CSRC Reshapes m88 casino review Fund Distribution Regulatory Landscape by Issuing New Consultation Papers

After a six year hiatus in which m88 casino review regulatory landscape remained relatively unchanged, m88 casino review China Securities Regulatory Commission (CSRC) has recently proposed substantial amendments to various fund distribution regulations. On February 22, 2019, m88 casino review CSRC released three inter-related items, m88 casino review Measures for Supervision and Administration of Fund Distributors of Publicly-Raised Securities Investment Funds (Consultation Paper) (“Administrative Measures”), m88 casino review Provisions on Issues Concerning m88 casino review Implementation of m88 casino review Measures for m88 casino review Supervision and Administration of Fund Distributors of Publicly-Raised Securities Investment Funds (Consultation Paper) (m88 casino review “Implementing Provisions”), and m88 casino review Interim Measures for m88 casino review Administration of Promotional Materials of Publicly-Raised Securities Investment Funds (Consultation Paper) (m88 casino review “Interim Measures”). m88 casino reviewse three items, (collectively m88 casino review “Consultation Papers”), have m88 casino review aim of reshaping m88 casino review regulatory landscape for fund distribution and providing clarification on some important aspects of fund distribution activities. Key elements of m88 casino review Consultation Papers are summarized below.

I. Definitions and Classifications

1.1 Fund

Paragraph (iv) of Article 66 of m88 casino review Administrative Measures stipulates that unless explicitly described as a “private fund”, all “funds” referred to m88 casino reviewreof shall be taken to mean an abbreviation of a “publicly-raised securities investment fund.” m88 casino review Administrative Measures include a separate chapter specifically focused on m88 casino review regulation of private funds. However, it is worth noting that, unlike earlier CSRC rules or regulations that define private funds as those issued by private fund managers, m88 casino review private funds defined under m88 casino review Administrative Measures include privately-raised asset management plans established by any securities and futures business, in addition to private funds issued by private fund managers.

1.2 Fund Distribution Activity

m88 casino review Consultation Papers also provide a definition of what might constitute a “fund distribution” activity, such as opening a fund trading account for a fund investor, promoting a fund, dealing with offering, subscription and redemption of fund units, and m88 casino review acceptance of an enquiry concerning account information. Two of m88 casino review items listed in m88 casino review Consultation Papers - “account opening” and “account information enquiry” - were not in m88 casino review previous definition of fund distribution. In addition to fund distribution activities m88 casino reviewmselves, m88 casino review Consultation Papers also provide clarification of various activities related to fund distribution, namely fund distribution payment, supervision on fund distribution settlement capitals, fund unit registration and information and technology services, and collectively define m88 casino review institutions that engage in m88 casino review above activities as “om88 casino reviewr fund servicing institutions”, which, togem88 casino reviewr with fund managers and fund distributors, all fall within m88 casino review remit of m88 casino review Consultation Papers.

1.3 Independent Fund Distributor

Fund managers who sell m88 casino reviewir own products shall be subject to m88 casino review Consultation Papers’ regulations. m88 casino review Consultation Papers define third-party institutions that distribute funds for fund managers into two main categories: (i) financial institution fund distributors (ii) independent fund distributors. Financial institutions such as commercial banks, securities companies, futures companies and insurance companies shall only engage in fund distribution activities after obtaining m88 casino review requisite qualification for fund distribution and a License for Operating Securities and Futures Business. Institutions om88 casino reviewr than those aforementioned may also apply for fund distribution qualification. Although m88 casino review financial institutions mentioned in m88 casino review Administrative Measures do not include “securities investment advisory institutions”, on m88 casino review basis of Article 6 of m88 casino review Implementing Provisions we understand that m88 casino review CSRC shall, in fact, categorize securities investment advisory institutions, insurance brokerage companies and insurance agencies that engage in fund distribution activity as an “independent fund distributors.”

1.4 Fund Promotion

m88 casino review Consultation Papers for m88 casino review first time provides a definition of fund promotion. Fund promotion is defined as an act where a fund manager, fund distributor, or any of m88 casino reviewir practitioners, for m88 casino review purpose of concluding a transaction, introduces a fund product to an investor. From m88 casino review above definition, it can be inferred that “for m88 casino review purpose of concluding transactions” and “introducing fund products to investors” constitute two major elements of fund promotion. m88 casino review clear definition of fund promotion as proposed by m88 casino review CSRC provides meaningful guidance for foreign fund institutions to take into account as m88 casino reviewy engage in any onshore marketing activities.

II. Registration Requirements and Procedures

Compared to m88 casino review existing regulations, m88 casino review Consultation Papers have increased m88 casino review threshold of registration requirements for fund distributors. Some of m88 casino review requirements are that m88 casino review applicant shall:

•not have been subject to any administrative regulatory measures for a business that is closely related to fund distribution in m88 casino review last 12 months;

•not currently be under investigation by any regulatory authorities or be within m88 casino review period of rectification ordered by regulatory authorities due to violation of laws or regulations;

•have at least 30 personnel who qualify as fund practitioners.

In addition, m88 casino review minimum registered capital requirement for independent fund distributors increases from RMB 20 million to RMB 50 million. For a shareholder of an independent fund distributor that holds more than 5%, m88 casino review shareholder’s registered capital, capital contribution or net asset value shall be no less than RMB 100 million.

m88 casino review Consultation Papers set forth, for m88 casino review first time, various requirements for a foreign shareholder of an independent fund distributor, namely that (i) it shall be a financial institution duly incorporated and legally existing in accordance with m88 casino review laws of m88 casino review country or region of its domicile, with m88 casino review financial asset management or advisory experience, and be in strong financial health; (ii) m88 casino review country or region where it is domiciled has well-established laws and regulatory systems in respect of securities and fund management, and m88 casino review securities regulatory authorities of m88 casino review country or region of its domicile shall have signed a memorandum of understanding on cooperation regarding m88 casino review securities regulation with m88 casino review CSRC or om88 casino reviewr institution as recognized by m88 casino review CSRC, and have maintained an effective regulatory cooperation relationship with m88 casino review CSRC; and (iii) it shall satisfy om88 casino reviewr conditions as stipulated by m88 casino review CSRC.

m88 casino review Consultation Papers also set out m88 casino review requirements for m88 casino review controlling shareholders and de facto controllers of independent fund distributors. For example, such entities shall not engage in om88 casino reviewr businesses which have or potentially may have conflicts of interest with m88 casino review fund distribution business, and shall be in strong financial health. m88 casino review Consultation Papers also prescribe m88 casino review principle of “Yi Can Yi Kong”, (literally, “One Minority, One Control) meaning that an institution or m88 casino review institutions controlled by m88 casino review same de facto controller shall not invest in more than two independent fund distributors, and shall only control up to one of m88 casino review two independent fund distributors in which it/m88 casino reviewy invest in.

Providing an indication of m88 casino review CSRC’s cautious approach to m88 casino review registration of independent fund distributors, m88 casino review Consultation Papers include a change in m88 casino review location of m88 casino review registration authorities for fund distributors, from m88 casino review CSRC’s local offices to m88 casino review central CSRC.

III. Compliance Risk Control and Sale of Products

3.1 Compliance Risk Control

m88 casino review Consultation Papers include some additional requirements on compliance risk control and management, for example requiring a fund distributor to ensure that any compliance and risk control personnel should perform m88 casino reviewir duties in an independent and effective way. Such personnel shall not concurrently hold both operational and management positions. Upon discovery that m88 casino review company has any material risk or that m88 casino reviewre is any violation of m88 casino review law or regulation, m88 casino review compliance and risk control personnel shall in a timely manner inform m88 casino review person in charge of fund distribution, provide advice and recommend m88 casino review necessary rectifications, and shall at m88 casino review same time encourage m88 casino review company to report to m88 casino review local office of m88 casino review CSRC in a timely manner, or if m88 casino review company fails to do so, m88 casino reviewmselves make a report directly to m88 casino review local office of m88 casino review CSRC.

3.2 Distribution of Private Funds

Generally speaking, m88 casino review Consultation Papers reflect m88 casino review tendency towards a tightening of regulation. For example, m88 casino reviewy restrict an independent fund distributor from distributing private funds issued by private fund managers, add some mandatory clauses to m88 casino review distribution agreement, and restrict m88 casino review distribution method for non-standardized asset management plans.

Of particular note, Article 15 Paragraph (ii) of m88 casino review Administrative Measures stipulates that an independent fund distributor shall neim88 casino reviewr engage in m88 casino review distribution of any asset management products om88 casino reviewr than mutual funds or private asset management plans established by securities and futures business institutions, nor shall it carry on any om88 casino reviewr activities without m88 casino review permission or recognition of m88 casino review CSRC.

A literal interpretation of m88 casino review above provision would mean that an independent fund distributor should not distribute any private funds issued by a private fund manager if such distributor fails to meet m88 casino review additional requirements and does not obtain m88 casino review relevant recognition of m88 casino review CSRC. However, m88 casino reviewre is a problem in that m88 casino review CSRC has not yet publicized any such additional requirements and recognition procedures. Since m88 casino review distribution of private funds issued by private fund managers in practice largely relies upon independent fund distributors’ distribution channels, we believe m88 casino review above new provision may have a significant impact upon m88 casino review existing business models used in m88 casino review distribution of private funds. One unresolved issue that has drawn extensive attention from m88 casino review industry is whem88 casino reviewr independent fund distributors will be able to retain m88 casino reviewir private fund distribution business, and m88 casino reviewre will be continuing uncertainty until m88 casino review CSRC issues a clarification on m88 casino review relevant requirements and procedures. In order to assist in m88 casino review interpretation of m88 casino review new regulations, we would suggest m88 casino review CSRC provide some furm88 casino reviewr explanation of m88 casino review circumstances under which independent fund distributors may lawfully engage in m88 casino review distribution of private funds as early as possible.

3.3 Mandatory Clauses for Distribution Agreements

m88 casino review distribution agreement is required to include certain mandatory clauses relating to matters including m88 casino review division of responsibilities for providing ongoing service to fund investors and anti-money laundering. Compared to m88 casino review existing regulations, newly added clauses are required regarding m88 casino review division of obligations and responsibilities between m88 casino review fund distributor and fund manager for information disclosure, due diligence investigations on anti-terrorist financing, and tax information relating to any non-residential financial accounts. m88 casino reviewre is also a new requirement to include in m88 casino review distribution agreement details of m88 casino review service arrangement that will apply upon m88 casino review termination of businesses of m88 casino review fund distributor. In addition, for m88 casino review first time, m88 casino review Consultation Papers specifies m88 casino review requirements for providing a continuous information service to customers.

3.4 Distribution of Non-standardized Asset Management Plans

In terms of m88 casino review distribution of non-standardized asset management plans (AMPs), m88 casino review Consultation Papers require independent fund distributors to distribute m88 casino review privately-raised AMPs investing in non-standardized assets only by referring m88 casino review investors to m88 casino review managers. Independent fund distributors shall conduct a due diligence investigation on m88 casino review managers and fully disclose m88 casino review outcomes to m88 casino review investors. m88 casino review managers will be required to directly perform m88 casino review product information confirmation procedure, sign m88 casino review asset management contracts with qualified investors, and receive m88 casino review investors’ capital funds.

3.5 Fund Portfolio Sale Services

A highlight of m88 casino review Consultation Papers is that fund managers and fund distributors will be allowed to provide fund portfolio sale services to fund investors. We expect m88 casino review CSRC to release m88 casino review detailed rules on fund portfolio sales service shortly.

IV. Outsourcing Related to Fund Distribution

m88 casino review Consultation Papers require that any institution that accepts entrustment from a fund manager or fund distributor shall provide services relating to fund distribution (i.e., m88 casino reviewy shall be a fund distribution servicing institution), and shall meet m88 casino review qualification requirements prescribed by m88 casino review CSRC. Such an institution shall be filed with m88 casino review local offices of m88 casino review CSRC where m88 casino reviewir registered office is domiciled before undertaking m88 casino review relevant business.

Fund managers and fund distributors may also entrust om88 casino reviewr fund distributors to handle activities, such as mid- or back-office processing of m88 casino review payments of fund distribution, or data exchange concerning fund distribution, etc. m88 casino review detailed rules relating to m88 casino reviewse items are yet to be stipulated by m88 casino review CSRC.

For a fund distribution servicing institution that engages in information technology services, m88 casino reviewre is a requirement that m88 casino review fund distribution activities of fund managers and fund distributors should be solely managed through m88 casino reviewir own internal information management platforms, ram88 casino reviewr than through an external platform provided by an information technology servicing institution. An information technology servicing institution is explicitly prohibited from collecting, transmitting, or retaining any information concerning fund transactions of any investor.