The Qualified Domestic Institutional Investor (QDII) program is, as the name indicates, an overseas investment program under which qualified domestic entities are allowed to market foreign fund products to domestic institutional and individual investors while the capital accounts are not fully open in China. The QDII program was first introduced in the People’s Republic of China (PRC) in 2004 to allow domestic insurance companies1 to invest overseas with a specified product scope, and was subsequently expanded in 2006 to allow domestic banks to also invest overseas. 2 In 2007, the regulatory authorities issued further regulations to permit domestic trusts, securities companies, and fund managers to invest overseas, 3 and in recent years the program entered a stage of rapid growth. There are five types of domestic QDIIs: insurance companies, banks, trusts, securities companies, and fund managers, all of which are subject to supervision by different regulatory authorities. As of August 28, 2015, the total foreign exchange investment quota granted under the QDII program was US$89.993 billion.4 This article intends to provide an overview of the program as currently implemented in the PRC5 as well as high-level guidance on the marketing and distribution in the PRC of products offered by foreign fund managers.6 An Overview of the QDII Program The QDII program is the national program7 that allows foreign fund managers to have indirect access to institutional and/or individual investors within the PRC for overseas investment (including, subject to detailed requirements, money market products, bonds, shares, funds, structured products, and financial derivatives). QDIIs must be licensed by the China Securities Regulatory Commission (CSRC) and granted a foreign exchange quota by the State Administration of Foreign Exchange (SAFE) before they can invest overseas. Unless a foreign fund manager can qualify as a QDII by establishing a joint-venture fund management company or otherwise, it usually has to work with an existing domestic QDII, relying on the latter’s QDII license, foreign exchange quota as well as distribution channels. Under this circumstance, it may serve as an advisor or subadvisor to the QDII. The applicable regulations and principal regulators are different, depending on the categories of the QDIIs concerned. In respect of domestic securities and fund managers who intend to qualify as QDIIs (Securities and Fund QDIIs), the CSRC is the principal regulator under the Pilot Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (effective as of July 5, 2007). For banks (Bank QDIIs) and trust companies who want to qualify as QDIIs (Trust QDIIs), the China Banking Regulatory Commission (CBRC) acts as the principal regulator under the Interim Administrative Measures for Overseas Wealth Management by Commercial Banks on Behalf of Their Customers (effective as of April 17, 2006) China’s Qualified Domestic Institutional Investor Program 7 INVESTMENT MANAGEMENT and the Interim Measures for Entrusted Overseas Financial Management Business of Trust Companies (effective as of March 12, 2007), respectively. In respect of insurance companies who need to qualify as QDIIs (Insurance QDIIs), the China Insurance Regulatory Commission (CIRC) is the principal regulator under the Interim Measures for the Administration of Overseas Investment with Insurance Funds (effective as of June 28, 2007). For each type of QDII, a set of ancillary regulations has been issued by the principal regulators as well as by other relevant regulators such as SAFE. Eligible Products Provided below are the eligible products for QDIIs to invest overseas: 1) For Securities and Fund QDIIs： (i) publicly offered funds (including publically offered money market funds8 ) registered with the securities regulatory authorities of countries or regions9 that have signed memoranda of understanding with the CSRC regarding bilateral regulatory cooperation. 2) For Trust QDIIs: (i) publically offered funds approved by or registered with relevant regulatory authorities of countries or regions10 that have signed memoranda of understanding with the CBRC regarding regulatory cooperation in respect of foreign wealth management business on behalf of clients; and (ii) money market funds with a credit rating of “investment grade” (or higher)11 granted by internationally recognized rating agencies. 3) For Bank QDIIs: (i) publicly offered funds12 approved by, recognized by or registered with relevant regulatory authorities of countries or regions13 that have signed memoranda of understanding with the CBRC regarding regulatory cooperation in respect of foreign wealth management business on behalf of clients; and (ii) subject to further consultation with relevant authorities, money market funds. 14 4) For Insurance QDIIs: (i) securities investment funds recognized by or registered with the securities regulatory authorities in the designated countries or regions, 15 including money market funds with a rating of at least AAA (or its equivalent); 8 INVESTMENT MANAGEMENT (ii) equity investment funds16 (a) which may only invest in designated countries or regions17 or which alternatively may only invest in target investments meeting certain specified criteria set forth under the Insurance QDII program, (b) with committed capital not less than US$300 million, and (c) whose management and operations are not controlled, and whose general partnership interest is not held, by a financial institution (directly or through its subsidiaries); (iii) funds of funds which invest in equity investment funds meeting the criteria set forth in clause (ii) above which have a simple and clear structure and do not invest in other funds of funds; and (iv) real estate investment trusts (REITs) listed and traded on stock exchanges in designated countries or regions,18 provided the relevant funds and their managers meet other detailed eligibility requirements. Marketing and Distribution of Foreign Fund Products Under PRC Law 1) Business Activities Prohibited Subject to certain limited exceptions expressly set forth under the PRC laws, foreign fund managers and/or their PRC representative offices are not allowed to conduct “business activities” within the PRC. There is no definition of “business activities” under PRC law. The CSRC has issued very few guidelines (formally or otherwise) clarifying the details of “business activities” that may not be undertaken by PRC representative offices of foreign fund managers in the PRC. Local practitioners rely on the Administrative Measures on Representative Offices of Foreign Securities Organizations Stationed in China as a reference for “business activities” that foreign fund managers may not undertake; these include: (i) entering into agreements (that may generate income for such representative offices or relevant foreign securities-related companies); (ii) opening of offshore securities accounts on behalf of their clients; or (iii) dealing with matters related to trading offshore securities on behalf of their clients. Even though the above criteria serves as useful guidance, in practice, the CSRC retains considerable flexibility in deciding whether specific activities will constitute “business activities.” 9 INVESTMENT MANAGEMENT In addition to the above restrictions, it is generally understood that representative offices of foreign fund managers may not enter into any agreements with, or issue other documents (e.g., offering memoranda) to, PRC counterparties that could result in the generation of income for themselves, their affiliates or the funds managed by their affiliated fund managers. Similarly, the natural person representatives of foreign fund managers should not enter into any such agreements or issue other documents (e.g., offering memorandum) on behalf of the foreign fund managers while they are physically within the PRC. Although the above-described activities are more relevant to entering into/performing foreign fund products/services-related transactions rather than to marketing or distribution activities, it is generally understood that a foreign fund manager or its representative office should not provide details related to specific foreign fund products or services from within the PRC to prospective investors, unless specifically permitted by the CSRC (as further described below). 2) Liaison Activities Permitted PRC representative offices of foreign fund managers are expressly allowed under PRC law to conduct “liaison” activities. Furthermore, while it is not expressly permitted under PRC law, it is generally understood that foreign fund managers are permitted to travel to the PRC to meet institutional investors for the purpose of “liaison” activities. While the precise scope of such permitted activities is unclear, the regulatory authorities are aware that many foreign fund managers travel to the PRC to meet prospective Chinese clients for the purpose of providing general information regarding their business, expertise, and experience. 3) Permitted Activities under the QDII Program Under the Securities and Fund QDII program, the CSRC allows foreign fund managers19 to provide various support services within the PRC. Such services may include providing information on foreign funds to domestic Securities and Fund QDIIs and training the staff of the domestic QDIIs. However, the activities may not include public promotion of the foreign fund manager’s products, services, and brands. While we are not aware of other regulatory authorities adopting a similar approach for the other QDII programs, it would be reasonable to expect that a similar approach would likely be undertaken by the CBRC and CIRC as the CSRC is the primary regulator of the PRC securities industry. 10 INVESTMENT MANAGEMENT Conclusion The QDII program has been active for almost a decade; its mechanisms and rules are relatively well understood. There are foreign fund managers who have established joint ventures to qualify as domestic QDIIs. At the same time, there are many foreign fund managers that work closely with the domestic QDIIs to access the PRC market.