2018.11.12 XIE, Qing (Natasha)、QIN, Tianyu
On October 22, 2018, the China Securities Regulatory Commission (CSRC) issued and implemented the Administrative Measures on the Private Asset Management Business of Securities and Futures Operation Institutions and the Provisions for Administration of the Operation of Private Asset Management Plans of Securities and Futures Operation Institutions (collectively, “New Measures”). The New Measures, together with the Measures for Supervision and Administration of Wealth Management Business of Commercial Banks (“Wealth Management Regulations”) promulgated by the China Banking and Insurance Commission (CBIRC) on September 28, 2018, constitute the detailed rules for the implementation of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (“Guiding Opinions”).
As the CSRC points out in its draft statement published on the same day ("Draft Statement”), the New Measures provide continuity with the regulatory policies governing the private asset management sector introduced in 2016, and follow the existing regulatory framework and other major regulations. They are consistent with the principle provisions of the Guiding Opinions, while also detailing various specific operational requirements.
The contents of the New Measures are extensive, so for our clients’ benefit, we have analyzed and commented on what we believe to be the key elements of interest.
1. Scope of Application
The New Measures are applicable to securities and futures operation institutions and to the private asset management plans (“AMP”) issued by such institutions. In this context, securities and futures operation institutions refer to securities companies, fund management companies, futures companies, and subsidiaries established by the aforementioned institutions to undertake private asset management activities. The New Measures apply to AMPs investing in standardized assets and also to those investing in non-standardized assets.
In terms of the Qualified Domestic Institutional Investor (QDII) activities, as we had anticipated that CSRC may adopt the same approach of CBIRC, the CSRC clarifies in its Draft Statement that since the CSRC has provided specific rules according to which securities and futures operation institutions may run QDII businesses, the implementation of the New Measures will not influence the current business model of QDII.
It is worth noting that while the New Measures do not apply to private fund managers per se, given that AMPs may invest in underlying assets through private funds, we are of the view that certain restrictions included in the New Measures will still impact significantly on private fund businesses.
2. Underlying Trust Relationship of Asset Management Contracts
In contrast to the Wealth Management Regulations, the New Measures explicitly stipulate that all types of AMPs shall be established based on a trust relationship. The Draft Statement specifically sets forth the following three aspects that shall have reflected the nature of a trust relationship: (i) clarifying that the asset of an AMP is independent of the proprietary properties of its manager and custodian; (ii) stipulating that the asset managers shall perform all active management responsibilities; and (iii) requiring that both the account names of the securities account and futures account of an AMP and the exercise of the rights of the relevant securities held by such AMP shall be clearly differentiated from the situation where the relevant securities are held by the investors directly.
3. Basic Principles
3.1 Look Through Up To Ultimate Investors: Where an AMP accepts investments by other asset management products, there is no need to calculate the total number of the investors of such asset management products on a consolidated basis. However, the manager of the AMP will still be required to identify the actual investors and the ultimate sources of funding of the AMP.
3.2 Look Through Down To Underlying Assets: The New Measures refine the regulatory requirements that apply to an AMP’s portfolio investments in the following three aspects:
(i)An AMP shall look through the underlying assets in order to classify and apply the relevant ratio requirements on different types of assets;
(ii)An AMP must adopt a method of diversification of portfolio investment and follow the detailed rules on the relevant proportion requirements for portfolios;
(iii)Non-standardized underlying assets are particularly required to complete the title registration.
3.2.1 Classification: AMPs shall be classified into one of four categories according to their underlying asset class: fixed-income-type products; equity-type products; commodity and financial-derivatives-type products; and mixed-type products. Taking into account the feasibility of their practical application, the New Measures provide for two special circumstances for exemption from the 80% minimum ratio requirement applying to certain type of products: (i) if remaining below the required ratio is in order to avoid specific risks, and such circumstance has been agreed by all the investors, provided that the time for which the proportion remains below the required ratio shall not last consecutively for more than 6 months; or (ii) if it is within the defined “building position” time period.
3.2.2 Diversification on Portfolio Investments – Maximum 25%: The proportion of the funds invested by a collective AMP in the same asset shall be no more than 25% of the net value of such AMP; and the proportion of funds invested by all collective AMPs managed by the same securities and futures operation institution in the same asset shall be no more than 25% of such asset, except for those 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. Other collective AMPs as recognized by the CSRC shall be exempted from the aforementioned requirement such as, for example, close-ended collective AMPs whose investors are all professional investors as prescribed by the CSRC and for which the minimum investment threshold for a single investor is no less than RMB 10 million, and AMPs whose securities investments are made entirely in proportion to the composition of relevant indexes.
It is our understanding that “the same asset” referred to in the aforementioned restriction includes underlying asset, and also extends to asset management product. Hence, the aforementioned requirement actually restricts an AMP from being the sole fundraising channel for a private fund. The essence of such requirement is to require AMPs to make diversified portfolio investments as a real fund rather than acting as a fundraising channel only. Besides, these restrictions may to large extent make it difficult to develop a feeder fund business to finance non-standardized asset project and therefore might restrict the development of business with underlying assets being non-standardized.
3.2.3 Special Requirement on Non-standardized Assets: The New Measures also require that, if the underlying assets of an AMP are non-standardized assets, the titles of the underlying assets should in principle have been registered with the competent authorities.
3.3 Prohibiting Multi-Level Nesting: Consistent with the Guiding Opinions, if an AMP invests in other AMPs, it shall be explicitly agreed that the AMP invested shall not then invest in any other asset management product, other than publicly-raised funds. The New Measures do not provide any exemptions to the multi-level nesting requirement.
4. Prohibitive Regulations related to “Channel” Business
The New Measures clarify that in relation to the “channel” business:
(i)It is prohibited to provide “channel” services to evade regulations, such as circumventing the regulatory requirements on investment scope, leverage restrictions and so on.
(ii)It is prohibited for an asset management contract to allow an investor or its designated third party to be solely responsible for the due diligence or investment.
(iii)It is prohibited for the asset management contract to allow an investor or its designated third party to place investment orders or provide investment recommendations, or to require the manager to exercise the rights of the relevant securities held by the AMP according to the instruction of the investor or its designated third party.
5. Investment Advisors
The New Measures continue the previous qualification requirements of investment advisors of AMPs as prescribed by the CSRC. They stipulate that an investment advisor of an AMP shall be a securities and futures operation institution, commercial bank asset management institution, insurance asset management institution or other financial institution recognized by the CSRC that can engage in asset management activities in accordance with the law, or private securities fund manager that comply with the following requirements simultaneously:
(i)Having been a member registered with the Asset Management Association of China for more than one year without any record of material violation against any laws or regulations;
(ii)Having at least three investment management personnel with three or more consecutive years of traceable securities or futures investment management experience, with no records of bad practice; and
(iii)Other requirements as prescribed by the CSRC.
Furthermore, in line with the Guiding Opinions and the Wealth Management Regulations, the New Measures prohibit investment advisors from executing investment orders directly, and prohibit an investment advisor and its affiliate from using its proprietary funds or the funds raised to invest in a junior class of a structured AMP.
6. Transition Period
The New Measures provide the same transition period as the Guiding Opinions, i.e., up until December 31, 2020. The regulator does not prescribe in the New Measures a uniform timetable of rectification for the transition period and each institution may lay out its rectification schedule based on its own situation. The New Measures further stipulate that after the transition period, any remaining non-standardized credit assets that are difficult to rectify for specified reasons or non-standardized equity assets that have not expired shall be properly handled with the consent of the CSRC.
