The private fund industry has developed rapidly over the last two years. Since the Asset Management Association of China (“AMAC”) implemented the registration system for private fund managers (“PFMs”) on February 7 2014, the number of registered PFMs has reached 25,904[1]. Unlike highly regulated traditional financial institutions, PFMs were not subject to any administrative approval and their registrations did not require a substantial review. Due to this low barrier for entry and deficient integration over the regulation of financial markets, PFMs became a conduit through which more highly regulated industries, such as banks, trust companies and securities houses, could participate in innovative business activities outside their original scope of business. After the stock market fluctuation in the latter half of 2015 and increasing occurrences of illegal fundraising, regulators have been pushed to strengthen their supervision over the private fund management industry by issuing stricter self-disciplinary rules and measures.
With this in mind, the AMAC promulgated the Notice of Further Regulating Registration of PFMs (“Notice”) on February 5, 2016. The Notice tightened the registration and record filing of PFMs in terms of license management, information filing, and qualification requirement of senior executives.
- PFMs failing to launch funds before deadline will be deregistered
Based on AMAC’s own statistics, over two thirds of PFMs registered with the AMAC have not engaged in the fund management business. A PFM will be deregistered if it fails to file its first private fund before the following deadlines: (1) within 6 months, if it is a newly registered private fund manager upon promulgation of the Notice; (2) before May 1, 2016, if it is a private fund manager who has been registered for more than 12 months prior to promulgation of the Notice; (3) before August 1, 2016, if it is a private fund manager who has been registered for less than 12 months before promulgation of the Notice. It will be unnecessary to register a private fund manager if it has no plan to launch a fund within six months.
- Consequence of failing to submit information promptly
The Notice emphasizes PFMs’ obligations on information filing. The following chart sets out the consequences for failures to file relevant information promptly.
- Qualification Requirement of Senior Executives
The Notice requires that all senior executives of PFMs undertaking securities investments (such as stock investments) shall be qualified to participate in the fund management business; and that at least two senior executives of non-securities investment PFMs shall be qualified to participate in the fund management business. The legal representative/general partner and the compliance/risk control responsible persons of a non-securities investment PFM shall also be qualified to participate in the fund management business. The Notice also requires that persons responsible for compliance/risk control shall not undertake in any investment business. In order for the senior executives to be qualified to participate in managing funds, one of the following requirements shall be satisfied: (1) passed the Fund Qualification Examination; (2) engaged in business related to investment management in the past three years and qualified for other accreditation conditions, which generally refer to engaging in business related to investment management in the past three years with the average asset under management over 10 million RMB annually; (3) passed the Securities Qualification Examination, the Futures Qualification Examination, or the Banking Qualification Examination and qualified for other accreditation conditions, or passed the Certified Public Accountant (CPA) Examination, the Bar Examination, the Certified Public Valuer (CPV) Qualification Examination or other qualification examinations related to finance and qualified for other accreditation conditions; (4) other requirements accredited by the AMAC Accreditation Committee. Senior executives that meet the second and third conditions shall also pass the Fund Professional Ethics Examination. Qualified senior executives shall complete 15 credits of additional training annually to maintain their qualification.
- PRC Legal Opinion
The Notice requires that a Legal Opinion on Registration of PFM (“Legal Opinion”) shall be submitted whenever a newly applied PFM registers with the AMAC, a registered PFM applies for filing of its first private fund, and a registered PFM undertakes material changes such as change of controlled shareholder(s), actual controller and legal representative/general partner. The Legal Opinion shall express conclusive opinions on the following items of the applicant: application materials, company registration status, specialized operation, shareholding structure, actual controller, affiliates and branches, basic facilities and conditions of operation, risk management system and internal control system, outsourcing, compliance, and qualification of senior executives.
AMAC also decided that it will no longer issue paper or digital licenses for PFM registration, to respond the situation where some PFMs illegally made use of such paper or digital certificate to mislead investors.