With the promulgation of the Interim Measures for Supervision and Management of Private Investment Funds, the private fund industry has entered a new era of rapid and orderly development and continuous improvement of supervision since 2014. The Guiding Opinions on Regulating Asset Management Business of Financial Institutions (the new regulations for asset management), promulgated on 27 April 2018, unify the regulatory standards for similar asset management products and establish the principle that the new regulations for asset management shall apply in the absence of explicit provisions of special laws and administrative regulations to private investment funds.
The China Securities and Regulatory Commission (CSRC) issued and began to implement the Administrative Measures for the Private Asset Management Business of Securities and Futures Operators (management measures) and the Regulations on Operation and Management of Private Asset Management Plans of Securities and Futures Operators (operation and management regulations, collectively referred to as the asset management rules with the management measures) on 22 October 2018, so as to further implement and improve the regulatory policies for private asset management of securities and futures operators under the new regulations for asset management. This article will briefly introduce the differences between the private funds and the private asset management plans of securities and futures under the asset management rules.
Whether private funds are subject to the asset management rules
According to the provisions of the asset management rules, non-public fundraising or acceptance of property entrustment by securities and futures operators, the establishment of private asset management plans, and fundraising, investment and other operational activities of asset management plans of securities and futures operators are subject to the provisions of the asset management rules. Securities and futures operators under the asset management rules refer to securities companies, fund management companies, futures companies and their subsidiaries that are engaged in private asset management business.
Meanwhile, the asset management rules do not indicate whether the private fund managers or private funds should be governed by these rules. Therefore, although the new regulations for asset management theoretically apply to private funds, the private fund managers and private funds they manage, for the present time, are not directly regulated by the asset management rules according to the provisions of the asset management rules.
About the fundraising process
To balance the fundraising and investment needs, private funds usually integrate initial closing and subsequent fundraising to raise funds in accordance with current practice. Private fund managers have considerable autonomy over the process of fundraising. According to the management measures, the fundraising process of asset management plans of securities and futures consists of fundraising, capital verification, establishment announcement and project investment.
According to the new regulations for asset management, if asset management products are directly or indirectly invested in the equity of unlisted enterprises and their beneficial rights (usufruct), they shall be closed-end asset management products. The closed-end asset management plans described in the management measures mainly refer to those plans that do not involve participation and exit during the period of existence.
For the asset management plans of securities and futures intended for private equity (PE) and venture capital (VC) investment, if a closed-end asset management plan is required and subsequent participation is unavailable in the light of the above-mentioned provisions, it may have to accept full subscription before the establishment of the asset management plan, which may bring more fundraising pressure compared with private funds.
If the regulatory authorities clarify the application rules of the new regulations for asset management to private funds, and if the arrangement of subsequent subscription, increase or decrease of funds, or admission or withdrawal of investors are considered as features of open-end products, this will also bring significant impact to the operation of private funds.
About the design of structure
According to current practice, it is relatively common that fund managers use feeder-master fund structures to conduct project investment. According to the management measures, the securities and futures operators shall not invest the assets under asset management plans they manage in other asset management plans managed by them (except for legally established fund of funds (FOF) asset management plans, or as otherwise stipulated by the CSRC). According to these provisions, the mode of using a feeder-master fund structure in asset management plans of securities and futures will be significantly restricted.
About the proportion of portfolio investment
The current regulations have no clear restriction on the proportion of individual projects invested and portfolio investment made by private funds. There are many single-project private funds in practice. The operation and management regulations require securities and futures operators to adopt the form of a portfolio of assets for collective asset management plans, and to set a ratio limit of “double 25%”, which means that unless the assets are investment products approved by the CSRC, or all investors meet certain conditions, the funds invested by a collective asset management plan in the same asset shall not exceed 25% of the net asset value of the plan, and the funds invested by all the collective asset management plans managed by the same securities and futures operators in the same asset shall not exceed 25% of the asset. The corresponding securities and futures operators should pay more attention to the investment restrictions of asset management plans when conducting investment management.
About fund fees
Private funds usually count fundraising expenses as fund fees. However, the operation and management regulations clearly provide that the expenses incurred before establishment of an asset management plan and the expenses related to fundraising during the existence of the plan shall not be included in the plan assets. The regulations also particularly set out that securities and futures operators, custodians, investment advisers and related employees must not directly or indirectly return management fees to investors.
The asset management rules overall have relatively more detailed provisions on the asset management plans of securities and futures operators, and some provisions represent the regulatory principles of the CSRC on private equity business, which may possibly be referenced by and applicable to private funds.
Chen Fang is a partner and Li Jingxiong is a non-equity partner at Zhong Lun Law Firm
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