LawFlash

China Securities Regulatory Commission Responds to Foreign Asset Managers’ FMC Applications

December 18, 2020

Feedback on recent applications to the China Securities Regulatory Commission provides some clarity on what will be expected from foreign asset managers wishing to establish fund management companies in the Chinese domestic mutual fund market.

After accepting two initial applications by foreign capitalized asset managers to establish fund management companies (FMCs) on September 18, the China Securities Regulatory Commission (CSRC) recently provided feedback on the application materials submitted by the two foreign asset managers. The CSRC requested that Applicant 1 and Applicant 2 provide their respective responses within 30 working days, and upon reviewing their responses, the CSRC would then decide whether to allow these applications to proceed to next stage of consultations.

The CSRC’s views concerning these applications are now available on its official website, and can be a meaningful reference for understanding the overall regulatory regime imposed on wholly foreign-owned FMCs. The CSRC’s views focus on the following major points.

Qualifications of Direct Shareholders

Both Applicant 1 and Applicant 2 were asked to submit supplementary information and materials to demonstrate their respective experience in the asset management industry.

For Applicant 1

  • The scale, type of products, and performance of mutual funds, pension funds, charitable funds, and endowment funds managed by all subsidiaries of Applicant 1 Asia Holdings Private Limited (as the direct shareholder of the proposed Applicant 1 FMC) during the last three years.
  • The scale of securities investment funds and mutual funds managed by Applicant 1 International during the last three years.

    For Applicant 2

  • Supplementary materials to evidence that Applicant 2’s parent limited liability company (as the direct shareholder of Applicant 2’s proposed FMC) and its related group companies are highly ranked in international markets in respect of its asset management business.

Moreover, the draft of new FMC measures (the Draft Measures), which the CSRC released on July 31, 2020, set some additional requirements with respect to qualifications of the major shareholder of a FMC, including having the “capacity for continuous capital replenishment” (i.e., a capital support commitment). Although the Draft Measures have not come into effect, the CSRC also requested that both Applicant 1 and Applicant 2 submit an undertaking letter pursuant to which they would be obliged to provide continuous capital and liquidity support wherever there is a shortfall in the capital position of the FMC.

Requirements in Respect of ‘Actual Controller’

Applicant 1 and Applicant 2 were further asked to provide supplementary materials to demonstrate that their respective “actual controller” complies with the financial standards required by the People’s Republic of China (PRC) law. Specifically, the relevant “actual controller” must not violate any of the following requirements:

  • Net assets must be less than 50% of the paid-in capital of the FMC
  • Contingent liabilities must be more than 50% of the net assets of the FMC
  • No outstanding indebtedness that cannot be satisfied with existing assets

Requirements for Directors and Senior Management Personnel

The CSRC also provided its views concerning the appointment of directors and senior management personnel of the Applicant 1 FMC.

Related to the Capacity to Perform the Duties of a Director of the FMC

The CSRC noted that, in consideration of the facts that (1) all of the six directors to be appointed for the Applicant 1 FMC have no working experience in the China securities and fund management markets and (2) only one proposed independent director is a PRC citizen, the CSRC requested that Applicant 1 demonstrate the following:

  • Such directors have knowledge of relevant PRC laws and regulations
  • Such directors have the capacity to perform their duties as directors of the FMC

This feedback suggests that the CSRC is likely to require that any proposed foreign director of an FMC demonstrates a solid familiarity with the Chinese mutual fund market and that each director is sufficiently qualified and experienced to perform their duties as an FMC director in a satisfactory manner.

Concurrent Post Arrangements

The proposed chairman of the board of the Applicant 1 FMC currently serves as a director of other Applicant 1 entities in Asia. Because of this, the CSRC requested that Applicant 1 explain whether such concurrent posts could result in conflicts of interest and potential “tunneling” (i.e., seeking unjust benefits for themselves or any third party other than investors by using fund assets or taking advantages of their positions), as well as what measures Applicant 1 would put in place to mitigate these issues.

In this connection it should be noted that, under PRC law, the general manager of an FMC must not concurrently work for any other asset management institution (whether located in China or elsewhere). Since the proposed general manager of the Applicant 1 FMC currently serves as a director of other Applicant 1 entities in Asia, the CSRC requested that Applicant 1 explain whether this general manager would continue her concurrent post after being employed by the Applicant 1 FMC or would retire from such positions to undertake the position as the general manager of the Applicant 1 FMC.

Takeaways

The CSRC’s commentary on the two applications has provided some increased clarity concerning what will be expected from foreign asset managers wishing to establish FMCs in the Chinese domestic mutual fund market. It is becoming increasingly clear that the Hong Kong model for regional management of China operations will not work for the new FMCs, and that China expects a strong commitment to the China market in terms of global experience, capital, local talent, and committed management for foreign FMCs permitted to operate in China. Interested international fund groups should plan accordingly.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Tokyo
Christopher P. Wells

Shanghai/Beijing
Alex Wang