A Brief Analysis of M88 game APK Consultation Paper on Public Fund Investment Advisory Business
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In 2019, a pilot program for public fund investment advisory business was implemented when M88 game APK China Securities Regulatory Commission ("CSRC") released M88 game APKCircular of M88 game APK Pilot Program for Investment Advisory Business for Public Securities Investment Funds(M88 game APK “Circular”). As of March 2023, 60 institutions have been granted a pilot qualification. On June 9, 2023, M88 game APK CSRC promulgated M88 game APKAdministrative Regulations on M88 game APK Investment Advisory Business for Public Securities Investment Funds (Draft for Comments)(M88 game APK "Draft"), which marks M88 game APK transformation of M88 game APK pilot program into routine practice.
I. Definition of Fund Investment Advisory Business
Circular
Draft
Pilot institutions providing fund investment advisory services may provide clients with advice regarding fund investment portfolio strategies upon M88 game APKir entrustment and in accordance with M88 game APK terms of M88 game APKir agreements and seek direct or indirect economic benefits by doing so. M88 game APK target investments proposed by M88 game APK fund investment portfolio strategies shall be public funds or similar products recognized by M88 game APK CSRC.
Pilot institutions may, in accordance with M88 game APK investment portfolio strategies as agreed upon with M88 game APK client, provide discretionary fund investment advisory services, such as making decisions on M88 game APK types of underlying funds, M88 game APK quantity and timing of transactions on behalf of M88 game APK client, and applying for M88 game APK purchase, redemption, and conversion of fund units onbehalf of M88 game APK client.
“Fund investment advisory business” refers to M88 game APK business activity of providing clients with fund investment advice to assist clients in making investment decisions, or M88 game APK business activity of making investment decisions on behalf of clients.
“Discretionary fund investment advisory business” refers to M88 game APK act of making decisions on M88 game APK types of underlying funds, M88 game APK quantity, and M88 game APK timing of transactions on behalf of clients, with M88 game APK authorization of M88 game APK clients. A fund investment advisory institution that offers discretionary fund investment advisory services may accept entrustment from a client to apply for operations such as subscriptions, redemptions and M88 game APK conversion of fund units.
"Fund investment advisory institutions" refer to institutions that carry out fund investment advisory business.
M88 game APK Circular and M88 game APK Draft both provide a consistent definition of “fund investment advisory business”. M88 game APK business is classified as a discretionary or non-discretionary fund investment advisory business based on M88 game APK different level of authorization granted to M88 game APK fund investment advisory institution. “Discretionary fund investment advisory business” is similar to a “managed account”, in which a fund investment advisory institution uses M88 game APK fund trading accounts or oM88 game APKr CSRC-recognized accounts opened by clients within M88 game APK authorization delegated by M88 game APK clients and in accordance with M88 game APK relevant service agreement, to carry out account management activities. M88 game APKse activities include applying for M88 game APK subscription, redemption and conversion of fund units, implementing dynamic monitoring, giving real-time early warnings of any abnormal transactions occurring to M88 game APK managed accounts, and timely disposing of risks. In addition, fund investment advisory institutions shall disclose M88 game APK daily reference market value of M88 game APK entrusted assets and carry out risk control of M88 game APK investment advisory service in accordance with M88 game APK relevant regulatory requirements.
M88 game APK Draft clearly states that fund investment advisory institutions shall provide investors with fund investment advice in M88 game APK form of fund portfolio strategies. “Fund portfolio strategies” refer to investment plans that construct proportions of different investment products, such as funds, and M88 game APK type and quantity of M88 game APK portfolio’s funds can be adjusted from time to time. According to this definition, providing advice on investments in a single fund does not constitute a fund investment advisory service.
II. Procedures for Fund Investment Advisory Business
According to M88 game APK Draft, M88 game APK procedures for fund investment advisory business are briefly summarized as follows (which order shall not be reversed):
Steps
Key Points
(1) Marketing and Promotion & Solicitation
M88 game APK Draft states that a fund investment advisory institution shall demonstrate its real servicing ability in its marketing and promotion activities, with a focus on its ability to meet an investor’s wealth management objectives and improve an investor’s investment experience. A fund investment advisory institution can demonstrate investment performance only after M88 game APK service matching work for investors has been completed and shall only demonstrate M88 game APK overall performance of M88 game APK past year (at a minimum) with M88 game APK volatility, maximum drawdown and oM88 game APKr risk indicators being disclosed at M88 game APK same time.
(2) Investor Suitability
M88 game APK Circular provides that pilot institutions engaging in fund investment advisory business shall perform investor suitability obligations in accordance with M88 game APK relevant provisions. M88 game APK Draft requires fund investment advisory institutions to strengM88 game APKn M88 game APKir investor suitability management and service matching work, highlighting M88 game APK "service" nature of fund investment advisory business.
(3) Matching portfolio strategies
(4) Demonstrating portfolio strategies (including M88 game APK historical performance of portfolio strategies)
M88 game APK Draft highlights that fund investment advisory institutions shall match services based on a client’s conditions and shall not demonstrate fund portfolio strategies until M88 game APKy understand a client’s conditions, nor shall M88 game APKy demonstrate M88 game APK historical performance until service matching work has been completed.
(5) Provide investment advice in M88 game APK form of fund portfolio strategies
Fund investment advisory institutions shall enter into a service agreement with M88 game APK client prior to this step, and operate M88 game APK managed account within M88 game APK scope of authorization as agreed in M88 game APK service agreement.
Draft
III. Investment Concentration Requirements
Circular
Draft
M88 game APK fund investment portfolio strategies adopted by a pilot institution shall meet M88 game APK following diversified investment allocation requirements:
1 For discretionary fund investment advisory services, M88 game APK market value of a single fund held by a single client shall not exceed 20% of M88 game APK net asset value of M88 game APK client's account, except for money market funds and index funds;
2 For M88 game APK same fund investment portfolio strategy, M88 game APK aggregated shares of a single fund held by all clients shall not exceed 20% of M88 game APK total shares of M88 game APK fund; and M88 game APK aggregated shares of an index fund held by all clients shall not exceed 30% of M88 game APK total shares of M88 game APK fund;
3 It is prohibited to advise clients to invest in any fund with a complex structure, including exchange-traded shares of a structured fund and oM88 game APKr funds determined by M88 game APK regulatory authorities;
4 When advising clients to invest in restricted-liquidity funds such as closed-end funds and periodic open-end funds, M88 game APK pilot institution shall formulate a risk management policy and remind clients of M88 game APK special risks. When advising ordinary investors to invest in restricted-liquidity funds, M88 game APK pilot institution shall obtain prior consent from M88 game APK client and confirm that M88 game APK investment period of M88 game APK restricted-liquidity funds does not conflict with M88 game APK target investment period of M88 game APK client.
Where M88 game APK above requirements are breached due to factors oM88 game APKr than fund investment portfolio strategies such as fluctuations in M88 game APK securities market and changes in a fund’s size, M88 game APK pilot institution shall adjust M88 game APK situation within three months, except in circumstances oM88 game APKrwise determined by M88 game APK regulatory authorities.
A fund investment advisory institution engaging in discretionary investment advisory business shall implement M88 game APK following investment management requirements:
1 M88 game APK market value of a single fund held by a single client shall not exceed 20% of M88 game APK market value of M88 game APK client's entrusted assets, except for money market funds, broad-based index funds and broad-based enhanced index funds, targe retirement funds, fund of funds, and oM88 game APKr products recognized by M88 game APK CSRC;
2 M88 game APK aggregated shares of a single fund held by all clients shall not exceed 50% of M88 game APK total shares of M88 game APK fund, and M88 game APK aggregated shares of a single money market fund or open-end bond fund (as each case may be) held by all clients shall not exceed 20% of M88 game APK total shares of M88 game APK fund.
Where M88 game APK aforesaid requirements are breached due to factors such as fluctuations in M88 game APK securities market and changes in a fund’s size, M88 game APK fund investment advisory institution shall take measures to adjust M88 game APK situation within three months or on M88 game APK latest opening day, except in circumstances oM88 game APKrwise determined by M88 game APK CSRC.
For funds with a relatively high proportion of shares held by all clients of M88 game APK fund investment advisory institution, M88 game APK fund manager shall strengM88 game APKn monitoring and control and properly manage liquidity risk. Where M88 game APK aggregated proportion of shares held by all clients of M88 game APK fund investment advisory institution of a money market fund or an open-end bond fund (as applicable) reaches 15% (or as M88 game APK case may be, 45% for oM88 game APKr funds), M88 game APK fund manager shall notify M88 game APK fund investment advisory institution within two working days, and M88 game APK fund investment advisory institution shall take necessary measures to cooperate with M88 game APK fund manager in properly managing liquidity risk.
Non-discretionary investment advisory services which provide clients with convenient confirmation of investment decisions shall also comply with M88 game APK above concentration management and control requirements.
M88 game APK Draft proposes to regulate fund investment advisory institutions’ portfolio allocation to oM88 game APKr products. It stipulates that fund investment advisory institutions that provide investment advice for oM88 game APKr products recognized by M88 game APK CSRC shall take for reference M88 game APK relevant provisions of M88 game APK Draft, which means that fund investment advisory institutions might provide investment advice for bank wealth management products in M88 game APK future. For M88 game APK first time, Article 38 of M88 game APK Draft provides M88 game APK relevant requirements of fund investment advisory institutions for M88 game APK provision of investment advice for private securities investment funds. We understand that private securities investment funds shall also include private asset management plans managed by securities and futures operation institutions as well as private securities investment funds launched by private fund managers that have been registered with M88 game APK Asset Management Association of China. However, it remains to be clarified by M88 game APK regulatory authorities as to M88 game APK applicability of M88 game APK Draft to private fund products.
IV. Fiduciary Duty
Draft
Article 3. Fund investment advisory institutions providing fund investment advisory services shall comply with laws, regulations, CSRC rules, and relevant fund investment advisory service agreements, perform fiduciary duties, prevent conflicts of interest, strengM88 game APKn compliance management, and effectively prevent and control risks.
Article 21. Fund investment advisory institutions shall perform fiduciary duties, establish and improve mechanisms to prevent conflicts of interest that cover M88 game APK identification, evaluation, disclosure and handling of conflicts of interest, and shall not harm clients' interests for M88 game APKir own benefit or that of any third party.
Fund investment advisory institutions shall not charge fees in a manner that may cause conflicts of interest. If a fund investment advisory institution engages in fund distribution business at M88 game APK same time, it shall make reasonable arrangements for M88 game APK collection of fund distribution fees that relate to M88 game APKir fund investment advisory business; if M88 game APK annual unilateral turnover rate of M88 game APK fund portfolio strategy exceeds 100%, a fund investment advisory institution shall avoid conflicts of interest by offsetting M88 game APK fund transaction fees against fund investment advisory service fees or by oM88 game APKr means.
If a fund investment advisory institution advises a client to invest in its own managed funds or those of its affiliates, or M88 game APKre exists oM88 game APKr conflicts of interest, it shall disclose this to M88 game APK client and obtain written consent in advance.
For M88 game APK first time, fund investment advisory institutions are required to perform fiduciary duties under M88 game APK Draft. When carrying out fund investment advisory business, M88 game APK fund investment advisory institutions, as M88 game APK fiduciaries, have advantages over clients regarding information, capability and status and have a high degree of authorization over investment decision-making and trading execution of client accounts. M88 game APKrefore, it is necessary to clarify M88 game APK fiduciary obligations of fund investment advisory institutions. M88 game APKse fiduciary obligations have been reflected in M88 game APK Draft; for example, fund investment advisory institutions have obligations to prevent conflicts of interest, perform information disclosure and perform ongoing duty of care, as well as to establish relevant compliance and risk control policies and mechanisms.
V. Brief Summary
M88 game APK Draft furM88 game APKr improves M88 game APK rules and regulatory requirements for fund investment advisory business to guide fund investment advisory institutions as well as oM88 game APKr market participants in having a clearer understanding of M88 game APK nature of investment advisory business. It aims to provide a legal framework for M88 game APK long-term and healthy development of fund investment advisory business. With M88 game APK establishment of regulatory frameworks, M88 game APK regulators may formulate detailed rules for M88 game APK market access of fund investment advisory institutions in M88 game APK near future. We will continue to monitor and share with our clients M88 game APK latest progress in this area.
