Private funds finally given regulatory system

For example, retail funds were not allowed to invest in stocks issued by the funds of custodian banks. For the first time, the Law includes privately raised funds within its scope. While managers could raise private funds, their operation has been something of a grey area.

Privately raised funds

“Considering the amended Law, private funds investing in listed companies are legalised, as long as they fulfil the registration procedures and comply with the requirements – this makes their position much clearer,” said Lawrence Guo, a partner with Jade & Fountain PRC Lawyers in Beijing.

Private funds have existed in China's capital markets for around five years and in that time they have become major investors. The Law was designed to allow the China Securities and Regulatory Commission (CSRC) to regulate these investments.

“Once private fund managers and private funds have been regulated by the CSRC, they obtain a legal position to raise money from qualified investors and manage investor's assets, which will spur development of private funds in the future” said Sandra Lu, a partner with Llinks Law firm in Shanghai.

The Law only includes investment in listed companies – the National Development and Reform Commission (NDRC) has produced a series of policies and circulars to regulate privately raised funds investing in unlisted companies.

Private funds investing in unlisted companies were included in draft versions of the Law, but were removed when it was promulgated. This means that private equity (PE) and venture capital (VC) funds remain outside the scope of the Law.

This is logical and consistent with regulatory trends in the US and EU. Since the 2008 financial crisis, government oversight of privately offered funds has increased to eliminate previous regulatory gaps in supervision.

“Private funds are permitted to invest in shares publicly issued by the companies limited by shares, bonds, funds, other securities and derivatives recognised by the CSRC, while PE and VC investing in shares privately issued by unlisted companies should fall under a different regime,” said Lynn Yang, a partner at Norton Rose in Shanghai.

However, a PE fund that invests in both private and public funds need to comply with both CSRC and NDRC policies and rules. “This will likely mean dual-governmental filing, registrations and reporting,” said Guo.

Mutual fund managers

The Law relaxes many of the restrictions previously in place for fund managers. For example, fund managers of private funds are only required to register with the Asset Management Association of China (AMAC). This is also the same for a post-launch filling.

The CSRC used to oversee such registrations and fillings. “The AMAC has been working closely with the CSRC and reports to them over regulatory work like funds filling and registration. Currently, the two organisations are working together on registrations and fillings,” said Lu.

The AMAC has recruited additional staff to deal with the increase in regulatory work. This is seen as a positive move as the CSRC is beginning to loosen its grip on mutual fund managers.

Another major change is improving the compliance and risk management of mutual fund managers from the share holder and trading requirements. In the past, the Chinese regulators prohibited directors, supervisors, senior management personnel or other professionals of fund managers to trade shares.

“Once the law becomes effective, they or their relatives or interested parties have the green light to make securities investments, but shall be subject to restrictions such as reporting and conflict of interests,” said Yang. The Shanghai-based partner also added that this follows international practices.

Investment Fund Association

This is expected to change once the Law becomes effective in June and private fund managers seek to raise funds.

Yang also predicted that: “the CSRC may soon allow securities companies, insurance asset managers and private fund managers, with strong financial standing, three-year profitability and a good track record of securities asset management experience, to be able to manage public funds, which could be a potential competitor to mutual fund managers.”

The move can be seen as reflecting CSRC's resolution to boost and diversify the assets and funds management industry by introducing competitive market players.

A full text translation and an analysis feature of the amended PRC Securities Investment Fund Law will be available online in February and in the March/April issue of China Law & Practice

By David Tring

Further reading:

PRC Securities Investment Fund Law (2003)

Circular on Promoting the Compliant Development of Equity Investment Enterprises