Statement by a CSRC Spokesperson on Issues Relevant to the Establishment of Fund Management Companies

Statement by a CSRC Spokesperson on Issues Relevant to the Establishment of Fund Management Companies (Including Fund Management Companies with Foreign Equity Participation)

(Published by the China Securities Regulatory Commission on July 12 2002.)

3700/02.07.12

Since the issue of the Establishment of Fund Management Companies With Foreign Equity Participation Rules (the Establishment Rules), the CSRC has received numerous telephone calls and letters from domestic and overseas institutions enquiring about issues related to the establishment of fund management companies. In order to facilitate the preparatory work of applicants wishing to establish fund management companies, increase examination and approval transparency and promote the development of the fund sector, we have collected relevant questions and provide the following collated set of answers:

1. Recognition of the Qualifications of Sponsors and Shareholders of Fund Management Companies

(1) What is the legal basis for the establishment of fund management companies with foreign equity participation? Who is responsible for the examination and approval of establishment and routine oversight?

A: Pursuant to the Establishment Rules, the main elements of the legal basis for the establishment of fund management companies with foreign equity participation are the Company Law, the Administration of Securities Investment Funds Tentative Procedures (the Tentative Procedures) and relevant provisions of the CSRC. The names and registered capital of fund management companies with foreign equity participation, and the establishment, duties and responsibilities of the elements of their organizational structure, should accord with the Company Law, the Tentative Procedures and the relevant provisions of the CSRC.

The Establishment Rules specify that the CSRC is responsible for the examination, approval and routine oversight of fund management companies with foreign equity participation.

(2) What conditions must the sponsors or shareholders of fund management companies satisfy?

A: Any institution that satisfies the requirements of laws and regulations, has a relatively good reputation in the market and whose operations are legally compliant may act as a sponsor of a fund management company. The specific criteria are as follows:

(a) the main sponsor is a securities company or trust and investment company established in accordance with relevant State provisions;

(b) the business position of the main sponsor is good and it has posted consecutive profits in the three most recent years; and

(c) the paid in capital of each sponsor is not less than Rmb300 million.

An overseas shareholder of a fund management company with foreign equity participation should satisfy the following conditions:

(a) it is a financial institution established and lawfully existing in accordance with the laws of the country (or region) where it is located and has not been subjected to serious penalties by the securities regulator or judicial authorities during the three most recent years;

(b) the country (or region) where it is located has sound securities-related legal and regulatory systems and its securities regulator has executed a memorandum of understanding on cooperation in securities oversight and maintains a cooperative oversight relationship with the CSRC;

(c) it has paid in capital of not less than the equivalent of Rmb300 million in a freely convertible currency; and

(d) other prudential conditions specified by the CSRC.

If an overseas financial institution does not satisfy the prescribed conditions, but its parent or a subsidiary does, then such parent or subsidiary may act as an overseas shareholder of a fund management company with foreign equity participation.

(3) How is the scope of “overseas shareholders” defined?

A: The term “an overseas shareholder in a fund management company with foreign equity participation” means an institution registered outside the People's Republic of China. The Establishment Rules specify that an overseas shareholder of a fund management company with foreign equity participation is a financial institution established and lawfully existing in accordance with the laws of the country (or region) where it is located.

(4) Can a foreign-funded institution be the largest shareholder of a fund management company?

A: Provided that the provisions on capital contribution ratios specified in Article 8 of the Establishment Rules are complied with and subject to the unanimous agreement of the foreign and Chinese parties through consultations, a foreign-funded institution complying with Article 6 of the Establishment Rules may be the largest shareholder of a fund management company. At this stage, in accordance with prudential principles, overseas financial institutions that hold the position of largest shareholder must have asset management business qualifications and experience.

(5) How will the provisions on the shareholding ratio of overseas shareholders in the Establishment Rules be specifically implemented?

A: The foreign shareholding ratio or the equity ratio accounted for by the foreign equity participation in a fund management company may not exceed 33% in the aggregate (including both direct and indirect holdings). Within three years from China's accession to the WTO, this ratio may be increased to 49%. The specific foreign shareholding ratio should be unanimously agreed upon through consultations between the foreign and Chinese parties and submitted, in accordance with relevant provisions, to the CSRC for its examination and approval.

(6) How many fund management companies may one institution take an equity participation in?

A: For the present and near future we encourage sponsors and shareholders of fund management companies to put their efforts into properly operating one fund management company. One institution may not take an equity participation in more than two fund management companies, whether wholly mainland-owned fund management companies or fund management companies with foreign equity participation, and may not hold a controlling stake (whether an absolute or a relative controlling stake) in more than one of such fund management companies.

(7) How will the foreign exchange issues of fund management companies with foreign equity participation be handled?

A: When carrying out foreign exchange transactions, such as inward remittances, outward remittances, etc., fund management companies with foreign equity participation and their overseas shareholders must abide by relevant State laws and regulations on exchange control and the regulations of the foreign exchange authority.

(8) Are there any differences in the permissible scope of business of fund management companies with foreign equity participation and that of wholly mainland-owned fund management companies?

A: They are the same.

(9) What matters must an applicant carry out before submitting an application to establish a fund management company?

A: Applicants for the establishment of wholly mainland-owned fund management companies and wholly mainland-owned applicants for the establishment of fund management companies with foreign equity participation must submit to the agencies of the CSRC and the stock exchanges the relevant compliance materials and an undertaking of compliance, in which they undertake to ensure strict legal compliance in their securities investment activities, pursuant to the requirements of the Several Questions Regarding Application for Establishment of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2001] No.10) and the Issues Relevant to the Implementation of Document Zheng Jian Ji Jin Zi [2001] No.10 Circular (ref. Ji Jin Bu [2001] No.33).

(10) Is an overseas shareholder that wishes to take an equity participation in a fund management company required to file a compliance record filing? Are the record filings of domestic shareholders subject to the 12-month minimum period for compliance record filings?

A: As overseas shareholders remain unable to invest in the China A share market, they are not required to carry out compliance record filing procedures as are domestic shareholders. However, pursuant to Article 6 of the Establishment Rules, an overseas shareholder is required to provide certification from the securities regulator or relevant authority of the country where it is located that it has not been subjected to serious penalties by the securities regulator or judicial authority during the three most recent years. Domestic shareholders are still required to abide by relevant CSRC regulations on compliance record filing and the time lapse between the date of submission of the compliance undertaking and the date of submission of the application to establish a fund management company should in principle not be less than 12 months.

(11) What is the basis for the examination and approval of equity participation in fund management companies by institutions from the Hong Kong and Macao Special Administrative Regions and Taiwan?

A: The relevant regulations of the Establishment Rules apply mutatis mutandis to the equity participation in fund management companies by institutions from the Hong Kong and Macao Special Administrative Regions and Taiwan.

2. Administration of the Qualifications of Operations Personnel

(1) Are foreign employees required to obtain fund operation qualifications? How should they obtain such qualifications?

A: To obtain fund operation qualifications, foreign employees must submit an application to the CSRC (including past records and valid certification of asset management) and participate in and pass a qualification examination, unless they receive dispensation from the CSRC.

(2) Are fund management companies with foreign equity participation also required to establish independent director systems? May foreign nationals hold the position of independent director?

A: Fund management companies with foreign equity participation also should establish independent director systems, in accordance with the Improving the System of Candidates for Directors of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2001] No.1). The number of independent directors should be larger than the number of directors appointed by the largest shareholder and such directors should account for no less than one-third of the board of directors. Qualified foreign nationals may hold the position of independent director of a fund management company.

3. Stage of Application for, and Examination and Approval of, Preparation of Establishment

(1) Which application stages must a newly established fund management company go through?

A: It must pass two stages: application for, and examination and approval of, preparation of establishment, and application for, and examination and approval of, commencement of business.

(2) What is the procedure for the examination and approval by the CSRC of applications for company preparation?

A: The procedure for the application for, and the examination and approval of, fund management company preparation is as follows:

(a) The applicants submit the application materials for fund management company preparation to the CSRC. If the application materials are found to be complete after examination, the CSRC will formally accept the application. If the application materials are found to be incomplete, the applicant will be notified in writing and the reason given.

(b) The CSRC will make a preliminary examination of the formally accepted preparation application materials and carry out an appropriate evaluation of the members of the establishment committee by reference to regulations relating to the administration of the qualifications of fund operations personnel.

(c) The CSRC implements the expert appraisal committee system in respect of preparation examination and approval. The expert appraisal committee will be convened after the completion of the preliminary examination.

(d) The CSRC will issue a decision to approve, to defer examination of, or not to approve the preparation within 60 working days (excluding the time during which the relevant parties amend or supplement the application materials) from the date on which it formally accepts the preparation application. If the preparation is approved, an official reply will be issued. If examination is deferred or the preparation is not approved, the applicants will be notified in writing and the reason given. If, after examination has been deferred, the applicants meet the conditions for resumption of examination, the applicants will receive separate written notification.

(3) Do the Chinese versions of application materials for fund management companies with foreign equity participation prevail?

A: Chinese is the only valid language. English versions of application materials must be accompanied by a Chinese translation.

(4) Which materials must accompany a preparation application?

A: The main materials that are required to accompany an application for preparation of establishment are listed in the Relevant Issues in the Examination and Approval Procedures for the Establishment of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2002] No.1).

(5) Which additional application materials must overseas shareholders submit to the CSRC?

A: Overseas shareholders must additionally submit the following materials:

(a) basic particulars of the overseas institution, mainly including the company's name, registered capital, establishment date, form of organization, scope of business, and a list and the résumés of the main persons in charge of the company and the members of the board of directors or the senior partners;

(b) (a duplicate) of the business licence issued by the relevant competent authority of the place where the overseas institution is located or of the place where its main business activities are carried out;

(c) a statement issued by the overseas institution that it has not been punished by the relevant competent authority in the country or region where it is located during the most recent three years and certified by the securities regulator or relevant authority of the country where it is located;

(d) the audited annual reports of the overseas institution for the most recent three years;

(e) if the overseas institution is engaged in securities asset management business, it should also provide the date on which it commenced to engage in securities asset management; the total value of the securities assets, and the performance of the funds offered to the public, under its management during the three years prior to the filing of its application; and its research report on the development of the Chinese fund market;

(f) if the overseas institution or an affiliate established an office, branch, wholly-owned enterprise or joint venture or directly or indirectly engaged in banking, securities or insurance business activities in China prior to its application, it should also submit a written report thereon and relevant information explaining the relevant particulars thereof; and

(g) other materials that the CSRC requests be submitted.

(6) What kinds of examinations will the CSRC conduct after accepting the preparation application?

A: After accepting the preparation application materials, the CSRC will examine the materials to determine whether they are complete. If the materials are complete, it will send letters to the relevant work units asking them to provide information on the applicants' compliance with their compliance undertakings, on whether their securities investments during the most recent year have met compliance requirements, on whether the company's sponsors have been punished by the CSRC, been suspected of violating regulations or been placed on a watch list during the most recent year, etc. so as to assist it in understanding the circumstances of the applicants. If the CSRC agrees to accept the application after receipt of the replies, it will issue a formal notice of acceptance to the sponsors, whereas if it does not agree to accept the application, it will notify the applicants and explain the reason therefor. Overseas shareholders will be subject to a similar examination.

(7) What is included in the materials on the members of the preparatory committee?

A: Such materials mainly include the list of members of the preparatory committee, their résumés, photocopies of their identification documents, photocopies of certificates of their educational attainments and degrees, information on their compliance with laws and regulations during the three most recent years and letters of recommendation from two or more senior managers of financial or securities type institutions or persons of standing in the community as well as materials related to the management of securities assets by at least two members of the preparatory committee during the last three years (including records on and valid evidence of their past performance in the management of assets).

(8) What other preparatory work needs to be done at the preparation application stage?

A: During the company preparation application stage, in addition to examining the relevant materials, the CSRC will, by way of an expert appraisal committee, etc., investigate the fund market knowledge and business planning of the members of the preparatory committee and the appropriateness and comprehensiveness of the fund management company's governance structure and internal control systems as well as evaluate the basic qualities, professional knowledge and capabilities of the members of the preparatory committee. The preparatory committees of fund management companies should duly carry out the foregoing facets of the preparatory work.

4. Stage of Application for, and Examination and Approval of, Commencement of Business

(1) How should a change in the particulars of a sponsor after the preparation for establishment of a company has been approved be handled?

A: If a major change in the basic particulars of a sponsor occurs or a circumstance that could affect the commencement of the business of the company arises during the preparatory period after the preparation for establishment of the fund management company has been approved, the company's preparatory committee should submit a written report explaining the relevant matters to the CSRC in a timely manner. If the relevant sponsor no longer satisfies the qualifying conditions or if a sponsor is replaced, the sponsors should convene a sponsors' meeting and, after a resolution has been adopted, the company's preparatory committee should submit the same to the CSRC for its examination and approval and carry out the relevant matters.

(2) Which materials need to be submitted when applying for commencement of business?

A: The main materials that are required to be submitted when applying for commencement of business are listed in the Relevant Issues in the Examination and Approval Procedures for the Establishment of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2002] No.1).

(3) What is the procedure for the examination and approval by the CSRC of applications by companies to commence business?

A: The procedure of the CSRC for examining and approving the commencement of business by fund management companies is as set forth below:

(a) After the applicants have completed the preparations for the fund management company, they should submit the application materials for commencement of business by the fund management company to the CSRC. The CSRC will first examine such materials to determine whether they are complete and decide whether to accept the application.

(b) The CSRC will issue a decision to approve, to defer approval of, or not to approve the commencement of business within 30 working days (excluding the time during which the relevant parties amend or supplement the application materials) from the date on which it formally accepts the application to commence business. If the commencement of business is approved, an approval document will be issued. If approval of the commencement of business is deferred or the commencement of business is not approved, the applicants will be notified in writing and the reason given.

5. Major Changes and Establishment of Branches/Offices

(1) Which major changes need to be reported to the CSRC for its approval?

A: The following major changes of a fund management company need to be reported to the CSRC for its approval:

(a) addition of (a) new company shareholder(s);

(b) change in the company's registered capital, change in the capital contribution ratio of the shareholders or change in the number of shareholders;

(c) change in the company's name;

(d) change in the company's domicile;

(e) replacement of a principal responsible person such as the chairman of the board, the general manager, the (a) deputy general manager, a supervisor, etc.; or

(f) establishment of, change in or closure of branches.

(2) Which changes need to be reported to the CSRC for the record?

A fund management company needs to report the following events to the CSRC for the record:

(a) amendment of the company's articles of association involving major changes that do not require the approval of the CSRC;

(b) establishment of, change in or closure of offices.

(3) Which procedures must a fund management company carry out when it wishes to establish a branch in China?

A: A fund management company must receive the approval of the CSRC to establish a branch in China. When applying to establish a branch, a fund management company should submit the following materials to the CSRC:

(a) an application including the reason for the establishment of the branch, its name, its location, etc.

(b) the resolution of the board of directors;

(c) the main duties and responsibilities, and the management system, of the proposed branch;

(d) the résumés of the proposed persons in charge and main business staff of the branch; and

(e) other materials specified by the CSRC.

After an application for the establishment of a branch has been approved, the fund management company should carry out the registration procedures with the administration for industry and commerce on the strength of the approval document from the CSRC in accordance with relevant provisions.

(4) Which procedures must a fund management company carry out when it wishes to establish an office?

A: When a fund management company wishes to establish an office in China, it should report the same to the CSRC for the record. Within 15 working days after the establishment of its office, the fund management company should report the location, duties, responsibilities, management system and the list of the persons in charge of the office, etc. to the CSRC for the record.

(5) What restrictions are there on the scope of business and method of establishment of a branch or office of a fund management company?

A: A branch may engage in the development and marketing of fund products and other business authorized by the company, provided that it does not exceed the scope of business of the company. Offices may not engage in business-type activities. Branches and offices may not be established as equity or cooperative joint ventures. The operation of a branch or office may not be contracted out or leased out.

Attachments: Relevant Laws and Regulations

PRC, Company Law

Administration of Securities Investment Funds Tentative Procedures

Establishment of Fund Management Companies with Foreign Equity Participation Rules

Improving the System of Candidates for Directors of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2001] No.1)

Administration of Securities Investment Funds Tentative Procedures Implementing Rules No.6: Administration of Qualifications of Fund Personnel Tentative Provisions (ref. Zheng Jian Fa [1999] No.53)

Several Questions Regarding Application for Establishment of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2001] No.10)

Issues Relevant to the Implementation of Document Zheng Jian Ji Jin Zi [2001] No.10 Circular (ref. Ji Jin Bu [2001] No.33)

Issues Relevant to the Establishment of Branches and Offices in China by Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2000] No.66)

Matters Relevant to Main Sponsors that Apply to Establish Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2001] No.35)

Relevant Issues in the Examination and Approval Procedures for the Establishment of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2002] No.1)

Several Issues Concerning Major Changes of Fund Management Companies Circular (ref. Zheng Jian Ji Jin Zi [2002] No.10)