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19 April, 2017
The rapid growth of the private fund management industry in China has compelled regulators to apply more stringent regulatory standards. Market participants may have realized that China’s financial regulators are quickly catching up with their international peers in many areas in terms of regulatory means and measures. On March 31, 2017, the Assets Management Association of China (“AMAC”) issued the FAQ Regarding Registration and Filing of Private Funds (XIII), under which it sets out how private fund managers (“PFMs”) should adhere to the principle of specialized operations, and in releasing this official statement and shifting the filing system, requires a segregation between a specialization in the operation of a private securities fund management business and a private equity fund management business in the legal form of “independent operational entities”. In the short run, such an upgraded regulatory principle of specialized operations echoes the trend in enhanced financial regulation and tempering various types of financial chaos. In the long run, because the private fund industry of our country is still in an early stage of development, underlining specialization of operations will be conducive to the long-term development of the entire industry.
1. “Upgraded” Principle of Specialized Operations
According to the “upgraded” principle of specialized operations, a PFM shall not jointly operate the private securities fund management and private equity fund management businesses. The reason it is referred to as an “upgraded” version is because the previous requirements of specialization in operations only required a PFM to set up corresponding internal policies to fulfill the specialized operation of different types of business under the same legal entity. However, according to the new requirements, when applying for the PFM registration, the applicant can only choose one type of institution and the corresponding type of business for registration, and when applying for filing of a private fund, it can only file a private fund falling within the type of business it registered with the AMAC. For example, a private securities investment fund manager is only allowed to file a private securities investment fund or a FOF thereof rather than a private equity investment fund.
The release of the “upgraded” principle of specialized operations is not a radical departure from previous track. Early in September 2016 when the new filing system of the AMAC was put online, any new application for registration was only able to apply for one type of businesses. Therefore the AMAC in effect achieved the “new-old cut” through shifting the online filing system, and began resolving the remaining historical issues by discontinuing the use of the old online filing system starting April 5, 2017. Any PFM having registered multiple types of institutions and businesses on the “Private Fund Registration and Filing System” (https://pf.amac.org.cn, “Old System”) must complete a rectification or update at the “Asset Management Business Electronic Registration System” (https://ambers.amac.org.cn, “New System”). If any private fund filed by a PFM with multiple types of business registered on the Old System is not consistent with the new type of business chosen by such PFM, such PFM may continue the operation of such private fund before the maturity date of its fund contract, however, no renewal of contract or expansion of the scale of investment will be permitted. Prior to the completion of the relevant rectification, a PFM registering on the Old System cannot file an application for a new private fund.
2. Separate Registration for Independent Operational Entities
The AMAC allows any private fund management institution that has actual and long-term needs to operate multiple types of businesses to set up independent operational entities and separately apply for registration as different types of PFMs, provided that each of them satisfies the requirement of specialized operations in terms of the staff, business system and internal control policies. This means that the entities under the same group engaging in private securities business and private equity business have to be corporations or partnerships separately incorporated, and as an independent operational entity, each corporation or partnership shall implement the principle of specialized operations with respect to staff, business systems and internal policies.
An accompanying practical issue arising from this change is whether holding concurrent positions at affiliate companies for different private management businesses will be deemed a deviation from the principle of specialized operations. Since each operational entity is an independent legal entity, which respectively registers at the AMAC for the type of business engaged, we may expect that a major consideration of a PFM when it structures multiple business entities will be how to fulfill resource sharing and operational cost-saving while adhering to the principle of specialized operations as well as preventing conflicts of interest.
For further information, please contact:
Natasha (Qing) Xie, Partner, Jun He
xieq@junhe.com
