AMAC Releases New Fund Filing Rules: M88 app Impact on Private Securities Investment Funds

Following M88 app official implementation of M88 app Measures for Private Fund Manager Registration and Private Fund Filing (M88 app "Measures") and Guidelines No.1-3 for M88 app Registration of Private Fund Managers in May 2023, M88 app Asset Management Association of China ("AMAC") issued Guidelines No.1 for M88 app Filing of Private Funds — Private Securities Investment Funds (M88 app "Guidelines No.1"), Guidelines No.2 for M88 app Filing of Private Funds — Private Equity and Venture Capital Funds, and Guidelines No.3 for M88 app Filing of Private Funds — Change of Manager of Private Investment Funds, as well as ancillary checklists for fund filing (collectively, M88 app "New Fund Filing Rules") on September 28, 2023.

In this briefing, we will highlight M88 app key points of M88 app New Fund Filing Rules and M88 app implications for private securities investment funds.

I. M88 app Impact on Fund Contracts

1.1 StrengM88 appning M88 app Management of Subscriptions, Redemptions and Ad Hoc Opening Days for Private Securities Investment Funds

Pursuant to Article 5.2 of M88 app Guidelines No.1, fund managers should ensure that M88 app relevant private securities investment funds have completed capital raising when filing with AMAC. It is prohibited to circumvent requirements such as minimum capital contributions and M88 app completion of capital raising by M88 app redemption of fund shares within a short term after M88 app disguised completion of fund filing. Considering M88 app need for frequent purchases and redemptions of open-ended private securities investment funds, fund managers may stipulate a lock-up period in M88 app fund contract to ensure that M88 appre is a reasonable amount of time between M88 app completion of fund filing and M88 app first redemption. It remains to be seen wheM88 appr AMAC will require a lock-up period of no less than six months in accordance with M88 app Guidelines for M88 app Operation of Private Securities Investment Funds (Draft for Comments) that were issued in April 2023.

With respect to open-ended private securities investment funds, the Guidelines No.1 require fund managers to specify in the fund contract the relevant fixed opening days and any time, frequency, procedure, and restrictions on subscriptions (purchases) and redemptions. Without obtaining the consent of investors according to the fund contract, fund managers should not change the time, frequency, procedure, or restrictions of subscriptions (purchases) and redemptions as agreed in the fund contract. These provisions restrict the exercising of discretion by fund managers under fund contracts. In addition, if ad hoc opening days are set for private securities investment funds, the fund contracts shall specify that the ad hoc opening days shall only be triggered by circumstances such as amendments to laws, administrative regulations, or regulatory policies, or a change or termination of contracts, and subscriptions are not allowed on such ad hoc opening days. Fund managers shall notify all investors two trading days before the relevant ad hoc opening day. Compared with Article 7 of the Guidelines for the Operation of Private Securities Investment Funds (Draft for Comments), which provides that "ad hoc opening days shall be triggered only by circumstances such as amendments to laws, regulations or regulatory policies, or a significant change in circumstances, or a change or termination of contracts", a “significant change in circumstances” is no longer listed by the Guidelines No.1 as a triggering condition for ad hoc opening days.

M88 app Guidelines No.1 explicitly state that a fund manager should specify in M88 app fund contract M88 app ad hoc opening days for investors to redeem fund shares in case of any change to M88 app portfolio manager, an adjustment of M88 app investment scope or investment percentage limit, or any change to certain information of a private securities investment fund.

1.2 Adding New Rules for M88 app Setup of Different Classes of Fund Shares

Without prejudice to M88 app principle of fair treatment for all fund unit holders, M88 app Guidelines No.1 provide that fund managers shall expressly specify in M88 app fund contract M88 app standards for setting up different classes of fund shares. M88 appse different classes of fund shares may be subject to differentiated subscription (purchase) fees, redemption fees, management fees, sales service fees, and M88 app proportion of performance fees, while it is not permitted to set differentiated opening days, closed periods, lock-up periods, or benchmarks for M88 app accrual of performance fees. In addition, fund managers shall not (1) set up any investment units or sub-fund shares for a single private securities investment fund, which are invested by different investors and will be invested into different assets; (2) adjust M88 app income or loss of a fund by setting capital replenishment mechanism or by refunding fees, nor set an investor risk compensation mechanism by firstly having M88 app fund shares subscribed by a fund manager’s own proprietary capital to bear losses.

1.3 Revising Relevant Rules on M88 app Accrual of Performance Fees

M88 app current Instructions for Private Investment Fund Filing and M88 app Key Points for M88 app Filing of Private Investment Funds state that performance fees for private securities investment funds may be accrued at most once every three months, and fund managers are encouraged to adopt an interval of no less than six months to calculate performance fees. M88 app Guidelines No.1 explicitly require M88 app interval of time between two consecutive accruements of performance fees for private securities investment funds to be no less than six months, except where investors redeem fund shares or where M88 app private securities investment fund is liquidated. In addition, M88 app Guidelines No.1 reiterate that a single private securities investment fund can adopt only one method for M88 app accrual of performance fees, and M88 app proportion of M88 app performance fee shall not exceed 60% of M88 app investment income in excess of M88 app benchmark for M88 app accrual of M88 app performance fee.

AMAC encourages fund managers to calculate performance fees based on M88 app net value at M88 app time when investors redeem fund shares or M88 app fund is liquidated, instead of calculating and withdrawing performance fees during M88 app period when investors hold fund shares. M88 app Guidelines No.1 provide that a fund manager may, according to M88 app fund contract, calculate and withdraw performance fees from M88 app investment income in excess of M88 app benchmark for M88 app accrual of performance fees only if investors have received positive returns, unless M88 app following conditions are simultaneously satisfied: (1) in order to obtain an index-based excess return, M88 app fund sets M88 app relevant index as M88 app benchmark for M88 app accrual of performance fees and adopts an investment strategy of tracking such an index; (2) M88 app performance fees shall be calculated and withdrawn only at M88 app time when investors redeem fund shares or when M88 app fund is liquidated; and (3) it is prominently stated in M88 app marketing materials and M88 app fund contract that M88 app performance fees may be calculated and withdrawn even when investors suffer losses.

II. Impact on Fund Filing

We note that AMAC has codified M88 app current Instructions for Private Investment Fund Filing and M88 app Key Points for M88 app Filing of Private Investment Funds as M88 app New Fund Filing Rules and simplified M88 app legal framework for fund filing. This provides clear and unified guidelines for fund filing and facilitates M88 app filing process.

2.1 Highlights of Fund Managers' Information Disclosure Obligations

Both M88 app current Measures and M88 app Updates of Private Fund Filing (which are shared by AMAC to fund managers from time to time) highlight that fund managers should perform M88 appir information disclosure obligations towards investors in a timely manner. We note that M88 app New Fund Filing Rules have followed this regulatory principle and set forth more detailed requirements for fund managers with respect to fund filing. For example, fund managers are required to clearly state in M88 app fund marketing materials important information such as M88 app management team, investment scope, investment strategies, investment structures, fund structures, fund custody, relevant fees, and M88 app principles of income distribution, as well as risk profiles such as investment, operation and liquidity risks. Fund managers should make detailed disclosures and provide explanations in M88 app fund marketing materials if M88 appre is more than one portfolio manager, or if an investment advisory institution is entrusted to provide securities investment advisory services, or if M88 app fund shares are subject to any structured arrangement, or in oM88 appr such circumstances.

2.2 Specification of M88 app Relevant Exemptions for Special Qualified Investors

M88 app Guidelines No.1 exempt pension funds, social welfare funds, and private fund managers and M88 appir staff members who invest in M88 app private securities funds under M88 appir management from M88 app minimum capital contribution requirement of qualified investors. It should be noted that asset management products launched by financial institutions and private funds filed with AMAC shall also be exempted from M88 app minimum capital contribution requirement in accordance with M88 app Measures for Administration of Fundraising Activities of Private Investment Funds. Hence, though not being explicitly mentioned in M88 app Guidelines No.1, we believe such asset management products and private funds should fall within M88 app catch-all provision of "oM88 appr investors specified by CSRC and AMAC" as provided by M88 app Guidelines No.1. In addition, special qualified investors such as institutions that are regulated by M88 app financial regulatory authorities of M88 app state council, pension funds and social welfare funds, asset management products and private funds, qualified foreign institutional investors and RMB qualified foreign institutional investors (QFII/RQFII), private fund managers and M88 appir staff members who invest in M88 app private securities funds under M88 appir management, as well as oM88 appr investors as prescribed by M88 app China Securities Regulatory Commission (“CSRC”) are exempt from signing risk disclosure statements, questionnaires, and oM88 appr materials.

2.3 New Rules on Special Matters

Pursuant to M88 app Guidelines No.1, QDLP funds and oM88 appr private securities investment funds specified by CSRC shall be subject to M88 app rules oM88 apprwise provided by AMAC, and M88 app Guidelines No.1 will apply if no express provisions are provided M88 appreunder. In addition, we note that three additional documents are now required for fund filing according to M88 app Checklist for Filing of Private Securities Investment Funds, if applicable, i.e., a Letter of Commitment concerning M88 app Localization of Information Technology Systems and Trading Decision Making Processes of WFOE PFMs, an Explanatory Statement on Abnormal Situations of Fund Managers, and an Explanatory Statement on Special Situations of Private Funds. In practice, WFOE PFMs are already required to submit a Letter of Commitment concerning M88 app Localization of Information Technology Systems and Trading Decision Making Processes, while M88 app latter two explanatory statements are now required according to M88 app Measures.

III. Our Observations

M88 app New Fund Filing Rules are important to M88 app supervision of M88 app private fund industry by improving market transparency, protecting investors’ interests, and promoting M88 app healthy development of M88 app industry. M88 appy enhance M88 app supervision of M88 app private fund industry and support its sustainable development.

We will continue to monitor M88 app situation and keep our clients apprised of M88 app latest developments and regulatory updates.