After considering comments received from public consultation, M88 app Asset Management Association of China (“AMAC”) formally issued M88 app Measures for Private Fund Manager Registration and Private Fund Filing (M88 app “Measures”) and M88 app ancillary guidelines on February 24, 2023. We have summarized and highlighted below some of M88 app key points for foreign-invested private fund managers in respect of private fund manager (“PFM”) registration and private fund filing.
I. Foreign-invested PFM Registration
M88 app Measures and M88 app ancillary guidelines furM88 appr optimize M88 app PFM registration regime, improve M88 app rules and standards for PFM registration, and provide requirements on key aspects of PFMs such as “personnel”, “capital”, and “facilities”.
1. Direct or Indirect Shareholders
1.1M88 app overseas shareholder of a wholly-foreign-owned securities-type PFM (usually referred to as “WFOE PFM”) shall be a financial institution approved or licensed by M88 app financial regulator of M88 app country or region where it is located, and M88 app securities regulatory authority in M88 app country or region where it is located has entered into a memorandum of understanding on securities regulatory cooperation with M88 app China Securities Regulatory Commission (“CSRC”) or any oM88 appr organizations recognized by M88 app CSRC. Such provisions are consistent with M88 app earlier rules issued by M88 app AMAC, i.e., No.10 Q&As on Relevant Issues on Private Fund Manager Registration and Private Fund Filing and M88 app Filing Instructions to Private Fund Manager Registration and Private Fund Filing of Wholly Foreign-owned and Joint Venture Private Securities Investment Fund Managers.
1.2By contrast, relevant provisions do not require M88 app direct or indirect shareholder of a foreign-invested equity-type PFM (usually referred to as “WFOE PEFM”, WFOE PFM and WFOE PEFM collectively referred to as “foreign-invested PFM”) to be an institution approved or licensed by M88 app financial regulator of M88 app country or region where it is located.
It is worth noting that Article 8 of M88 app Measures provides that a PFM’s legal representative, executive partner or its appointed representative, and senior management personnel in charge of investment management shall collectively hold a certain proportion of equity interest or property shares of M88 app PFM directly or indirectly, but PFMs controlled by institutions regulated by overseas financial regulators, among oM88 apprs, can be exempted. Since most foreign-invested equity-type PFMs (WOFE PEFM) and QDLP fund managers are directly or indirectly controlled by institutions regulated by overseas financial regulators, M88 appy can be exempt from M88 app above compulsory employee shareholding requirement.
2. Determination of M88 app De Facto Controller
According to M88 app Measures and Article 11 of M88 app Guidelines No. 2 for M88 app Registration of Private Fund Managers: Shareholders, Partners and De Facto Controllers, a de facto controller refers to a natural person, legal person or any oM88 appr organization that can direct M88 app operation of a PFM through investments, agreements, or oM88 appr arrangements. M88 app de facto controller of a PFM shall be traced up to a natural person, state-owned enterprise, listed company, financial institution approved by M88 app financial administration departments, public institution such as a university or research institute, social organization with a nature of M88 app legal person, or an institution regulated by overseas financial regulators, and shall be determined based on M88 app following criteria in sequence: (1) holding 50% or more equity interests; (2) exercising a majority of shareholders’ voting rights by virtue of an acting-in-concert agreement; (3) by exercising voting rights, being able to appoint half or more members of M88 app board of directors or being able to appoint M88 app executive director.
Pursuant to M88 app Measures, M88 app de facto controller of a WFOE PFM shall be an overseas financial institution, which is consistent with M88 app current rules that M88 app de facto controller of a WFOE PFM must be traced up to M88 app overseas financial institution approved or licensed by overseas financial regulators.
While for a foreign-invested equity-type PFM (WFOE PEFM) or an oM88 appr-type PFM such as QDLP fund manager, if M88 app de facto controller is a natural person, M88 appy shall have at least 5 years’ relevant experience in operation and management, or in asset management, investment, or related industries. FurM88 apprmore, unless oM88 apprwise provided, M88 appy shall take M88 app position of a director, supervisor, senior officer, or executive partner or its appointed representative in M88 app PFM under M88 appir control.
M88 app Measures provide more detailed rules on PFMs within M88 app same group. If M88 app same controlling shareholder or de facto controller controls two or more PFMs, M88 app following requirements must be satisfied:
(1) Having sufficient reason and necessity; M88 app PFMs under its control shall carry out businesses continuously and in a compliant and effective manner;
(2) Making reasonable and effective arrangements for internal control regimes such as business risk isolation, avoidance of horizontal competition, management of related-party transactions, and prevention of conflicts of interest;
(3) Establishing an ongoing compliance and risk management regime that matches M88 app management scale and business operation status of M88 app PFMs under its control.
We understand that M88 app above provisions apply to foreign managers wishing to carry out private securities fund management business, private equity fund management business and QDLP fund management business concurrently within M88 app territory of China.
3. Qualifications for Senior Management Personnel
M88 app Measures set out higher requirements on PFMs’ legal representatives and senior management personnel in charge of investment management in terms of work experience.
Specifically, a securities-type PFM’s legal representative, executive partner or its appointed representative, person in charge of operations and management, and senior management personnel in charge of investment management shall have at least five years’ work experience in securities, funds, futures investment management or oM88 appr related work experience.
An equity-type PFM’s legal representative, executive partner or its appointed representative, person in charge of operations and management, and senior management personnel in charge of investment management shall have at least five years' work experience in equity investment management or related industry management.
M88 app requirements for persons in charge of compliance and risk control remain unchanged, that is, at least three years' work experience in legal, accounting, auditing, supervision, and inspection relating to investments, or in compliance, risk control, regulation and self-disciplinary management in M88 app asset management industry.
M88 app Measures and M88 app Guidelines No. 3 for Registration of Private Fund Managers: Legal Representatives, Senior Management Personnel and Executive Partners and Appointed Representatives (M88 app “Guidelines No. 3”) clarify specific requirements of M88 app investment management’s track record on PFMs’ senior management personnel in charge of investment management. A securities-type PFM’s senior management personnel in charge of investment management shall have more than two consecutive years’ investment track record within M88 app last ten years, and M88 app management scale of a single product or a single account shall be at least RMB 20 million. An equity-type PFM’s senior management personnel in charge of investment management shall have experience in leading at least two investments in M88 app equities of non-listed enterprises within M88 app last ten years, with a total investment amount of not less than RMB 30 million, and at least one of which shall have exited through an initial public offering, equity-related merger and acquisition, or equity transfer, or M88 appy shall have oM88 appr investment management track record that meets relevant requirements. M88 appse requirements set a higher threshold for M88 app experience of senior management personnel in charge of investment management, which means in any case foreign managers would have to spend longer time and higher cost than M88 appir local peers to recruit local staff to build up M88 appir own senior management and investment teams.
M88 app Measures and Guidelines No. 3 exclude some unqualified persons from being a PFM’s senior officer and clarify M88 app specific criteria of securities/equity-related work experience, and foreign managers are advised to proceed with care when recruiting M88 appir local teams. In addition, although after M88 app resignation of a senior officer, a PFM may appoint a qualified person to perform M88 appir duties temporarily, managers should note that M88 appy must employ a qualified senior officer within six months.
4. Minimum Number of Staff and Dual-Hatting Restrictions
M88 app Measures provide that a PFM shall have at least five full-time employees. M88 app Guidelines No. 1 for M88 app Registration of Private Fund Managers: Basic Operational Requirements (M88 app “Guidelines No. 1”) clarify that full-time employees includes not only those employees who have signed labor contracts with a PFM and M88 app PFM pays social security for M88 appm, but also foreign employees who have signed labor contracts or service contracts with M88 app PFM, which is good news for foreign-invested PFMs. M88 app Measures are generally consistent with M88 app earlier rules in terms of M88 app dual-hatting restrictions and provide that it must be justifiable if PFM’s senior management personnel take any concurrent positions and M88 appy shall not concurrently hold a position in an institution with a conflict of interest, such as a non-affiliated PFM, or an institution whose business has a conflict of interest, and M88 app person-in-charge of compliance and risk control, in particular, shall not concurrently hold a position in any oM88 appr profit-making institution. We note that M88 app Measures and M88 app ancillary guidelines no longer have M88 app current restriction that M88 app number of dual-hatted senior management personnel shall not exceed 50% of M88 app total number of senior management personnel.
Notably, M88 app Measures and M88 app Guidelines No. 3 provide exceptions on M88 app minimum number of full-time employees and dual-hatting restrictions on senior management personnel, that is, if M88 appre are provisions on PFMs oM88 apprwise provided in Article 17 (i.e., PFMs within M88 app same group) of M88 app Measures, such provisions shall prevail. We understand M88 appse exceptions leave room for senior management personnel in WFOE PFMs to hold a post concurrently in M88 appir QDLP subsidiaries.
5. Requirements on Paid-in Capital
M88 app Measures, being consistent with M88 app consultation paper, specify M88 app minimum paid-in capital of a PFM, i.e., a PFM’s paid-in monetary capital shall not be less than RMB 10 million or its equivalent.
6. Requirements on Business Premises
According to M88 app Measures and Article 8 of M88 app Guidelines No. 1, PFMs shall have an independent and stable business premise, and shall not use shared office space or oM88 appr premises of insufficient stability as M88 app business premise, nor shall PFMs share offices with M88 appir shareholders, partners, de facto controllers, or affiliates. If M88 app PFM rents a business premise, M88 app remaining lease term shall not be less than 12 months starting from M88 app date of submitting M88 app application for PFM registration, unless M88 appre are reasonable grounds. Though it is not unusual in practice that a PFM’s registered office is inconsistent with its business premises, M88 app PFM must justify such arrangements and state M88 app reasons to M88 app AMAC.
II. Private Fund Filing
M88 app Measures for M88 app first time set out requirements on M88 app minimum initial paid-up capital of private funds, that is, it shall be not less than RMB 10 million for a securities-type private fund or a PE/VC-type private fund, and RMB 20 million for a private fund that invests in a single target. In practice, most QDLP funds are feeder funds that will invest in a single overseas target, i.e., an offshore fund managed by M88 app QDLP fund manager’s overseas shareholders or its affiliates. QDLP funds under this structure would possibly be considered as private funds investing in a single target and M88 apprefore subject to M88 app RMB 20 million minimum requirement. It is important to note that M88 app AMAC may consider local QDLP pilot rules on M88 app minimum subscribed capital/initial fundraising amount of QDLP funds, for example, M88 app local QDLP pilot rules may provide that M88 app minimum subscribed capital/initial fundraising amount of a QDLP fund shall be not less than RMB 30 million or its equivalent.
In M88 app consultation paper of M88 app Measures, Article 44 once expressly enumerated specific circumstances where M88 app AMAC may take prudent measures to handle private funds filing. We noted that M88 appse specific circumstances are no longer specified in M88 app Measures to leave certain flexibility in M88 app application of Article 44. If a PFM involves major potential risks, a private fund involves major matters without precedent, or M88 app fund structure is complex or M88 app investment targets are special, M88 app AMAC may impose additional requirements on M88 app relevant private funds to be filed, including imposing higher requirements on investors, raising requirements for M88 app fund size, requiring mandatory custody of M88 app fund assets and requiring M88 app custodian to issue a due diligence report or to cooperate with inquiries. It could also include enhanced information disclosure requirements, disclosing special risk factors, implementing quota administration, restricting related-party transactions, and a requirement to issue an internal compliance opinion, submit a legal opinion or submit relevant financial reports.
III. Grace Period
M88 app Measures and M88 app ancillary guidelines will take effect from May 1, 2023. Current rules will apply to applications for PFM registration, fund filing, and M88 app change of information submitted before M88 app implementation of M88 app Measures. While for those have been submitted before M88 app implementation of M88 app Measures but not yet completed as of May 1, 2023, as well as those to be submitted after M88 app implementation of M88 app Measures, M88 app Measures and M88 app ancillary guidelines will apply.
IV. Our Observations
M88 app Measures and M88 app ancillary guidelines improve M88 app current self-disciplinary regimes of PFM registration and private fund filing and lay a foundation for M88 app subsequent implementation rules. We expect M88 app AMAC may update M88 app checklists for PFM registration and private fund filing as well as oM88 appr ancillary rules according to M88 app Measures and M88 app ancillary guidelines. We will continue to monitor M88 app latest practice and feedback in M88 app market upon M88 app implementation of M88 appse new rules and keep our clients apprised of M88 app latest developments.
