The China Securities Regulatory Commission (“CSRC”) launched a consultation on new investment advisory rules (“Consultation Paper”) on April 17, 2020. The Consultation Paper is a landmark document, covering many financial institutions and diversified business activities. It will reshape part of the legal framework of wealth management in China, and will impose far-reaching effect on the landscape of securities, investment funds and asset management sectors.

 

The Consultation Paper delicately struck a balance among entity regulation, function regulation and conduct regulation.

 

Under currently effective rules, someone may feel confused by various investment consulting/advisory businesses; while the Consultation Paper added more clarity on the definitions of such businesses.

 

Further to the consolidation of regulatory rules on asset management by the People’s Bank of China (“PBOC”), the China Banking and Insurance Regulatory Commission (“CBIRC”), CSRC and the State Administration of Foreign Exchange (“SAFE”) in 2018, the Consultation Paper is another major effort made by regulators. Consolidation of regulatory rules on investment advisory services conducted by various financial institutions regulated by CSRC will pave the way for ultimate consolidation of regulatory rules for all financial institutions regulated by both CSRC and CBIRC.

 

We would like to share with you some key points below that might be of interest to foreign institutions.

 

1. Consolidation of Three Types of Business Activities

 

Business Activities	Introduction
Securities Investment Advisory Service	Providing investment advice to clients on their investment in securities and derivatives, without discretion.
Fund Investment Advisory Service	Providing investment advice to clients on their investment in mutual funds, with or without discretion.
Publishing Securities Research Report	Providing securities research report or analysis to clients, and earn profit from such activities directly or indirectly.

 

(Institutions engaging in such business activities hereinafter are referred to as “Investment Advisors”.)

 

2. Licensing

 

Business Activities	Investment Advisory License
Securities Investment Advisory Service	Obtaining license after the application is verified by CSRC.
Fund Investment Advisory Service	Obtaining license after it has completed registration with CSRC.
Publishing Securities Research Report	Only available to securities companies or their subsidiaries engaging in securities investment advisory services.

 

The investment advisory license of Investment Advisors, excluding mutual fund management companies, securities companies, futures companies, commercial banks, insurance companies and other financial institutions recognized by CSRC (collectively, “Specific Financial Institutions”), shall be renewed every three years.

 

3. Auxiliary Services - Not Requiring Investment Advisory License

 

Auxiliary Services	Required License	Not Required License	Other Requirements
Securities companies as the brokers, providing free auxiliary securities investment advisory services.	Broker license	Securities investment advisory license	Business conduct shall follow provisions in the Consultation Paper; shall NOT engage in investment advisory services with discretion.
Mutual fund distributors providing free auxiliary fund investment advisory services.	Fund distribution license	Fund investment advisory license

 

4. Providing Investment Advisory Services to Onshore Asset Management Products – Not Requiring Investment Advisory License

 

Where securities companies, mutual fund management companies, futures companies and their private asset management subsidiaries (collectively, “CSRC Regulated Financial Institutions”) provide investment advisory services to onshore asset management products, they do not need to apply for this investment advisory license. However, they shall comply with (1) relevant requirements on business conduct provided in the Consultation Paper and (2) other applicable rules by CSRC. Further, it shall be reported to local CSRC offices when they engage in such advisory business for the first time. 

 

Requirements	Applicable?	Some Guidance (non-exhaustive)
Licensing requirement in the Consultation Paper	No	/
Business conduct requirement in the Consultation Paper	Yes	E.g., requirements on prevention of conflict of interests, investor suitability and special protection of ordinary investors.
Other requirements stipulated by CSRC	Yes	For example, when providing investment advisory services to asset management products of CSRC Regulated Financial Institutions, they shall follow all existing and to-be-implemented rules on investment advisors of asset management products of CSRC Regulated Financial Institutions.

 

5. Private Fund Managers Providing Investment Advisory Services to Onshore Asset Management Products or QFII/RQFII

 

According to the Consultation Paper, where private fund managers (WFOE PFM included) provide investment advisory services to (1) onshore asset management products or (2) affiliated QFII/RQFII, the provisions as otherwise provided by CSRC will prevail. In other words, so long as there are other provisions in other applicable rules, private fund managers do not need to apply for this investment advisory license, nor do they need to comply with relevant requirements on business conduct provided by the Consultation Paper.

 

Services	Provisions by CSRC
Investment advisory services to onshore asset management products	For example, where private fund managers provide investment advisory services to private asset management products of CSRC Regulated Financial Institutions, they shall obtain the qualification with AMAC after meeting with the 1+3+3 requirement, and they shall follow other requirements on business conduct as provided by CSRC.
Investment advisory services to QFII/RQFII	The new rules on QFII/RQFII will be applicable. The CSRC disclosed a consultation paper on the new rules for public comment in January 2019, but it has not come into effect yet.

 

Notably, in both the 2019 QFII/RQFII consultation paper and this Consultation Paper, it seems that private fund managers are only permitted to provide investment advisory services to affiliated QFII/RQFII.

 

6. Eligibility Requirements on Foreign Shareholder

 

Shareholder Type		Key Requirements (Non-exhaustive)
Legal person or other association	Holding no more than 5% shares	N/A
	Holding more than 5% shares	Net assets not less than RMB 50 million; good financial status and capital replenishment capability…	N/A
	Controlling shareholder		profitable for the past 3 consecutive years; net assets not less than RMB 500 million
Foreign shareholder		In addition to the above applicable requirements, foreign shareholders shall also be financial institutions duly established in their home country/region, and the financial regulators in their home country/region shall have signed a MOU with CSRC…

 

Unless otherwise permitted by CSRC, one can invest in no more than 2 Investment Advisors, but is only permitted to control one of the two.

 

No foreign shareholding limit is mentioned. It is expected that there will be no restriction, considering that both WFOE securities companies and WFOE mutual fund management companies have been allowed.

 

7. Staffing Arrangement

 

Senior Management Personnel in charge of investment advisory services shall have more than 3 years’ experience in securities/fund sectors or 5 years’ experience in other financial sectors, among which they shall have more than 2 years’ management experience. There is also requirement on the number of employees with more than 3 years’ relevant experience (“Veteran Staff”), depending on how many types of investment advisory services, among all 3 types, the Investment Advisors are engaging in.

 

Types of Business	Number of Veteran Staff
One type only	No less than 10
Two or three	No less than 20

 

8. Robo-advice

 

Where Investment Advisors provide programmatic advisory service (“程序化咨询服务” in Chinese), relevant models, algorithms and investment philosophy shall be reported to local CSRC offices.

 

We understand that part of the legal accordance of such requirement is Article 23 (robo-advice) of the Guiding Opinions on Regulating Asset Management Business of Financial Institutions, jointly issued by PBOC, CSRC, CBIRC and SAFE in 2018.

 

9. Risk Reserve

 

Where Investment Advisors provide investment advisory services with discretion, or high-risk investment instruments (e.g., stocks, structured products and derivatives) are involved in the investment advice, such Investment Advisors shall set aside risk reserves according to applicable rules by CSRC.

 

Specific Financial Institutions as Investment Advisors are exempted from such duties, mostly because they have already been well regulated in various ways.

 

10. Eligibility Requirement on the Investment Advisor

 

Among other requirements, it is required that the net assets of an Investment Advisor shall not be less than RMB 100 million.

 

11. Investor Suitability and Special Protection on Ordinary Investors

 

The Investment Advisors shall not recommend ordinary investors (rather than professional investors) to buy high-risk investment instruments, unless the ordinary investors insist that they are willing to receive such services and have gone through several stringent procedures provided in the Consultation Paper.