Regulatory update in China's Private Fund Industry - I

Private fund managers are seeing increasing opportunities as well as challenges in the burgeoning asset management industry in China. Some of the challenges come from coping with the increasingly stringent rules and regulations in the industry which used to be regulated lightly. 

Recently, the Asset Management Association of China (the AMAC), authorised by China Securities Regulatory Commission (ie CSRC, China’s securities regulator), to regulate the private fund industry, has issued Announcements on Further Regulating the Registration Matters of Private Fund Managers and Rules on Regulating the Activities on Promoting and Marketing of Private Funds respectively on 05 February 2016 and 15 April 2016. Both announcements address the registration requirements for a fund management entity, and the promotion and marketing of a private fund. The issuance of these regulations demonstrates the AMAC’s determination to strengthen the regulation of the private fund industry.

In this paper we have summarised the highlights of the new regulations, followed by the introduction of the background and our observation.

Regulatory highlights in the announcement on further regulating the registration matters of private fund managers

Registration of the management entity

Currently only two types of entities are allowed to engage in private fund management activities:

• entities that are duly registered with the AMAC, and
• entities that are duly registered with CSRC (ie, securities and mutual fund management companies) who are also a member of the AMAC (ie filed with the AMAC for conducting private fund businesses).

Most entities that carry out private equity investment or public securities investment (similar to a hedge fund manager) fall into the first category. Now under the new rules, in order for them to obtain (or maintain) the registration status with the AMAC, they need to satisfy the following requirements, among others:

• Having certain number of investment management team and risk/compliance management team to pass the qualification exams (The first exam was administered after the new regulations took effect on 23 April 2016, 11,272 people took the exam.) Recently, exemptions were made available by the AMAC to a limited number of PE investment managers with extensive experience in the field. 1

• Having assets under management (no minimum AUM amount stipulated).

• Having been supported by an official legal opinion issued by an external law firm on various aspects of the managers including its corporate registration, team qualification, risk management policies and practice, type of trading, portfolio investment, etc.

Some foreign asset managers have established their subsidiaries in China (primarily in the form of a wholly foreign owned enterprises, or “WFOE”). They use WFOEs to conduct investment management or advisory businesses (which is subject to the successful registration with the AMAC). We have assisted a number of foreign asset managers launching their onshore investment management units in China.

The second category consists of securities companies or mutual fund management companies whose traditional strength lies in mutual fund management but have gradually expanded their footprints in private fund sector. These entities are more active in fundraising activities than portfolio management in terms of their role in private fund industry.

Background and market observation

China’s nation-wide regulations in private fund industry have just been developed for a few years. Started with a relatively “light touch” approach, the regulatory system started to change from the beginning of 2016. The year 2015 has seen a bout of illegal fundraising activities, where investment managers have illegally marketed their funds and tricked investors into believing that the AMAC registration is some form of governmental endorsement. Given this, the government authorities have determined to crack down the illegal fundraising activities and overhaul the sector. Also it is said that many corporate registration authorities have suspended or slowed down from earlier this year the establishment of new financing firms until the overhaul is over. This is the context in which the AMAC rules were issued.

The current regulatory system is not entirely clear whether it focuses on regulated activities or on management entities. A comprehensive regulatory framework for private fund managers is being built up and thus more detailed rules can be expected in the near future.

1  According to the relevant rules, senior management officers of PE fund manager may apply to the AMAC for being exempted from taking the fund practicing qualification if one of the following criteria is met:

• Having worked in PE (VC) industry for no less than six years, and participate in at least two projects with successful exit
• Acting as senior management officers in any listed companies or large companies with a registered capital of no less than RMB 1bn, and have working experience of over 12 years
• Senior management officers with working experience of over 12 years in economic social management, or
• Having been teaching and researching of economics, finance and other related majors in universities or research institutions for over 12 years and obtained a title of professor or researcher.