On 30 August 2017, China’s State Council released the consultation paper (the Consultation Paper) for Interim Regulations for Administration of Private Investment Fund. To date, the primary regulations in this area were the Interim Measures for Supervision and Administration of Private Investment Fund (the Interim Measures), issued by the China Securities Regulatory Commission (the CSRC), which regulate private investment funds offered by securities companies and fund management companies in the PRC. The Interim Measures are ministry-level regulations and do not have the authority to impose administrative penalties such as fines, or suspending or cancelling licences. The Consultation Paper, once adopted by the State Council by way of an administrative regulation, will afford the CSRC with sufficient statutory grounds to enact further detailed rules involving administrative penalties and to take enforcement actions to issue these administrative penalties to violators.
The Consultation Paper does not propose to regulate private fund-like investment products offered by the banks (wealth management products) and trust companies (trust products).
Although the Consultation Paper primarily aims to regulate domestic private fund managers (the PFM), it may have an impact on foreign managers that have set up WFOEs or JVs to provide advisory or consulting services in the PRC. Notably, it proposes that provision of non-discretionary advisory services should be a regulated activity. These advisory services may cover areas which have thus far been unregulated such as private equities and private funds. Depending on the final version of the Consultation Paper, foreign managers may need to assess if their current PRC presence will continue to be in compliance.
Investment scope of private funds
In line with the Interim Measures, the Consultation Paper defines private funds as funds that are established and managed by PFMs within the territory of the PRC, with eligible investors by way of private placement, including private securities investment funds and private equity investment funds. The investment scope of private funds includes securities, derivatives, private equity, funds and other investment vehicles as recognised by the CSRC. The Consultation Paper proposes to provide the CSRC with the authority to further expand and specify the investment universe.
Delegation of investment adviser
The Consultation Paper proposes to clarify that the provision of non-discretionary advisory services should be a regulated activity in the PRC and should require a CSRC licence or Asset Management Association of China (AMAC) registration. The Consultation Paper proposes to allow PFMs to appoint investment advisers to provide investment advisory service so long as such investment advisers are approved by the CSRC or registered with AMAC. The proposal is designed to address a practice whereby AMAC registered PFMs delegate investment management or advisory services to an unlicensed or unregistered entity.
Eligibility requirements for senior personnel
Eligibility requirements for directors, supervisors and other senior executives of PFMs are for the first time introduced by the Consultation Paper. The proposals are identical to those applicable to directors, supervisors and other senior executives of retail fund houses. This is a significant change, as, to date, senior executives of PFMs have generally only been required to obtain the PRC funds industry qualification.