The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (the New Rules) were officially issued on 27 April 2018. In addition, on 22 October 2018, the China Securities Regulatory Commission issued two sets of related implementing rules, namely the Administrative Measures for the Private Asset Management Business of Securities and Futures Firms (the Measures) and the Administrative Provisions for the Operation of the Private Asset Management Plans of Securities and Futures Firms (the Provisions). These two sets are collectively referred to as the Asset-Management Rules.
The New Rules and the Provisions set forth new criteria to determine what makes a qualified investor different from qualified investors in the currently implemented Interim Measures for the Regulation of Private Investment Funds (the Interim Measures). Accordingly, the writer of this column have teased out and compared the differences in the provisions on qualified investors in the aforementioned documents, as well as analyzing the issue of the application from hereon in of the criteria for qualified investors of private funds.
The criteria for qualified investors that private funds currently rely on, carried in Article 12 of the Interim Measures, state that “the term ‘qualified investor of a private fund’ means an entity or individual that has the attendant capacity to identify and bear risks, invests not less than RMB1 million in a single private fund and satisfies the following relevant criterion: (1) an entity with net assets of not less than RMB10 million; or (2) an individual with financial assets of not less than RMB3 million or whose average annual income, during the most recent three years, is not less than RMB500,000”.
In the New Rules, a qualified investor is a natural person, legal person or other organization, with the attendant capacity to identify and bear risks, that invests not less than a certain amount in an asset-management product and satisfies any of the following relevant conditions: (1) has at least two years of investment experience, and satisfies one of these conditions: net household financial assets of not less than RMB3 million, household financial assets of not less than RMB5 million or the individual in question having an average annual income of not less than RMB400,000 during the most recent three years; (2) being an entity with legal personality with net assets of not less than RMB10 million as at the end of the previous years; or (3) another circumstance under which the financial regulator deems one to be a qualified investor. A qualified investor is required to invest not less than RMB300,000 in a single fixed return product, not less than RMB400,000 in a single mixed type product or not less than RMB1 million in a single equity type product or a single commodity and financial derivative type product.
A comparison of the two shows that the New Rules are consistency with the Interim Measures in terms of the requirement for a qualified investor to have the attendant capacity to identify and bear risks, but differs with the latter in terms of the provisions on investment experience, amount of assets, minimum subscription amount, etc. For example, the New Rules add the requirement that a natural person investor is required to have at least two years of investment experience; change the basis for determining the amount of assets from “personal financial assets” to “household financial assets and net assets”; and set different thresholds for investing in different types of products. These provisions reflect the idea the People’s Bank of China put forward that “suitable products are to be sold to suitable investors”.
Looking at current actual practices of private funds, it seems provisions of the Interim Measures on the criteria for qualified investor of private funds are still being applied rather than those of the New Rules. The discrepancies in the two sets of criteria have resulted in a certain degree of ambiguity in the application of the law, and the issue is awaiting further interpretation by the regulator or the issuance of further relevant rules for clarification. The writers of this column argue that, under the current background and trend towards more stringent regulation, it is beholden on private funds to adhere to a stricter line on the criteria for qualified investors in order to minimize regulatory risks.
The Provisions issued on 22 October 2018 also set forth criteria for determining qualified investors. In Article 3, the Provisions add granularity to and supplement the New Rules. For example, they include qualified foreign institutional investors (QFII) and renminbi qualified foreign institutional investors (RQFII) within the scope of qualified investors; and add a new provision, stating that, where an asset-management plan invests in non-standard assets, the amount a single qualified investor invests may not be less than RMB1 million.
However, pursuant to Article 2 of the Provisions, they apply to the private asset-management business engaged in by securities companies, fund-management companies, futures companies and the lawfully established subsidiaries of the aforementioned firms, and the Measures also specify the identical scope of application. Accordingly, it is evident that private fund managers and private funds are not subject to or governed by the Asset-Management Rules. As such, the more detailed criteria for qualified investors under the Provisions do not apply to the private fund sector. Of course, the writers hold that, though the Asset-Management Rules do not apply to private funds, as many of their provisions reflect the legislative outlook and regulatory stance of the regulator, it is beholden on private funds to pay attention and give the appropriate weight thereto. Future regulations or implementing rules relating to private funds are likely to refer to and draw on the requirements in respect of qualified investors and other provisions of the Asset-Management Rules.
Lastly, the writers argue that it is beholden on private funds to take a strict line on applying the criteria for qualified investors and, additionally, to pay close attention to the regulatory stance of the relevant regulator on this issue. We expect that the Private Fund Regulations to be officially promulgated and the related implementing rules to be issued in future will further provide the criteria for the qualified investors of private funds.
Wang Bin is a partner and Shi Yutian is a legal assistant at Boss & Young