Since China allowed eligible wholly foreign-owned enterprises (“WFOE”) and joint venture companies to register as private securities investment fund managers (“PFM”) with the Asset Management Association of China (“AMAC”) in 2016, a large number of global asset managers have established WFOE in China. According to the statistics of the AMAC, as of March 2, 2020, 25 WFOE have completed registration with the AMAC and become private securities investment fund managers (“WFOE PFM”), with 77 private funds filed with the AMAC and the total AUM reaching RMB 7.5 billion. On April 24, 2020, the WFOE PFM set up by William O’Neil became the 26th WFOE PFM.
Over the past few years, foreign investment related laws have changed, and the China Securities Regulatory Commission (the “CSRC”) and the AMAC have actively paved the way for WFOE PFM to better conduct business. This article will introduce relevant regulatory rules and industry practice after a series of policy adjustment.
Section I Foreign Entry
On June 30, 2016, the AMAC released the AMAC FAQ Regarding the Registration and Record-filing of Private Funds (No.10) (“AMAC FAQ No.10”) and officially started to accept eligible WFOE to register as WFOE PFM. Before that, the foreign ownership limit in PFM is 49%.
Section II Company Establishment
Over the past decade, foreign entry policies have undergone several significant changes. After the implementation of the PRC Foreign Investment Law in 2020, a foreign institution that intends to set up WFOE PFM may directly go through relevant formalities and file relevant information reports with the market regulation authority, and it does not need to separately submit application to or file with the Ministry of Commerce.
Section III PFM Registration
PFM shall complete registration with the AMAC via AMAC’s AMBERS system. The AMAC guides the registration of PFM by issuing a series of self-regulatory rules and documents (the “Registration Rules”).
Though registration of PFMs is not a licensing matter requiring approval by governmental authorities, the AMAC is authorized by the PRC Fund Law to examine the application materials, make feedback comments and request the applicant to make supplementary statements or rectification. On February 28, 2020, the AMAC released the “Checklist of Application Materials for the Registration of Private Fund Managers”, further enhancing the openness and transparency of its work.
In principle, the AMAC will complete the registration formalities in 20 business days after all the application information and documents are complete. In practice, it may take longer time.
Section IV Eligibility Requirements for PFM
Relevant eligibility requirements have been well provided in the Registration Rules issued by the AMAC. We have summarized some key points as follows:
- Personnel
PFM shall have no less than five employees. The senior management personnel other than the legal representative shall, in principle, not hold concurrent position in other firms (where there is a proper reason, the number of senior management personnel with dual-hatting arrangement shall not exceed half of the number of all senior management personnel); ordinary employees other than senior management personnel shall not hold concurrent position in other firms.
Senior management personnel include but not limited to legal representative, general manager, deputy general manager (if applicable) and compliance/risk control officer. The general manager, the chairman of the board of directors (if the company has a board of directors) or the executive director (if the company does not have a board of directors and only has one executive director) shall take the role of the legal representative.
Fund practitioners (include senior management personnel) shall obtain the fund practitioner qualification by passing the examinations organized by the AMAC or by other permitted means.
- Capital
There is no requirement on minimum capital (registered capital or paid-in capital) so far, but PFM shall ensure that the paid-in capital may fully cover the operating costs for a period of time (such as reasonable staff remuneration and office rental expenses). In the context of strengthening risk management and control in the financial sector, it is likely that there will be regulatory requirements on the minimum capital of PFM in the future.
- Office
The AMAC imposes no requirements on the location or area of PFM’s office, but in principle the location and area of the office shall match the business plan of such PFM.
- Internal Control Policies
PFM shall formulate a set of internal control policies covering such areas as information disclosure, investment decision and placing orders, fund distribution, fund practitioner administration and control, and ensure the legitimacy, compliance and feasibility of such policies.
- Legal Opinion
Starting from 2016, the AMAC requires PFM to engage lawyers in China to conduct due diligence investigations, confirm their eligibility and compliance status, and issue legal opinions accordingly.
Section V Special Requirements for WFOE PFM
In addition to the requirements listed in Section IV, WFOE PFM need to satisfy such other requirements as follows.
- Shareholder
The shareholder of a WFOE PFM shall be a financial institution approved or licensed by the financial regulator of the countries or regions where it is located, and has not been imposed with any material punishment by the regulator and judicial authorities in the preceding three years. The securities regulator of the country or region where it is located shall have signed a MOU on securities regulatory cooperation with the CSRC or any other institution recognized by the CSRC.
- Actual Controller
The actual controller (if any) of WFOE PFM shall also satisfy the above eligibility requirements applicable to the shareholder.
According to the AMAC, to identify the actual controller of a PFM, one shall trace to the ultimate natural person, state-controlled enterprise or collective enterprise, listed company, or overseas institution subject to the regulation of foreign financial regulators. In the past, some WFOE PFM identified a natural person or a non-financial institution as the actual controllers in accordance with such principle, but such natural person or non-financial institution failed to meet the eligibility requirements listed in the above subsection 1.
To facilitate the registration of WFOE PFM, the AMAC amended the rules for identification of WFOE PFM’s actual controller in 2018. After that, WFOE PFM’s actual controller may be traced to any foreign institution regulated by an overseas financial regulator, without need to be further traced to a higher level or ultimate shareholder. The new guidance has cleared obstacles for many WFOE PFM.
- Hong Kong, Macao and Taiwan Institutions
The Measures for the Administration of Securities Investment Fund Management Companies, which is applicable to mutual fund management companies, clearly specified that the eligibility requirements for foreign financial institutions (as the shareholder of mutual fund management companies) shall be applicable to financial institutions in Hong Kong, Macao and Taiwan (“Three Regions”) by reference. In comparison, the AMAC FAQ No.10 does not contain similar provisions. In practice, the Three Regions’ financial institutions shall refer to the AMAC FAQ No.10, but shall also comply with other guidance by the AMAC.
- PFM Indirectly Controlled by Overseas Institutions
Overseas institutions cannot circumvent the provisions of the AMAC FAQ No.10 by indirectly holding shares in PFM.
Section VI Business Activities
- Launching and Managing Private Funds
Pursuant to the PRC Fund Law and other relevant laws and regulations, WFOE PFM may issue and manage private funds only after completion of registration with AMAC. A WFOE PFM shall file its first private fund within six months from the date of completion of registration.
- Providing Investment Advisory Services for Domestic Asset Management Products
As different financial institutions and asset managers are regulated by different regulators in China, on one hand, the CSRC and the AMAC allow eligible WFOE PFM to provide investment advisory services for other domestic asset management products; on the other hand, WFOE PFM shall also comply with regulatory rules applicable to relevant domestic asset management products with respect to eligibility requirements on investment advisors.
For example, WFOE PFM meeting relevant eligibility requirements (e.g., registered with the AMAC for more than one year and being a member of the AMAC, and having at least three investment management personnel with track record in securities and futures investment management for more than three consecutive years) may provide investment advisory services for private asset management products of mutual fund management companies, securities companies, futures companies and their private asset management subsidiaries. To help WFOE PFM meet such eligibility requirements, the AMAC has recognized the overseas investment track record of relevant investment management personnel since 2018.
- Providing Investment Advisory Services for QFII/RQFII
According to the QFII/RQFII Consultation Paper released by CSRC in January 2019, the CSRC intended to permit QFII/RQFII to entrust its affiliated PFM (WFOE PFM included) to provide investment advice. At present, WFOE PFM generally expect such policy to be implemented as soon as possible, and expect that there will be more opening-up measures in the to-be-issued new QFII/RQFII rules (e.g., no longer restricting WFOE PFM to provide investment advisory services for affiliated QFII/RQFII only).
Section VII Fundraising
In addition to such issues as private placement, confirmation of qualified investors, cooling-off period, investor suitability assessment and CRS, which shall be carefully handled when launching a private fund, special attention shall be paid to the following issues for WFOE PFM:
- Fundraising Institutions
PFM may raise funds on its own, or entrust any institution which holds a fund distribution license and is a member of the AMAC to raise funds.
In February 2019, the CSRC released a consultation paper on the fund distribution licensing administration and adjustment of relevant business rules, intending to provide more stringent regulations on distribution of private funds. So far, such policy adjustment has not been implemented. After setting up WFOE PFM in China, global asset managers are still not very familiar with local market compared with local asset managers, and they may heavily reply on the distribution channels of such fund distributors. Therefore WFOE PFM shall pay close attention to such policy adjustment.
- Co-investment with Proprietary Funds
According to the AMAC FAQ No.10, the utilization of the WFOE’s capital and the RMB funds acquired through foreign exchange settlement of the WFOE’s capital shall comply with relevant foreign exchange rules. However, according to current foreign exchange rules, foreign exchange under capital accounts and the RMB capital settled from such foreign exchange, shall, unless otherwise stipulated, not be used directly or indirectly for securities investments or wealth management product investments except for investments in capital guaranteed products of banks.
Therefore, WFOE PFM must not invest in the private funds to be launched by it with the capital acquired from settlement of its registered capital, but may invest with the proceeds generated from its legitimate business operations (such as income from its management fees).
- Fundraising Channel
Among long-term funds, national social security fund, insurance funds and enterprise annuities cannot invest in private funds managed by WFOE PFM, but WFOE PFM can be entrusted by charitable organizations to manage their assets. Among all types of domestic asset management products, some can invest in private funds managed by WFOE PFM (e.g., private asset management products issued by mutual fund management companies and securities companies), while others cannot (e.g., mutual funds, retail wealth management products of commercial banks).
Under the QFII/RQFII Consultation Paper, the CSRC is expected to allow QFII/RQFII to invest in private securities investment funds. Now, WFOE PFM generally expect such policy to be implemented as soon as possible.
- Anti-money Laundering
Although the PRC Anti-money Laundering Law and relevant anti-money laundering (“AML”) regulations of the People’s Bank of China (“PBOC”) and the CSRC have not listed PFM as institutions with AML obligations, the self-disciplinary rules issued by the AMAC require PFM to perform the obligation of AML. In practice, WFOE PFM usually perform the AML obligation (especially the obligations in respect of KYC) by referring to the aforesaid regulations and complying with the AML policy within its Group. It is noteworthy that the PBOC has required AML obligors to look through and identify the beneficial owner of various asset management products since 2018.
Section VIII Filing of Private Funds
PFM shall apply for record-filing of private funds through the AMBERS system within 20 business days after the completion of fundraising. Before completion of the filing, a private fund may, for the purpose of cash management, invest in demand deposits with banks, treasury bonds, central bank bills, and money market funds etc.
Section IX Investment Operation
In addition to such usual precautions paid in fair trading, prohibition of illegal acts (including market manipulation, rat trading, insider trading, short-swing trading, etc.), disclosure of changes of shareholding ratio in any listed companies, and restriction on transfer of securities, WFOE PFM shall pay special attention to the following matters:
- Investment Decision and Placing Orders
According to the AMAC FAQ No.10, WFOE PFM shall make independent investment decisions and operate according to the principles of making independent investment decisions and placing trading orders by independently, and shall not place trading orders through foreign institutions or foreign-based systems. Considering that, global asset managers accustomed to using specific investment management systems (such as Bloomberg and Aladdin system) usually comprehensively consider the PRC Cyber Security Law, the AMAC FAQ No.10 and other relevant laws and regulations, and design a set of system both in line with regulatory provisions and meeting their own needs and habits to the greatest extent in investment transactions and risk control.
- Investment Under Stock Connect Scheme
Initially, private funds of WFOE PFM cannot invest in Hong Kong stock market through Stock Connect scheme. However, in 2019, the CSRC and the AMAC pushed to remove such restriction.
- Investment in CIBM Bonds
Pursuant to the regulatory requirements of the interbank market (“CIBM”), a PFM intents to open an account in CIBM should be “one of the firms with the highest AUM within the industry” and should “have been recognized by relevant regulator or self-disciplinary body of the industry delegated by the regulator”. It is practically difficult for a newly established WFOE PFM to meet such requirements.
The AMAC addressed this issue in 2018 by permitting consolidation of the AUM of WFOE PFM and the assets managed by its affiliated parties for investment in the securities market of China in the form of QFII, RQFII, Stock Connect and Bond Connect, etc.).
Section X China’s Opening-up Commitment
In recent years, the CSRC and the AMAC have made great efforts to promote the implementation of many opening-up policies, which has created a good business environment for WFOE PFM. For example, in addition to a number of policies mentioned above, the AMAC launched the fund practitioner qualification examination in English for senior management personnel and portfolio managers of WFOE PFM in April 2018.
In the wave of opening-up of the financial sector, the CSRC and the AMAC will continue promoting the opening-up of private fund management sector, and attract more and more WFOE PFM. With such opening-up policies, on one hand, it introduces overseas advanced asset management experience to China, and on the other hand, it provides domestic investors with more asset management options.
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Please kindly note that this Memo is rendered mainly with respect to relevant laws and regulations of the PRC (for purposes of this Memo only, the PRC does not include Hong Kong, Taiwan or Macau) in effect as of the date of this Memo. This Memo is being furnished solely to you on a confidential basis for your reference purposes only.
Jingtian & Gongcheng Investment Funds & Asset Management Group has vast experience with setting up foreign-invested financial institutions and asset managers in the PRC and applying for licenses from financial regulators, including but not limited to mutual fund management companies, private fund management companies, securities companies, wealth management companies and QFLP/QDLP/QDIE fund managers.
In September 2019 and March 2020, Jingtian & Gongcheng received international recognition by garnering the China Investment Fund Law Firm of the Year Award from China Law & Practice and Asia Firm of the Year from The Asian Lawyer under leading international legal publishing group ALM, respectively.
Should you have any further questions, please feel free to contact Messrs. James Yong Wang and Eric Ye Zou below.
