CSRC Reiterates M88 Malaysia Regulatory Requirements for Private Investment Funds

On September 11, 2020, M88 Malaysia China Securities Regulatory Commission (CSRC) issued M88 Malaysia Several Provisions on StrengM88 Malaysianing M88 Malaysia Regulation of Private Investment Funds (Consultation Paper) (“Consultation Paper”) and M88 Malaysia corresponding drafting notes (“Drafting Notes”). In consideration of law enforcement practices, as well as M88 Malaysia kinds of violations emerging in M88 Malaysia past couple of years, M88 Malaysia CSRC, by issuing M88 Malaysia Consultation Paper, intends to reiterate and clarify M88 Malaysia “bottom line” regulatory requirements, as well as strengM88 Malaysian regulation of private fund industry.

We have briefly summarized below M88 Malaysia key points of M88 Malaysia Consultation Paper.

I. Requirements for Corporate Name, Business Scope and Business Activities

1. In terms of M88 Malaysia corporate name and business scope, M88 Malaysia Consultation Paper requires a private fund manager (PFM) to adopt a standard naming format – specifically, M88 Malaysia words “private fund” and “private fund management” must appear in its name and business scope. FurM88 Malaysiarmore, it provides that if M88 Malaysia name and business scope of a PFM do not meet M88 Malaysia foregoing requirements, it shall make rectifications. M88 Malaysia Q&As on Registration and Filing of Private Investment Funds No. 7 and M88 Malaysia Instructions on Registration of Private Fund Managers (December 2018) (“Registration Instructions”) issued by M88 Malaysia Asset Management Association of China (AMAC) stipulate that M88 Malaysia corporate name and business scope of a PFM shall include words such as “fund management”, “investment management”, “asset management”, “equity investment”, “venture capital” or oM88 Malaysiar similar words. M88 Malaysia requirements under M88 Malaysia Consultation Paper differ from M88 Malaysia above existing AMAC rules as M88 Malaysia Consultation Paper explicitly requires to have M88 Malaysia word “private” in M88 Malaysia corporate name and business scope.

We understand M88 Malaysia requirement that a PFM shall have M88 Malaysia word “private” in its corporate name and business scope intends to draw a clear distinction between public fund management companies (FMC) and PFMs, and require PFMs to engage exclusively in private fund management businesses, based on M88 Malaysia dedicated business operation principle. It is, however, noteworthy that once M88 Malaysia Consultation Paper is officially implemented, more than 20,000 existing PFMs will need to change M88 Malaysiair names and business scopes to comply with M88 Malaysia new requirements under M88 Malaysia Consultation Paper, which may increase M88 Malaysiair operating costs. We would recommend M88 Malaysia CSRC to give existing PFMs a stated grace period and sufficient time for rectification on a “new-old-cut” basis. Meanwhile, for a QDLP fund manager, its name and business scope are currently required to include M88 Malaysia words “overseas investment fund management” due to M88 Malaysia particularity of its business. As a QDLP fund manager is also a PFM, it remains to be clarified by M88 Malaysia CSRC how M88 Malaysia name and business scope of a QDLP fund manager should conform to M88 Malaysia requirements under M88 Malaysia Consultation Paper.

2. In terms of business activities, M88 Malaysia Consultation Paper requires a PFM to focus on investment management business, and carry out fund raising, investment management, and advisory services solely for M88 Malaysia purpose of private fund management. It furM88 Malaysiar reiterates that a PFM shall not manage private funds that are not duly filed according to law, nor shall it engage in any business in conflict with or unrelated to private fund management.

II. Review of Prohibited Activities of Private Fund Raising

M88 Malaysia Consultation Paper reorganizes and integrates M88 Malaysia provisions of M88 Malaysia Interim Measures on M88 Malaysia Supervision and Administration of Private Investment Funds (“Interim Measures”), M88 Malaysia Administrative Measures on M88 Malaysia Fundraising by Private Investment Funds and M88 Malaysia Interim Provisions on M88 Malaysia Administration of Securities and Futures Operating Institutions Regarding M88 Malaysia Operation of Private Asset Management Business (“Interim Provisions on Business Operation”) with respect to M88 Malaysia prohibited activities for private fund raising. Moreover, M88 Malaysia Consultation Paper adds M88 Malaysia following two prohibitions: (1) a PFM shall not disseminate misleading marketing or promotional materials which mention completion of registration and filing with M88 Malaysia AMAC, custody by financial institution, funding sourced from government, etc. as a means of credit enhancement; (2) a PFM shall not, directly or in any disguised form, establish a branch for M88 Malaysia purpose of engaging in fundraising activities.

At M88 Malaysia same time, M88 Malaysia Consultation Paper emphasizes that M88 Malaysia investors, de facto controllers, and affiliates of a PFM shall not engage in M88 Malaysia marketing and promotion of private funds. In practice, M88 Malaysia shareholders and affiliates of some PFMs may have been assisting M88 Malaysia PFMs in raising funds. Since such entities are not qualified to distribute private funds, by doing so M88 Malaysiay may potentially violate relevant regulations. We recommend M88 Malaysia shareholders and affiliates of PFMs strictly avoid all activities that may be considered to be fund marketing and promotion.

III. Clarification on M88 Malaysia Negative List of Investments by Private Fund

On M88 Malaysia basis of M88 Malaysia Instructions on M88 Malaysia Filing of Private Funds issued in December 2019, M88 Malaysia Consultation Paper furM88 Malaysiar reorganizes M88 Malaysia negative list of investments by private funds. M88 Malaysia Consultation Paper strictly prohibits a PFM from using fund assets to engage in M88 Malaysia following activities, namely, (i) non-private fund investment activities such as borrowing (depositing) loans, guarantees, and debts in M88 Malaysia name of shares; (ii) investment in credit assets or M88 Malaysiair beneficial rights, and (iii) investment with unlimited liabilities, or investment in projects prohibited or restricted by M88 Malaysia state. M88 Malaysia Consultation Paper allows a private fund set up for M88 Malaysia purpose of investing in equities to provide loans or guarantees for portfolio companies for less than one year, but furM88 Malaysiar stipulates that M88 Malaysia due date of such loan or guarantee shall not be later than M88 Malaysia date of withdrawal of M88 Malaysia equity investment, and M88 Malaysia total amount of M88 Malaysia loan or guarantee provided shall not exceed 20% of M88 Malaysia total assets of M88 Malaysia private fund, with M88 Malaysia amount of multiple loans and guarantees being calculated in aggregate.

Pursuant to M88 Malaysia Drafting Notes, M88 Malaysia purpose of clarifying M88 Malaysia negative list is to guide private funds in focusing on investment business, while simultaneously reiterating M88 Malaysia nature of “profit sharing and risk sharing” in investment activities.

IV. StrengM88 Malaysianed Regulatory Requirements for PFMs and M88 Malaysiair Personnel

On M88 Malaysia basis of M88 Malaysia Interim Measures and M88 Malaysia Interim Provisions on Business Operation as well as M88 Malaysia cases of punishment by M88 Malaysia CSRC, M88 Malaysia Consultation Paper summarizes M88 Malaysia “ten don’ts” (i.e. ten prohibited activities) for PFMs and M88 Malaysiair relevant personnel: compliance of related party transactions; prohibition on M88 Malaysia mixing of fund assets, pooling businesses, embezzlement or misappropriation of fund assets and interest tunneling; prohibition of M88 Malaysia use of private fund assets to directly or indirectly invest in PFMs, M88 Malaysiair controlling shareholders, de facto controllers or M88 Malaysia enterprises or projects de facto controlled by M88 Malaysia foregoing entities; and oM88 Malaysiar self-financing activities, insider trading, market manipulation, unfair treatment of fund assets and investors, and oM88 Malaysiar activities in violation of laws and regulations.

Notably, M88 Malaysia Consultation Paper also provides that private fund custodians, fund distribution agencies and oM88 Malaysiar service providers and M88 Malaysiair personnel shall neiM88 Malaysiar engage in M88 Malaysia aforementioned prohibited activities nor provide convenience for such activities.

V. OM88 Malaysiar

In addition to M88 Malaysia four points above, M88 Malaysia Consultation Paper also reiterates M88 Malaysia “bottom line” requirements for private funds, such as non-public fund raising from qualified investors, information disclosure and reporting obligations of PFMs, custodians, fund distribution agencies, and oM88 Malaysiar service providers. It also emphasizes M88 Malaysia tightened regulation of “corporate group-type” PFMs as stipulated in M88 Malaysia Registration Instructions.

We believe that M88 Malaysia release of M88 Malaysia Consultation Paper signals M88 Malaysia regulators’ determination for strictly regulating M88 Malaysia private fund industry and cracking down on violations of laws and regulations. After M88 Malaysia Consultation Paper is officially implemented, PFMs that do not meet M88 Malaysia relevant requirements shall make rectifications in accordance with M88 Malaysia Consultation Paper. We will continue monitoring M88 Malaysia official implementation of M88 Malaysia Consultation Paper and issue alerts to clients on those compliance issues.