Launching Funds in China
February 28, 2003 | BY
clpstaff &clp articles &The past several years have seen continuous growth in China's investment funds market, and especially in open-end funds. The China Securities Regulatory…
The past several years have seen continuous growth in China's investment funds market, and especially in open-end funds. The China Securities Regulatory Commission (CSRC) has issued different rules regarding the examination and approval procedures for applications to launch funds. The major rules are: Questions Relevant to the Application for Establishment of Securities Investment Funds Circular issued in November 1997 (the 1997 Circular), the Questions Relevant to the Application Materials for the Launching and Establishment of Securities Investment Funds Circular and the Questions Relevant to the Examination and Approval Procedures for the Launching and Establishment of Securities Investment Funds Circular both issued in January 2002. How these regulations relate to each other has been unclear and they seem to conflict on different points. To provide a better framework for the industry, the CSRC promulgated the Questions Relevant to the Examination and Approval for the Establishment of Securities Investment Funds Circular (the New Circular) on November 26 2002, and the 1997 Circular was abolished subsequently. While the 1997 Circular simply set out criteria for the closed-end fund, the New Circular is applicable to open-end as well as closed-end funds.
Application Materials
Under the New Circular, the promoters of a closed-end fund are required to execute the "Fund Promoters' Agreement" before they authorize the fund management company (the Applicant) to deliver the application materials to the CSRC. However, in the case of an open-end fund, the Applicant may deliver the application materials directly to the CSRC. To apply for an open-end fund, letter of undertakings, application report, fund deeds, custodian agreement, prospectus, distribution agreement, resolutions of the board of directors of the Applicant, legal opinion and other documents may be required by the CSRC. Three additional documents, i.e., the promoters' agreement, particulars of the promoters, and the promoters' financial statements, are necessary in the case of a closed-end fund. It is also worth noting that fund advertisement shall be covered in the due diligence conducted by the law firm.
Accepting the Application
The Circular specifically provides that the CSRC will examine the application materials to determine whether they are complete and acceptable within seven days from the date on which it receives the application. The criteria for acceptance are as follows:
(1) the Applicant is not under investigation by the relevant state authorities for violation of any laws or regulations;
(2) the Applicant has not been ordered to correct its violation of laws or regulations and the fund deeds by the CSRC;
(3) there haven't been any major changes in the fund management company, such as to its senior management, nor any litigation or arbitration that may have detrimental effects on the funds managed by the Applicant;
(4) it has been at least 12 months since the Applicant's previous fund failed to meet the establishment requirements; or
(5) other situations determined by the CSRC subject to prudential principles.
Examination and Approval
The CSRC will conduct a compliance examination after its acceptance of the application materials. The examination will focus on documents including risk disclosure and mechanisms to protect fund holders' interests. The CSRC will suspend the process of examination and approval if:
(1) one of the Applicant's funds is under examination and approval;
(2) the main management of the Applicant (including front office and back office) who are appointed to manage the proposed fund are not qualified to engage in fund management;
(3) the Applicant conducted any activities violating laws and regulations during the period of examination and approval; or
(4) other events determined by the CSRC occur subject to the prudential principles.
In the case that the CSRC suspends the process, the Applicant will be notified once it is resumed. An expert committee will be invited to review the application materials if the application is deemed appropriate after completion of the examination procedures. The committee will offer an opinion for the CSRC regarding the type of funds, target scale of the fund, target clients, feasibility of the fund, proposed services to be provided to the investors and the corporate governance of the Applicant. The CSRC will then make its decision in writing and notify the Applicant based on the committee's opinion within 60 days after the date on which it accepted the application.
Self-examination and Record Filing
Under the New Circular, the Applicant and the distributors shall conduct self-examination for the distribution of the fund within seven working days after the establishment of the fund. They shall file the summary report with the CSRC as well as the advertisements for the distribution of the fund. Whenever any additional distributors are retained by the open-end fund, the Applicant shall file with the CSRC within seven working days after the date on which the distribution agreement comes into force.
By Henry Liao
Zhong Lun Law Firm
Shanghai
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