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The CSRC’s New Public Fund Measures - Highlights of the New Regulations

2022.06.06 XIE, Qing (Natasha)、ZHANG, Chi、LUO, Danchen、ZHANG, Lin、XU, Lujia

The Measures for Administration and Supervision on Publicly Raised Securities Investment Fund Managers (“Measures”) and its implementing rules will take effect on June 20, 2022. The Measures will replace the original Administrative Measures for Securities Investment Fund Management Companies and the Interim Provisions on the Public Securities Investment Fund Management Business Operated by Asset Management Entities.

Highlights of the Measures include: (1) Its application scope covers both publicly raised securities investment fund management companies (FMCs) and other asset management institutions engaged in public fund management business. The Measures strengthen the consistency of public fund management business rules, that is, other asset management institutions are now subject to the same regulatory requirements as FMCs in terms of compliance and internal control, personnel qualifications and operation management related to public fund management business. (2) The Measures provide full-chain rules for public fund managers regarding “access - internal control - operation –corporate governance - exit - supervision" and promote the “regulation by business types (Gong Neng Jian Guan)” under the current framework titled “regulation by institutional types (Ji Gou Jian Guan).”

The key points of these requirements are summarized as follows:

1.  Application Scope

Public fund managers include (i) fund management companies (FMCs) and (ii) other asset management institutions approved by the China Securities Regulatory Commission (CSRC) for public fund management business. A fund management company refers to a profit-making legal person approved by the CSRC to engage in public fund management business and other businesses approved or recognized by the CSRC. Other asset management institutions refer to asset management subsidiaries of securities companies, insurance asset management companies, bank wealth management subsidiaries (“Bank WMS”), institutions registered with the Asset Management Association of China (AMAC) that specialize in private securities-type investment fund management business, and any other institutions stipulated by the CSRC.

Among other asset management institutions, at present, only securities companies, asset management subsidiaries of securities companies, and two insurance asset management companies have ever obtained a public fund management business license, and no Bank WMSs have ever applied or been approved for a public fund management business license. The current regulatory framework for publicly raised bank wealth management products is different from that for publicly raised funds issued by FMCs, i.e., there are certain restrictions or a lack of explicit provisions regarding the permissible investment scope, unitholders' meetings and business operations for public bank wealth management products. Bank WMSs that apply for a public fund management business license need to transform their existing public wealth management products to fully comply with the CSRC regulatory requirements on public fund management business, which is burdensome. It remains to be seen whether Bank WMSs have the motivation to apply for a public fund management business license. Moreover, it is uncertain whether the China Banking and Insurance Regulatory Commission (CBIRC), the regulator of Bank WMSs, will allow a Bank WMS to apply for a public fund management business license.

2.  Threshold for Shareholders and De Facto Controllers

According to the Opinions on Accelerating the Promotion of High-quality Development of the Public Fund Management Industry ("Public Fund Opinions"), the CSRC will strengthen the examination of the ethics, reputation, and professional competence of the sponsors of FMCs. In line with the previous regulations, the Measures set differentiated thresholds by categorizing the shareholders of an FMC into major shareholders, non-major shareholders holding 5% or more equity interest, and shareholders holding less than 5% equity interest. It is worth noting that,

(1) As a major shareholder, an institution shall have been profitable for at least the last three consecutive years, and be a licensed financial institution (or an institution that manages at least one licensed financial institution for at least one consecutive fiscal year). A licensed financial institution includes securities companies, futures companies, commercial banks, trust companies, insurance companies, insurance asset management companies, and other financial institutions recognized by the CSRC. Additionally, a licensed financial institution shall maintain the sound operation and management of its main business, with at least one indicator (such as its business scale, income, profit, or market share) being above the average level of the industry.

(2) For an institutional shareholder holding 5% or more equity interest, the requirement for its net assets over the last year has increased from RMB 50 million to RMB 100 million.

(3) Except for the employee stock ownership plan (ESOP), a limited partnership enterprise is not allowed to be the shareholder of an FMC, nor is an asset management product allowed to be a direct or indirect shareholder of an FMC, unless otherwise recognized by the CSRC.

The Measures set forth higher thresholds for natural persons to set up an FMC. The Measures enhance the qualification requirements for natural person sponsors, highlighting the requirements regarding their ethics, reputation, and professional competence. In addition, the transfer of equity interest by a natural person who is the major shareholder of an FMC is restricted to a certain extent.

In addition to the above common requirements for institutional shareholders, a foreign shareholder of an FMC shall be highly ranked internationally in terms of its financial assets, assets under management, income, profit and market share for the last three consecutive years. The financial institution or its parent company shall satisfy any one of the following requirements: (i) the relevant indicators of securities investment funds or publicly raised securities investment funds under its management shall rank at the forefront internationally, or (ii) the relevant indicators of stocks, bonds, ETFs, REITs, pensions, insurance funds and other single-class assets under its management, or the relevant indicators of discretionary management or ESG shall rank globally at the forefront; or (iii) other circumstances recognized by the CSRC.

3. Limitations on the Maximum Number of Licenses

An institution or institutions controlled by the same entity shall not invest in more than two independent FMCs, and shall only control up to one of the two independent FMCs in which they invest in. Other asset management institutions under the same control may apply for a public fund management business license, and there is no limitation on the number of asset management institutions obtaining public fund management business licenses.

4. Obligations and Liabilities of Shareholders and De Facto Controllers

(1) General Obligations

The Measures set general requirements for the shareholders and de facto controllers of an FMC, that is, they shall uphold the investment philosophy, exercise their rights and perform their duties in accordance with the law. They shall improve the corporate governance, risk management and internal control of the FMC, ensure the compliant operating of the FMC, and protect the interests of the fund unitholders. The shareholders of an FMC shall maintain the stability of the shareholding structure and undertake in writing not to transfer the equity interests of the FMC within a certain time period, unless otherwise stipulated by the CSRC. When disposing of their equity interests in the FMC, the shareholders shall act in good faith, abide by the commitment made in their subscription or purchase of equity interests and the relevant provisions of the CSRC, and shall not impair the lawful rights and interests of fund unitholders.

(2) Requirements for Independent Operation and Information Segregation

The CSRC strictly prohibits major shareholders and de facto controllers from abusing their controlling rights to interfere with the normal operation and management of the FMC and prevents over-control by the management team due to a lack of supervision by the shareholders. The Measures set forth the prohibited acts of the shareholder and the de facto controller, including the failure to adopt effective measures to prevent improper competition between the FMC and the shareholder or de facto controller or any companies under their control, and interfering with the normal operation and management of the FMC or the investment fund operation. As the previous regulations, the Measures only provide the foregoing principles regarding independent operation for all public fund managers, including FMCs and other public fund managers. In practice, foreign shareholders need to strictly observe these requirements and strike a balance between the independent operation of the FMC and the application of its global internal control policy, to avoid being regarded as intervening in the FMC's operations in an inappropriate or unlawful manner. In addition, all public fund managers shall establish a system to segregate key business and customer information between themselves and their shareholders. The Measures only provide for information segregation requirements in principle. Public fund managers need to establish internal policies to meet these requirements.

It is worth noting that the above requirements apply to both FMCs and other public fund managers. If the shareholder or de facto controller of a public fund manager intervenes in the operation and management of a public fund manager, or the investment operation of the fund, the CSRC may order it to make rectifications within a certain time limit, and may, depending on the circumstances, order it to transfer the equity interests of the public fund manager. It may restrict the exercise of the shareholders' rights before it corrects the illegal acts or transfers the equity interests. Moreover, the CSRC may impose administrative penalties on it and the relevant responsible persons, such as issuing regulatory warnings, confiscating any illegal gains, and issuing fines.

(3) Obligations Related to Risk Resolution

The Measures stipulate that the major shareholders and de facto controllers of an FMC shall have the ability to replenish capital on an ongoing basis and shall formulate risk resolution plans. If a public fund manager is subject to risk resolution measures, the major shareholders of the public fund manager shall convene with other shareholders and relevant parties to properly handle the relevant matters based on benefiting the interests of the fund’s unitholders. A public fund manager and its shareholders, directors, supervisors, senior management personnel, and persons in key positions shall perform the relevant duties and shall not arbitrarily be absent from duty, resign from their jobs or leave the country without approval.

(4) Obligations to Provide Information

The CSRC and its local branch offices may conduct extended inspections on the shareholders and the de facto controllers of such shareholders of public fund managers and may require them to provide information and materials within a specified time period.

(5) Liability for Violations

Where the shareholders of a public fund manager or the de facto controller of a shareholder violates laws, administrative regulations, the Measures or any other CSRC rules, the CSRC and its local branch offices may take regulatory measures such as : (1) impose a regulatory talk or issue a warning letter to the manager, order it to make a public statement, order it to report periodically, order it to rectify the matter, suspend part or all of its business, and suspend the acceptance of its application documents, (2) impose a regulatory talk or issue a warning letter to the responsible directors, supervisors, senior managers and persons-in-charge as well as any other directly responsible persons, determining them as inappropriate candidates.

5.  Corporate Governance

According to the Public Fund Opinions, the CSRC is hoping to establish a Chinese-specific and modern corporate governance regime of asset management institutions and improve the corporate governance of FMCs by proposing to (1) adhere to the principle of prioritizing the investors’ interests; (2) improve the "three meetings and one layer"1 system; (3) give full play to the supervisory functions of independent directors, supervisors and chief inspectors; (4) reinforce senior management personnel to fully perform their duties; and (5) comprehensively strengthen the Party construction of FMCs, fitting the leadership of the Party into all aspects of the corporate governance of state-owned FMCs.

6. Business Operation Management

The Measures strengthen the regulations on investment and trading activities. Public fund managers are required to establish and improve investment management policies and procedures, enhance the management of moving in-and-out of securities, reasonably set limits on the authority of investment managers, and set up a mechanism for pre-control, in-process monitoring, and post analysis and the review of trading orders.

The Measures require that FMCs shall engage in public fund management business and may engage in private asset management business or other related business only upon the approval or recognition of the CSRC. In addition, if an FMC establishes a subsidiary in China, it shall in principle hold 100% equity interest of such subsidiary. It is worth noting that the Public Fund Opinions support FMCs with prominent public fund management businesses, stable and compliant operations, and appropriate professional capabilities to set up subsidiaries that specialize in businesses such as publicly listed infrastructure real estate investment trusts (REITs), private equity investments, fund investment consultancy, or pension financial services. FMCs can no longer establish a “full-function” subsidiary to engage in asset management business.

7. Staff Remuneration and Performance Reviews

The Measures require the board of directors of an FMC to conduct performance reviews on the management team for a three-year or more time period. They require an FMC take long-term investment performance and compliance and risk control as important parameters for the performance reviews of key personnel, implement systems regarding deferred remuneration, claw-backs and follow-up bonuses, and prohibit any short-term appraisals or excessive incentives. We believe this echoes the general principles previously established in the Public Fund Opinions whereby an FMC shall establish a long-term appraisal mechanism, with full coverage of all management team members and key staff such as portfolio managers. It takes into account compliance and risk control status, long-term investment performance (a period longer than three years) as well as the actual returns to investors. The Measures require FMCs to strictly implement a system of deferred remuneration as well as a system of bonus claw-back for staff that breach laws, regulations, and norms, and prohibit any short-term or excessive incentive schemes.

[1] This means shareholder meetings, board of directors, board of supervisors, and senior management personnel.

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