On 31 March 2017, the Asset Management Association of China (AMAC) issued the Answers to Questions on the Registration and Recordal of Private Funds (13), upgrading the requirements of professional management and marking the end of the private fund “hybrid operation” era. This column analyzes the road to this upgrading, and clarifies the ways in which private fund managers can respond.
Article 22 of the Interim Measures for the Regulation of Private Investment Funds, issued by the China Securities Regulatory Commission (CSRC) on 21 August 2014, specifies that if a private fund manager manages different types of private funds, it is required to adhere to the principle of professional management. A manager that manages different private funds that could give rise to a funneling of benefits or a conflict of interests is required to establish a mechanism to prevent the same.
Following the reversion of the oversight of private securities investment funds and private equity investment funds to the CSRC, the measures served as the overarching document for the regulation of private funds, and the principle of professional management that the measures specified was mainly addressed at private fund managers that manage different types of private funds.
Article 8 of the Guidelines for the Internal Controls of Private Investment Fund Managers, issued by the AMAC on 1 February 2016, specifies that private fund managers are required to comply with the principle of professional operation, their main business is to be clear, and they may not concurrently engage in other business unrelated to the management of private funds, or which presents a conflict of interest. The above-mentioned provisions show that the AMAC has expanded the principle of professional management to the principle of professional operation, requiring private fund managers not to concurrently engage in other business that is unrelated to the management of private funds or which presents a conflict of interest. However, the authors argue that professional operation still falls within the meaning of professional management.
Answers 13, issued by the AMAC on 31 March 2017, adds further detail to the requirement that a private fund manager may register only one institutional type and one business type, and may not concurrently engage in more than one type of private fund management business. The authors argue that although answers 13 provide a further detailing of the principle of professional management specified by the measures, their requirements on the implementation of the principle of professional management are clearly more stringent than those of the measures, and they also resurrect the regulatory spirit of times when the regulation of private funds fell within the purview of the National Development and Reform Commission (NDRC).
Ways to respond
A broad look at the road to the upgrading of the requirement of professional management shows that the requirements of the regulators in respect of the professional management of private fund managers have progressively become more stringent. How should an applicant that proposes to apply for the recordal/registration of a private fund manager go about implementing the requirement of professional management? The authors propose that implementation be carried out in the following ways:
Scope of business
The scope of business is a key focus of the AMAC when verifying whether an applicant satisfies the requirement of the principle of professional management. The applicant’s scope of business must be consistent with the private fund management business and the applicant may not use a scope of business that is exclusive to an institutional type other than the one that it proposes to apply for.
The applicant’s scope of business should include such words as “fund management”, “investment management”, “asset management”, “equity investment”, and “venture capital”, which are closely tied to the attributes of the business of a private fund manager.
Conversely, the scope of business of an applicant may not include such words as “private lending”, “private financing”, “margin lending business”, “small-amount wealth management”, “small-amount lending”, “P2P/P2B”, “crowd funding”, “factoring”, “provision of security”, “real estate development”, “trading platform”, etc., that is in conflict with the private fund investment business and may not contain business that conflicts with the business of the buyer of “investment management” or other non-finance business.
The key to implementing the requirement of the principle of professional management is the professional capacity of the employees, and the key personnel of an applicant must have the capacity to implement professional management.
The senior officers and fund managers of an applicant proposing to engage in private securities investment fund business are required to have secured fund qualifications. The legal representative/executive partner and the compliance and risk control officers of an applicant proposing to engage in fund business or other private securities investment fund business are required to have secured fund qualifications, and the personnel that engage in the private fund offering business of all applicants are required to have secured fund qualifications.
Compliance and risk control officers may not engage in investment business. Senior officers may not serve concurrently with non-affiliated private fund institutions. The authors recommend that an applicant avoid engaging more than one senior officer that serves concurrently and engages full-time compliance and risk control officers.
However, after the issuance of answers 13, can senior officers serve concurrently in an affiliated private fund institution of a different management type? It is the authors’ opinion that as the requirement of professional management is continually being upgraded, the AMAC’s attitude towards this question may be negative.
Internal control systems
The internal control systems of an applicant should be consistent with the type of institution it is proposing to apply for. With respect to internal control systems, the AMAC places particular emphasis on their soundness and practicability. With a view to implementing the principal of professional management, the AMAC is currently supportive of applicants outsourcing professional matters to fund business service firms that have the operational qualifications and are on file with the AMAC.
Author: Thomas Wang is a partner and Carol Li is an associate at Boss & Young