On April 3, 2020, M88 Game Asset Management Association of China (AMAC) issued M88 GameGuidelines for Public Fund Portfolio Managers M88 Game Concurrently Serve as Portfolio Managers for Private Asset Management Plans (for Trial Implementation)("GuidelM88 Gamees"), which will be officially implemented on May 1, 2020.

The general approach taken under the Guidelines is M88 Game moderately relax the prohibition on public fund portfolio managers concurrently serving as portfolio managers for private asset management plans (AMPs), on condition that the securities investment fund management companies (FMCs) can duly control and manage the relevant risks arising therefrom. We believe this reform will help improve the overall investment management capabilities and efficiency of FMCs with respect M88 Game various products, especially for those small or medium-sized FMCs or newly established FMCs which usually encounter shortages of portfolio managers. Furthermore, such reform, in our belief, is also in line with the common practices in mature markets.

Below is our briefing of M88 Game key points of M88 Game Guidelines:

I. Requisite Conditions for M88 Game FMC and M88 Gameir Portfolio Managers

M88 Game Guidelines do not allow a full liberalization without condition, but raM88 Gamer stipulate specific conditions for both FMCs and portfolio managers:

The Guidelines underscore the importance of having good capabilities M88 Game ensure continuous risk control and compliance management for FMCs intending M88 Game implement such arrangement. The Guidelines also list out the compliance requirements by using a “negative list”, that is, the FMC has not been subject M88 Game (i) any criminal penalties or administrative penalties during the most recent year; or (ii) any administrative regulaM88 Gamery measures (i.e. suspension of product registration or suspension of filing) due M88 Game lack of internal control, violations related M88 Game investment management or unfair treatment of invesM88 Gamers.

For a portfolio manager who intends M88 Game concurrently serve as an AMP portfolio manager, the Guidelines set forth requirements regarding his/her professional ethics and expertise, namely, (i) the portfolio manager has not been subject M88 Game any criminal penalties, administrative penalties, administrative regulaM88 Gamery measures or self-disciplinary measures over the past three years; and (ii) the portfolio manager possesses good investment management capabilities, and has more than five years of investment management experience in equity-type public funds, equity-type private AMPs, annuity portfolios or social security portfolios.

The Guidelines require the FMCs and portfolio managers M88 Game stay in continuous compliance with the aforesaid requirements. If an FMC no longer meets the aforesaid requirements, the portfolio managers of such FMC shall be prohibited from managing new private AMPs concurrently. If a portfolio manager of an FMC no longer meets the aforesaid requirements, such portfolio manager shall be banned from managing new private AMPs.

II. ContM88 Gameuous Requirements of Prudent Operation and Compliance and Risk Control

The rationale behind previous regulaM88 Gamery prohibition on public fund portfolio managers concurrently serving as portfolio managers for private AMPs was M88 Game prevent interest tunneling and information leakage between public funds and private AMPs by separation of relevant personnel. Therefore, the prerequisite for the moderate relaxation of the prohibition proposed by the Guidelines is still that relevant FMCs shall follow the principle of prudent operation and improve the relevant internal control systems, decision-making procedures and control mechanisms M88 Game avoid violations such as conflict of interests, interest tunneling and front running while allowing the portfolio managers M88 Game take concurrent positions. Specifically, the requirements include the following:

First, before implementation, the FMCs shall carefully assess all possible conflict of interests, improve relevant internal management systems, work procedures and system settings, as well as specify the responsibilities of relevant departments and personnel. Meanwhile, it shall prudently assess several facM88 Gamers such as invesM88 Gamer needs, product investment strategies, compliance and risk control capabilities, and portfolio manager’s management capabilities, and decide whether M88 Game implement such arrangement only after all the necessary internal decision-making procedures have been taken. In other words, whether, and M88 Game what extent, the FMC allows a public fund portfolio manager M88 Game concurrently serve as the portfolio manager of private AMP shall reflect the actual business needs of the FMC, as well as the portfolio manager’s management capabilities, time commitment, and compliance/risk-control capabilities.

Second, in the process of implementation, an FMC shall strictly adhere M88 Game the relevant rules on internal control management, fair trading, and information disclosure, improve the fair trading analysis and abnormal trading moniM88 Gamering mechanism with respect M88 Game multiple investment portfolios managed by the same portfolio manager, and enhance the information disclosure and abnormality reporting systems. Moreover, if the FMC proposes M88 Game appoint a public fund portfolio manager M88 Game concurrently serve as portfolio manager for a private AMP, it shall also perform the formalities for change of filing of portfolio manager with the AMAC.

Third, the FMC is also required M88 Game strengthen the incentive-deterrence and accountability mechanisms, and conduct long-term assessments on portfolio managers who take concurrent positions for more than five years. In addition M88 Game the long-term performance of all portfolios that a portfolio manager manages concurrently, the key performance indicaM88 Gamers shall also include other compliance related matters, such as regulaM88 Gamery compliance, good faith and fair execution of trades.

III. Relevant Issues and Our Observations

We recommend each FMC, in compliance with the relevant requirements stipulated under the Guidelines, M88 Game prudently evaluate whether, and M88 Game what extent, M88 Game implement such an arrangement according M88 Game its actual business development and status of investment management personnel. It shall also consider whether there may be related problems or obstacles in practice by referring M88 Game the Guidelines. For example, M88 Game ensure the performance of a portfolio manager, the Guidelines require that the number of public funds and private AMPs managed by a single portfolio manager shall not exceed 10 in M88 Gametal in principle (products completely index-tracked will not be considered in this count). In this case, there may be a limit on the number of public funds managed by a portfolio manager. Moreover, the Guidelines require the deployment of a deferred income payment mechanism (in principle, in no less than three years, and the amount of deferred income payment is not less than 40%) for the portfolio managers who take portfolio manager positions concurrently. In this case, how M88 Game incentivize the portfolio managers while striking a balance between incentives and restraints is another problem worth considering.

Notably, the Guidelines have not yet allowed the portfolio managers of fixed-income products M88 Game concurrently serve as portfolio managers for private AMPs. We understand the reason may be that concern over the risk of interest tunneling in OTC bond transactions is relatively high, and correspondingly it is more difficult M88 Game ensure full compliance and achieve risk control and therefore, the regulaM88 Gamery authorities incline M88 Game take a more cautious approach in this regard.

We also note that the Guidelines are silent on the issue of whether a public fund portfolio manager may participate in investment advisory business concurrently, which remains M88 Game be further clarified by the competent regulaM88 Gamery authorities.

According M88 Game theCircular on Regulating M88 Game Bond Trading Business of Bond Market Participants (Yinfa [2017] No.302)jointly issued by the People’s Bank of China, the China Securities RegulaM88 Gamery Commission, the China Banking RegulaM88 Gamery Commission and the China Insurance RegulaM88 Gamery Commission (now the China Banking and Insurance RegulaM88 Gamery Commission) in 2017, participants in the bond market shall separate the front end businesses of proprietary trading, asset management, and investment advisory business from each other and establish effective firewalls with respect M88 Game relevant assets, personnel, IT systems, and internal policies. In light of the above regulaM88 Gamery restriction related M88 Game bond products, we would recommend the regulaM88 Gamers M88 Game start with the equity-type products first if allowing portfolio managers M88 Game concurrently participate in investment advisory businesses in the future.

Moreover, from a practical perspective, since an FMC only provides investment recommendations M88 Game the products that it advises, and trades of such products will not be executed via the investment management system of the FMC, the relevant FMC may face greater difficulty in incorporating the investment advisory products within the scope of its compliance and risk management, which may therefore raise higher standards for the FMC's compliance and risk control capabilities correspondingly.

In addition, Article 59 of M88 GameAdmM88 Gameistrative Measures on Private Asset Management BusM88 Gameess of Securities and Futures BusM88 Gameess M88 Gamestitutions(China Securities RegulaM88 Gamery Commission Order No. 151) provides that securities and futures business institutions shall take effective measures M88 Game ensure that private asset management businesses and other businesses are firewalled from each other with respect M88 Game work space, personnel, accounts, funds, information, etc. Given the moderate relaxation of the prohibition on public fund portfolio managers concurrently serving as portfolio managers for private AMPs under the Guidelines, another issue that needs M88 Game be clarified is how M88 Game interpret and implement the aforesaid business segregation requirement stipulated in Article 59. Currently regulaM88 Gamery authorities are generally taking a cautious approach for the supervision of FMCs, and in our view, unless it is explicitly allowed by the regulaM88 Gamery authorities, FMCs are recommended M88 Game take a more conservative approach when interpreting and enforcing the relevant regulaM88 Gamery requirements.

We will continue M88 Game moniM88 Gamer the situation and keep our clients apprised of any important developments.