Pan-asset management concepts in regulating equity investment funds

In September 2016, the Asset Management Association of China (AMAC) launched a new registration platform, dubbed the Asset Management Business Electronic Registration System, which is intended to gradually replace the old Private Equity Fund Registration and Filing System. The change is widely interpreted by industry insiders as a shift of philosophy on the part of the AMAC from private equity fund regulation to general asset management regulation.

Q: What do the general business and the regulatory framework under the concept of “Pan-Asset Management” look like?

A: As limited to the concept of supervision over mixed operations in the financial industry, China has yet to make a comprehensive asset management law. The connotation and denotation of “asset management” also has yet to be defined. In the author’s view, “fiduciary management” and “investment for third parties” are two important aspects of asset management and a regulatory framework (as shown in the table at left) can be made out based on the nature of equity funds (publicly or privately offered).

Q: According to article 43 of the Law of the People’s Republic of China on Commercial Banks, commercial banks cannot invest in immovable property that is not for their own use, or in non-bank financial institutions and enterprises within China. So, how do commercial banks go about their asset management or equity investment business?

A: In practice, commercial banks can not only offer passive asset management like inter-bank fixed income bonds and non-standardized debt assets, but they can also invest in the shares of asset management plans of securities companies, fund management companies and their subsidiaries, in line with the Circular on Regulating Inter-bank Businesses of Financial Institutions. In terms of equity investment, commercial banks are broadly, albeit indirectly, invested in target companies with IPO potential through such channels as trust plans and fund subsidiaries’ specific asset management plans. Besides, commercial banks are also allowed to directly invest in technology-based innovative businesses through subsidiaries with a mandate to make investments and offer equity investment services to high-net-worth clients with relevant investment experience through co-operation with third-party fund managers.

Q: Can an equity investment fund with structured products be registered with the AMAC?

A: Some equity investment funds often work with trusts, fund subsidiaries, brokers’ asset management plans and banks to become limited partners of partnerships through the above-mentioned channels, or in other ways. However, their registration (or not) with the AMAC must depend on: (1) whether they have any agreement with banks, trusts or insurers that includes any prohibited clause specifying any guaranteed minimum return such as fixed income or any seniority arrangement similar to fixed income; and (2) whether each and every investor behind the funds of the banks, trusts or insurers is found through “penetrative” verification to be a qualified investor. Regulation from the AMAC is tightening up, as is reflected by the launch of the new registration platform. We understand this as the AMAC’s intention to shift towards “functional regulation”.

Q: Does an equity investment fund with structured products have material adverse impacts on a target company’s subsequent IPO or material asset restructuring?

A: As mentioned, some equity investment funds may work with trusts, fund subsidiaries, brokers’ asset management plans and banks to become limited partners of partnerships.

To assess whether such equity investment funds will have the adverse impacts mentioned in the question, the parties must pay attention to Guideline No. 4 for the Supervision of Unlisted Public Companies – Review Guideline for Issues concerning Administrative Licensing Applications of an Unlisted Joint-Stock Limited Company with Over 200 Shareholders. Such equity investment funds registered with the AMAC must be regarded as one qualified investor, or they may be subject to “penetrative” verification, which will have material adverse effects following the exit of the target company.