中国资产管理业翘首等待修订后的《证券投资基金法》及配套法规的施行
On December 28, 2012, the long anticipated amended Securities Investment Fund Law of the People’s Republic of China (
This Alert will briefly introduce the changes in the securities investment funds sector2 brought about by the Amended Law, the Interim Regulations and the Draft Regulations (if adopted).
A privately placed fund refers to a fund that will make securities investments under the direction of a fund manager where the funds are raised by non-public means in China and, unless otherwise provided in the fund contract, the assets (i.e. the funds raised and the securities acquired) are held in custody by a fund custodian for the benefit of the unit holders.
Before the Funds Law Amendment, the Securities Investment Fund Law only regulated publicly placed funds, which left the increasingly significant privately placed funds in a legal limbo. With economic restructuring and rising household demand for wealth management products, privately placed funds have grown rapidly in China. However, hindered by a lack of express legal standing, most privately placed funds were formed by means such as collective fund trust schemes (a.k.a. “sunshine funds”) and securities investment consulting arrangements (where “fund managers” allege that they are consultancies rather than fund managers, their services to investors are investment consultancy services, and investors manage their own investments based on their own discretion), with no or limited regulatory supervision. Absent appropriate governmental supervision, investors in privately placed funds have been exposed to excessive risk and potential fraud.
2. Publicly Placed Funds
The Funds Law Amendment relaxes the regulation of publicly placed funds, putting them on a more competitive level with other financial products (e.g. wealth management products provided by commercial banks).
As a further step in the efforts of the CSRC to simplify and speed up procedures regulating raising fund by publicly placed funds in recent years, the Funds Law Amendment abolishes the pre-approval requirement imposed on fund managers for their raising fund, instead now only requiring a pre-filing with the CSRC. In addition, application documents required to be filed have been simplified. Furthermore, a fund manager4 will now be allowed to apply to the Shanghai or Shenzhen Stock Exchange to list a fund without prior ratification by the CSRC (or stock exchange).
With respect to corporate changes in a fund management company that are subject to CSRC approval, the Funds Law Amendment appears to limit them to changes (i) of any person who holds 5% or more of the shares of the fund management company or (ii) of a “de facto controller” of the fund management company e.g. changing the parent company of a controlling shareholder of the fund management company,5 and (iii) in other material matters.6
Other major relaxations include: (i) expanded market access by (a) allowing qualified securities companies, insurance asset management companies and asset management firms (in addition to fund management companies) to be fund managers and (b) relaxing the required qualifications of the principal shareholders of fund management companies; (ii) expanded scope of investment by allowing funds to invest in securities (in addition to publicly traded stock and bonds) and their derivatives specified by the CSRC; and (iii) incentivized business operations by permitting the establishment of shareholding schemes for employees of fund managers subject to certain conditions.
While relaxing procedures, the Funds Law Amendment toughens rules regulating matters of conduct, supervision and accountability etc. These measures include bringing the shareholders and actual controlling persons of a fund manager under the regulation of the Amended Law, requiring fund managers and custodians to make allocations to a risk contingency provision, and tightening the fiduciary duties of directors and supervisors of fund managers, and other industry practitioners towards unit holders.
3. Brief Comparison of Publicly Placed Funds and Privately Placed Funds
Please click here to view the table.
4. The Role of Fund Service Providers
The Funds Law Amendment contains an enhanced set of rules regulating intermediary entities providing services to securities investment funds, such as fund sales companies, fund unit depositories, law firms and accounting firms etc. The law permits fund managers to outsource non-core businesses to such service providers.
5. Pilot Programs
The Funds Law Amendment expressly provides that (i) raising funds in China for investment in offshore securities and (ii) onshore securities investments by qualified foreign investors must be subject to the CSRC’s approval. This requirement appears to aim at pilot programs launched or to be launched by local authorities in these areas, such as the well-reported but non-published Shanghai Qualified Domestic Limited Partners program permitting the establishment of Shanghai registered hedge funds that will make investments in offshore secondary markets.
6. Private Equity Funds and Venture Capital Funds and Their Management Firms
Though the Amended Law bodes well for the rapidly growing privately placed securities investment fund sector, the Amended Law does not bring private equity funds and venture capital funds which are typically structured in the form of equity investment firms and venture capital investment firms respectively under its ambit.13 Therefore, the National Development and Reform Commission (the “NDRC”) will continue to be principal regulator of these funds.
The NDRC issued a notice on March 18, 2013 prohibiting equity investment firms and venture capital investment firms and their management firms from establishing securities investment funds or acting as fund managers of securities investment funds. The NDRC’s position on equity investment firms and venture capital investment firms does not conflict with the Funds Law Amendment and is in line with the existing regime regarding equity investment firms and venture capital investment firms. However, the NDRC’s position on equity investment management firms and venture capital investment management firms differs dramatically from the CSRC’s position reflected in the Funds Law Amendment, expressly allowing qualified equity investment management firms and venture capital investment management firms to act as fund managers of securities investment funds. It is unclear how the CSRC will coordinate with the NDRC to resolve this issue. It is unlikely for equity investment management firms and venture capital investment management firms will engage in securities investment fund management businesses before the NDRC changes their position.
Conclusion
The Amended Law introduces sweeping changes to the securities investment fund industry by bringing privately placed funds under its regulation, by relaxing existing regulations applicable to publicly placed funds, and strengthening and institutionalizing the roles of fund service providers. It also levels the playing field for publicly placed fund managers to compete head-on with other wealth management players.
1 The AMAC is a non-profit self-regulatory organization established on June 6, 2012 pursuant to the Securities Investment Fund Law and the Administrative Regulations on Registering Social Organizations.
2 References to “funds” in this Alert mean securities investment funds, unless the context indicates otherwise.
3 The official term used in the Amended Law is “non-publicly placed funds”. In this Alert we use the term “privately placed funds” which is also used in the Draft Regulations.
4 A fund manager of a publicly placed fund may or may not be a fund management company. (See Section 3 below).
5 According to the Company Law, a "de facto controller" refers to any person who is not a shareholder but is able to exercise actual control of the acts of the company by means of investment relations, agreements or any other arrangements.
6 Though the Amended Law appears to substantially decrease the scope of corporate changes in a fund management company that are subject to the CSRC’s approval, the Administrative Measures for Securities Investment Fund Management Companies (“Fund Management Companies Measures”) effective as of November 1, 2012 currently specify that some other corporate changes (e.g. setting up of branches by fund management companies, changing shareholders with a shareholding of less than 5% but having a material impact on the corporate governance of a fund management company, changing key provisions of the articles of association of fund management companies) are subject to the approval by the CSRC. It remains unclear (i) whether the CSRC will amend the Fund Management Companies Measures to remove approval requirements on such other corporate changes, or (ii) the CSRC will deem such other corporate changes to be the “other material matters” subject to the CSRC’s approval.
13 Because investments by private equity funds and venture capital funds focus on equities of non-listed enterprises, these funds are not regulated by the Funds Law Amendment. However, if such funds invest in publicly offered securities, they may be deemed to be privately placed funds regulated by the Funds Law Amendment.
This article was originally published by Bingham McCutchen LLP.