a “detailed, specific and complete” disclosure and it remains to be judicially tested. It is advisable that clients apply their international standards in the absence of an AMAC standard in applying the criteria of “detailed, specific and complete”.

C. Chinese Walls within the service providers

The Checklists require that, where the supervisory agency for fundraising (Supervisory Agency) is also a fund distributor, AMAC requires that the Chinese Walls mechanism and conflicts of interest policy shall be filed.

The purpose of the Supervisory Agency is to ensure the safety of the capital that is contributed by the investors into the fundraising account before such capital is remitted to the custodian account for fund investment operations and to check and calculate the amount of distributions to be made to each investor at the time of dividend distribution, fund unit redemption and fund liquidation.

In the context of securities investment funds, the fund administrator will typically assume the role of the Supervisory Agency and, for the sake of convenience of the fund operation and administration, the fundraising account will be opened in the name of the fund administrator. In contrast, with respect to private equity funds (including venture capital funds), the fundraising account is opened in the name of the fund manager and subject to the supervision of the Supervisory Agency, and the fund custodian will typically assume the role of the Supervisory Agency.

Many securities companies provide both fund administrative services and distribution services, among others. Therefore, if the fund manager appoints the same entity to serve as both the fund administrator/Supervisory Agency and the distributor, it would be one of the items that the fund manager should DD against that whether a Chinese Wall has been properly implemented within the internal teams of such entity and relevant policies have been adopted to avoid conflicts of interest arising from the dual capacity of such entity.

D. Documents to prove investment ability

The Fund Filing Guidance imposes a new obligation on the fund managers to check the investment ability and source of funding of investors, and to ensure that the investor invests on behalf of it/him/herself. To implement this new rule, the Checklists further require that both the confirmation letter signed by the investors and proof of the investors’ investment ability shall be filed. The types of acceptable documentation for proving the investment ability and source of funding of the investors are laid out in the Checklists to provide clearer guidance to fund managers.

Generally, an investor’s certificate of financial asset, certificate of future income or other equivalent documentation can serve as proof of the investor’s investment ability. The aggregation of the estimated realisable value of the financial asset and expected future income of the investor, as evidenced in the aforementioned documents, should be able to meet the investor’s payment obligations to the fund.

Specifically:

• Where the investor is a natural person, he/she may provide proof of his/her investment ability through certification of assets including but not limited to bank deposits, stocks, bonds, fund units, asset management plans, bank wealth management products, trust plans, insurance products, futures, equities and other financial assets, investment-oriented real estate and special movable assets, non-financial assets such as company equity, and bank statements for salary income flow, dividend flow, investment income flow, and tax payment certificates.
• Where the investor is an institutional investor, proof of investment ability may include, but are not limited to, capital verification reports, the latest annual audit reports and other documents.