2020.11.03 XIE, Qing (Natasha)、QIN, Tianyu
On October 23, 2020, the China Securities Regulatory Commission (CSRC) issued the Decision on Amending the Administrative Measures on Private Asset Management Business of Securities and Futures Operating Institutions (Consultation Paper) (“Consultation Paper for Administrative Measures”), the Decision on Amending the Administrative Provisions on the Operation of Private Assets Management Plans of Securities and Futures Operating Institutions (Consultation Paper) (“Consultation Paper for Administrative Provisions”) (collectively, “Consultation Papers”) and their corresponding drafting statement (“Drafting Statement”). According to the Drafting Statement, the proposed amendments are mainly to supplement and slightly improve the current regulatory provisions, while simultaneously relaxing certain regulatory requirements due to practical demands and implementation of the requirements under the new Securities Law, so as to further improve the regulatory framework in this regard and ensure the publicity and transparency of relevant regulatory provisions.
We have summarized the key points of the proposed amendments below.
Article 42 of the Consultation Paper for Administrative Measures proposes a new rule that each asset management plan (AMP) shall set a reasonable maximum debt leverage ratio to ensure that both (i) the investment leverage matches its investors’ risk tolerance and, (ii) there is sufficient cash or other financial assets with high liquidity for repaying the due debts.
If an APM enters into a securities reverse repo transaction, the Consultation Paper for Administrative Provisions requires that (i) the securities and futures operating institutions should strengthen their management of liquidity risks and counterparty risks; (ii) for a collective AMP’s investment in reverse repo transactions, it shall reasonably diversify the maturity dates, the counterparties and the concentration of repurchased securities for such transactions, as well as strengthen counterparty management in accordance with the look-through principle and improve the pledge management system.
The Consultation Paper for Administrative Provisions proposes a new rule that if the proportion of investments by an AMP in the same asset exceeds 50% of the net value of such AMP, the total assets of such AMP shall not exceed 120% of its net value, except for investments by such AMP in assets such as bank deposits, treasury bonds, central-bank bills, policy-related financial bonds, local government bonds and other investment products recognized by the CSRC.
Based on the operational characteristics of private equity investment funds, the Consultation Papers improve relevant rules to satisfy the investment demands of private equity investment funds through the following approaches:
4.1 Improving Relevant Arrangements for Payment by Installment
Article 5 of the Consultation Paper for Administrative Provisions stipulates that investors of a closed-end AMP that adopts a portfolio investment approach may contribute capital by installment, provided that the amount of initial payment by a single investor shall not be lower than the minimum investment amount of a single AMP invested by a qualified investor and the total amount of initial payments by all investors shall not be less than RMB10 million. In order to ensure the full performance of payment installations by investors, the Consultation Paper for Administrative Provisions requires that the relevant asset management contracts shall expressly provide for the principles and methods for dealing with investors’ failure to make relevant payments as agreed, as well as strict liabilities for breach of contract thereof.
4.2 Allowing for Private AMPs to Increase the Scale of Their Fund-Raising
Article 6 of the Consultation Paper for Administrative Provisions clarifies the pre-conditions that a private AMP shall satisfy for increasing the scale of its fund-raising, namely: (i) the AMP has been set up for more than one year and operated pursuant to law, and neither the securities and futures operating institution nor the custodian has violated any laws, administrative regulations or provisions issued by the CSRC and the asset management contract; (ii) the investment of the AMP shall adopt a portfolio investment approach; (iii) securities and futures operating institutions shall obtain prior consent of all investors and custodians in the manner agreed upon in the asset management contract; (iv) there is no circumstance of failing to conduct reasonable valuation as required or transferring risks, losses or benefits to new investors by increasing the scale of fund-raising; (v) it has been more than one year since the last increase in the scale of its fund-raising; (vi) other conditions stipulated by the CSRC.
The Consultation Paper for Administrative Measures further provided that where the scale of fund-raising of a closed-end collective AMP is expanded, the securities and futures operating institutions shall fully disclose to investors the source, scale, use and other information of the funds pursuant to the law.
4.3 Exemption of the 25% Limitation
The Consultation Paper for Administrative Provisions exempts private equity investment funds from the restriction that “all investments by all collective AMPs managed by the same securities and futures operating in the same asset shall not exceed 25% of the net value of such assets”. Specifically, AMPs set up for the purpose of acquiring other companies and AMPs specifically investing in equities of unlisted companies may not be subject to the aforementioned 25% restriction. According to the Consultation Paper for Administrative Provisions, an “AMP specifically investing in the equities of unlisted companies” refers to an AMP which uses no less than 80% of its total assets to invest in the equities of unlisted companies.
Furthermore, Article 21 of the Consultation Paper for Administrative Provisions provides that where a collective AMP established specifically for the purpose of investing in the equities of unlisted companies adopts a portfolio investment approach to investing, such collective AMP can invest in the equities of unlisted companies indirectly via special purpose vehicles (SPVs), provided that each of such SPVs shall be a company or a partnership that directly invests in the equities of unlisted companies and shall not undertake the fund-raising function or charge management fees or performance fees.
According to the Drafting Statement, the foregoing amendments intend to keep the Consultation Papers in line with existing regulatory provisions on venture capital funds and government industrial investment funds, while leaving open the possibility for indirect investments in the equities of unlisted enterprises through SPVs.
Article 11 of the Consultation Paper for Administrative Provisions lifts the limitation that the proportion of investment in a single collective AMP invested by securities and futures operating institutions with their self-owned funds shall not exceed 20% of the total assets of such AMP, so as to facilitate managers to make follow-up investments with their own funds.
Article 18 of the Consultation Paper for Administrative Provisions allows futures companies rated as A Class AA Grade in the latest two periods and their subsidiaries to issue AMP products that invest in standard warehouse receipts, over-the-counter derivatives or other non-standard assets. The CSRC specifies in the Consultation Papers that it will carry out a pilot trial in this regard among leading futures companies.
7.1 Refining Duties of Managers and Custodians.For example, there is a new obligation for managers to ensure that the entrusted funds and investment income thereof paid to an investor would be transferred to the initial settlement account used by such investor when investing in the AMP.
7.2 Exceptions to Multi-level Nesting. There is a notable qualification added to two articles of the Consultation Paper for Administrative Measures – Article 44, which provides that “where an AMP accepts entrustment by other asset management products, the securities and futures operating institution shall still perform its discretionary management duties earnestly and shall not sub-entrust its duties or invest in asset management products other than public funds” and Article 45, which provides that “if an AMP invests in other asset management products, it shall be expressly agreed that the invested asset management products shall no longer invest in other asset management products other than public funds.” Appended to both of these statements is “unless otherwise provided by the CSRC.” For now, it is unknown when and how the CSRC will stipulate exceptions to the regulatory requirements regarding multi-level nesting.
7.3 Simplifying Matters Related to Filing and Reporting. The CSRC has simplified the filing procedures in order to implement the policy of streamlining the administration and delegation of powers.
7.4 Extending Grace Period. In line with the Guiding Opinions on Regulating Asset Management Business of Financial Institutions, the Consultation Papers extend the grace period to the end of the year 2021.
We will continue to monitor the situation and keep our clients apprised of any important developments.