Regulation of securities investment advisory business

Provisional Measures provides that the institutions applying for Advisory Business qualifications shall meet the requirements set out in Article 6 thereof and proceed with the application procedures in accordance with Article 8 thereof.

According to Article 4 of the implementing rules of Provisional Measures, the institutions that are requested to apply for and obtain securities and futures investment advice qualifications include: securities and futures investment advisory companies; securities and futures brokerages; information services companies; information network companies; financial advisers; asset managers; and others recognised by CSRC.

Draft for Comments provides that those that provide clients with securities advisory services shall obtain the relevant practitioner qualifications and register with securities investment advisers at the Securities Association of China. The institutions must also have the relevant qualifications and inform clients of such information.

Approaches to securing access

(a) Securities investment advisers

According to the Provisional Measures and the Circular, securities investment advisers must submit the application for specialising in or conducting Advisory Business to the local CSRC for preliminary review and CSRC for final approval. Once receiving approval and the relevant personnel obtain practitioner qualifications, those institutions shall make a public announcement through media designated by CSRC.

(b) Securities companies and securities brokerages

Existing securities companies and securities brokerages may apply to CSRC for business scope expansion, in order to be allowed to undertake Advisory Business, and a change of business licence and securities business permit. This is in accordance with the Regulations for the Oversight of Securities Companies and Tentative Provisions for the Examination and Approval of Business Scope of Securities Companies.

(c) Fund managers

According to the Circular on Relevant Issues of Fund Management Companies' Providing Investment Advisory Services to Specific Targets, fund managers may provide investment advisory services to such specific clients as QFIIs, domestic insurance companies and other institutions without CSRC approval.

(d) Investment managers

Some investment managers with good reputations, flexible operation mechanisms and considerable revenue income have emerged in the dynamic market of PE funds. Such companies generally favour the participative approach and non-participative approach regarding the provision of investment advisory services. By the participative approach, an investment manager may act as a general partner and special trustor to participate in the management of a limited partnership and trust scheme respectively. By the non-participative approach, the investment manager cannot act as a general partner or special trustor through making capital contributions. It may only provide advisory services upon the advisory agreement.

To a certain extent, the investment manager should comply with the Provisional Measures in respect of the administration of securities investment advisory institutions by the non-participative approach. However, some investment managers have not yet obtained, or even applied for, securities investment advisory qualifications.

The Draft for Comments does not make it clear whether the different regulatory requirements would be applicable to those securities investment advisers that provide investment advice to retail investors in a public manner. In other words, even those securities investment advisers that provide one-to-one securities investment advice are only likely to be subject to regulation by CSRC.

Hence, the relevant authorities may consider learning from the foreign experience of classification regulation. Concretely speaking, stricter regulation could be imposed on securities investment advisers in respect of the provision of investment advisory services to retail investors in a public manner. And some regulation may be relaxed to a certain extent, or even abolished, in respect of the securities investment advisory qualification requirement. This might be in circumstances where the securities investment advisory institution provides one-to-one securities investment advice to institutional or sophisticated investors.