RULES AND REGISTRATION OF FUNDS IN CHINA

Transcription

1 RULES AND REGISTRATION OF FUNDS IN CHINA July 2013 Sissi Chen, Research Assistant Shirley Yeung, Research Assistant Limited 801, Two Exchange Square, 8 Connaught Place, Central, Hong Kong Tel: (852)

2 Disclaimer The information in this presentation is CONFIDENTIAL. It is intended solely for use by the person to whom it is given and may not be reproduced or redistributed. This presentation is not for distribution to the general public but for intended recipients only and may not be published, circulated, reproduced or distributed in whole or part to any other person without the written consent of Limited. In addition, this presentation is for informational and illustrative purposes only and should not be construed as legal, tax, investment or other advice. This presentation does not constitute an offer to provide legal and accounting services and opinion by Limited. All Copyrights reserved. 2

3 Hedge Funds in China The Regulatory Framework of Funds Securities Law Securities Investment Fund Law CBRC: Sunshine Funds CSRC: Two Types of Regulated Private Funds CSRC: Asset Management Business TABLE OF CONTENTS Further Details on Private Funds 39 3

4 HEDGE FUNDS IN CHINA 4

5 Hedge Funds in China Funds started in PRC in early 1990s, and has so far undergone four stages: Infancy Formation Rapid Expansion Adjustment and Standardization HEDGE FUNDS IN CHINA 5

6 Hedge Funds in China Two Categories of Hedge Funds One are companies backed up by the government, including brokers managing pooled property, trust and investment companies' trust and investment projects, and investment companies managing their own capital Under the name of Investment Consulting Company ( 投資咨詢公司 ) or Investment Management Company ( 投資管理公司 ), they provide management for pooled property HEDGE FUNDS IN CHINA 6

7 Hedge Funds in China No formal or universally accepted definition From Well Known Sunshine Funds, HF is: Closed-end Product: Limited Partnerships or Limited Liability Companies Aiming at absolute return Charging performance fees Minimum net worth of investors set HEDGE FUNDS IN CHINA 7

8 THE REGULATORY FRAMEWORK OF FUNDS 8

9 The Regulatory Framework of Funds Hierarchy of Chinese Laws 1. The Constitution of the People's Republic of China (PRC) 2. National Laws, issued by the National People's Congress 3. Administrative Regulations, issued by the State Council 4. Local Decrees, issued by local People's Congresses 5. Administrative & Local Rules, issued by an administrative agency or by a local People's Government THE REGULATORY FRAMEWORK OF FUNDS 9

10 The Regulatory Framework of Funds Relevant National Laws *Securities Investment Fund Law of the People s Republic of China 中華人民共和國證券投資基金法 Effective from June 1, 2013 *Chapter X Non-Publicly Offered Funds *Chapter XI Fund Service Institutions Securities Law of the People's Republic of China (2005 Revision) 中華人民共和國證券法 2005 修訂 Trust Law of the People's Republic of China 200 ( 中華人民共和國信託法 2001) THE REGULATORY FRAMEWORK OF FUNDS 10

11 The Regulatory Framework of Funds Relevant Administrative Regulations Regulation on the Risk Disposal of Securities Companies ( 證券公司風險處置條例 ) Regulation on the Risk Disposal of Securities Companies ( 證券公司監督管理條例 ) Measures for the Customer Asset Management Business of Securities Companies ( 證券公司客戶資產管理業務管理辦法 (2013 修訂 )) Detailed Rules for the Implementation of the Collective Asset Management Business of Securities Companies ( 證券公司集合資產管理業務實施細則 (2013 修訂 )) THE REGULATORY FRAMEWORK OF FUNDS 11

12 The Regulatory Framework of Funds Regulations by Financial Institutions (FIs) HK & US: regulations of the same financial product will apply to all types of FIs PRC: same financial product (say a Hedge Fund) will be governed by different regulations & regulators according to the different types of FIs Banks & Trust Companies China Banking Regulatory Commission (CBRC) Fund Management Companies & Securities Companies China Securities Regulatory Commission (CSRC)** Insurance Companies China Insurance Regulatory Commission (CIRC) THE REGULATORY FRAMEWORK OF FUNDS Gaps in-between possibly allows regulatory arbitrage 12

13 The Regulatory Framework of Funds Laws Securities Law & Securities Investment Fund Law Regulators CBRC CSRC CIRC FIs Banks & Trust Companies Securities Companies & Asset Management Companies Insurance Companies THE REGULATORY FRAMEWORK OF FUNDS 13

14 The Regulatory Framework of Funds Our Focus- China Securities Regulatory Commission (CSRC) Ministry-level unit directly under the State Council Include a general force for enforcement Regulates China's securities and futures markets with an aim to ensure their orderly and legitimate operation. China's stocks, bonds, futures and mutual funds Responsible for researching policies THE REGULATORY FRAMEWORK OF FUNDS More on the next page 14

15 The Regulatory Framework of Funds Our Focus- China Securities Regulatory Commission (CSRC) Processes applications for asset management companies, futures companies, Sino-foreign securities joint ventures (including any initial public offering underwriters and advisors), QDII quotas, and QFII quotas. Consults Chinese companies abroad on how to establish securities institutions and comply with international securities standards and regulations. THE REGULATORY FRAMEWORK OF FUNDS 15

16 SECURITIES LAW 16

17 Securities Law Narrowly defined Securities Stocks Bonds Shares in regulated mutual funds (i.e. publicly offered funds) SECURITIES LAW Legislation NOT applicable to Private Funds Main reason of unregulated status of funds before amendment of the Securities Investment Fund Law, 17

18 Securities Law Vs. Hong Kong & US SFO sch. 1: securities means funds issued by a body, whether incorporated or unincorporated... SA 1993: private offerings SECURITIES LAW 18

19 SECURITIES INVESTMENT FUND LAW 19

20 Securities Investment Fund Law Revised version took effect on 1 June 2013 Vs. Old version in 2004: 55 sections added, 3 sections deleted, 74 sections amended, 1 Part consolidated & 4 Parts added Key Areas of Amendment 1. More stringent regulations on public funds 2. Formal inclusion of private funds 3. General rules governing FIs offering funds SECURITIES INVESTMENT FUND LAW 20

21 Securities Investment Fund Law (1) More Stringent Regulations of Public Funds Public Fund = a fund with > 200 investors (not incl. 200) Allows fund manager to be in the form of partnership Cancel the prior approval requirement for change in Fund manager and its personnel NB. Still require prior approval from CSRC for change in substantial shareholders (>5%), change in executive director etc. Require 3 or more than 3 years of relevant experience from the directors and responsible officers Apply personal dealing restrictions to directors and responsible officers: prior application, review & record SECURITIES INVESTMENT FUND LAW More on the next page 21

22 Securities Investment Fund Law (1) More Stringent Regulations of Public Funds Conditional approval of personal investment on securities by dealers of fund Not including fund manager, senior staff, responsible officer and directors; Prior application, registration and review are required Including disclosure of relationships between connected persons & the beneficiaries; Ban the use of insider information Ban shareholders and its beneficiaries from unauthorized intervention of fund investment, manipulation of fund for his personal or third party interests etc. Ban funds from holding client assets Compulsory employment of an independent custodian SECURITIES INVESTMENT FUND LAW 22

23 Securities Investment Fund Law (2) Formal Inclusion of Private Funds Wide definition of private funds, the 3 categories: 1. Regulated private funds 2. Unregulated private funds by growth enterprises or district gov ts 3. Unregulated private funds in market Private funds = a fund with < 200 investors (incl. 200) Require registration of fund manager to the Asset Management Association of China (AMAC) SECURITIES INVESTMENT FUND LAW More on the next page 23

24 Securities Investment Fund Law (2) Formal Inclusion of Private Funds Stipulate qualifications of investors as to Asset value >RMB1m or Annual Income >RMB0.2m for all the 3 past years Ability in identifying and taking the risks & Minimum investment >1m Ban fund from using public means of offerings Report to AMAC upon completion of offerings Prohibit the transfer of shares in market SECURITIES INVESTMENT FUND LAW 24

25 Securities Investment Fund Law (3) General Rules Governing FIs Offering Funds Delegate the duties to enact specific guidelines to CBRC, CSRC & CIRC, area of concerns include: Marketing of funds Fees of funds Allocation of trades Valuation & rating of funds Investment consultancy Information system SECURITIES INVESTMENT FUND LAW 25

26 Securities Investment Fund Law NOTE The new Fund Law will for the first time regulate certain private funds in addition to mutual funds. THAT SAID, private equity and venture capital funds (PE/VC) will remain beyond the scope of the New Fund Law PE/VC: Usually only buy shares before IPO/ listing, and sell after IPO Privately Placed Funds: Commonly deal with shares in the market (Listed Company) SECURITIES INVESTMENT FUND LAW 26

27 CBRC: SUNSHINE FUNDS 27

28 CBRC: Sunshine Funds What is Sunshine Funds? Trust units launched by trust companies under the Administrative Measures on the Pooled Funds Schemes of Trust Companies, took effect on 1 March A CBRC-licensed China onshore trust company acts as a sponsor or trustee, delegates daily investment management to an invest adviser, with a bank and a securities company as the custodians for cash and securities respectively Investment Strategy: Stocks, Bonds & Real Property Performance Fee: commonly 20% CBRC: SUNSHINE FUNDS 28

29 CBRC: Sunshine Funds How is it regulated? Types of trust companies eligible to offer trust units Methods used to distribute trust units Maximum number of investors in each unit trust : 50 Tests determining qualifications of investors Able to invest RMD1m in one single trust Personal/ Family Assets over RMD1m at subscription Annual income >RMB0.2m in all 3 past years CBRC: SUNSHINE FUNDS 29

30 CBRC: Sunshine Funds NOTE Funds by other FIs (say banks & Asset Management Ltd) remains unregulated by this Measure Easily bypass: mirror trust units employing same investment strategy, appointment of same investment adviser to cope with the excess of investors in single trust unit CBRC: SUNSHINE FUNDS Substantially regulated under the revised Securities Investment Fund Law 1 st category: Regulated private funds 30

31 CSRS: TWO TYPES OF REGULATED PRIVATE FUNDS 31

32 CSRC: Two Types of Regulated Private Funds The Pilot Measures on Selected Client Asset Management Business of Fund Management Companies, took effect on 15 August 2011 Separate account business By Fund Management Companies The Implementing Rules for Targeted Client Asset Management Business of Securities Companies, took effect on 1 July 2008 Single client asset management business By Securities Companies FUNDS CSRS: TWO TYPES OF REGULATED PRIVATE 32

33 CSRC: Two Types of Regulated Private Funds Vs. Sunshine Funds: Similar Products with more investment strategies allowed How are they regulated? Similar to Sunshine Funds Cannot invest more 10% of the portfolio in a single stock (Revised by the new Securities Investment Fund Law) CSRC s approval required before offering Filing made to CSRC after completion of offerings Also subjected to the Revised Securities Investment Law: category 1 FUNDS CSRS: TWO TYPES OF REGULATED PRIVATE 33

34 CSRS: ASSET MANAGEMENT BUSINESS 34

35 CSRC: Asset Management Business Category 3 under the Revised Securities Investment Fund Law Decision on Amending the Measures for the Administration of the Customer Asset Management Business of Securities Companies and Decision on Amending the Detailed Rules for the Collective Asset Management Business of Securities Companies ( the 2 Decisions ) on 28 June 2013 Regulation on collective assets management business of securities companies Made to cope with the revised law CSRS: ASSET MANAGEMENT BUSINESS 35

36 CSRC: Asset Management Business Applicability of Securities Investment Fund Law Impose trustees liabilities on Securities Companies Clarify applicability of trust laws Require a fair institutional guarantee for asset safety Collective Asset Management Schemes Not to Exceed 200 Qualified Investors Yet, those schemes set up previously can continue to run, permitting entrance and withdrawal CSRS: ASSET MANAGEMENT BUSINESS 36

37 CSRC: Asset Management Business Abolishment of Double 10% Investment Ratio NOTE Before: can not invest more than 10% of the NAV in securities of one certain company Status of directional/ client-specific asset management business yet to be clarified Tentative Administrative Measures for the Investments of Privately-offered Funds in Securities (Consultation Draft) in February 2013 No applicability of the Decisions in other FIs: Banks, Trust Companies, Insurance Companies Not overruling other regulations CSRS: ASSET MANAGEMENT BUSINESS 37

38 Hedge Fund Regulation IS HEDGE FUND REGULATED IN CHINA? YES, HFs are now included as Private Funds in Securities Investment Law NO, Loopholes remain to make enforcement difficult Only a few types of HFs have detailed measures/ decisions issued by their respective regulator Limited application of each decision, guideline and measures (e.g. Pension fund remains unregulated) Large Number of unregulated private funds outside the named FIs CSRS: ASSET MANAGEMENT BUSINESS 38

39 FURTHER DETAILS ON PRIVATE FUNDS 39

40 Further Details on Private Funds A privately placed fund refers to a fund that Will make securities investments under the direction of a fund manager where the funds are raised by non-public means in China and, Unless otherwise provided in the fund contract, the assets (i.e. the funds raised and the securities acquired) are held in custody by a fund custodian for the benefit of the unit holders. FURTHER DETAILS ON PRIVATE FUNDS 40

41 Further Details on Private Funds Before, the Securities Investment Fund Law only regulated publicly placed funds, which left the increasingly significant privately placed funds in a legal limbo. With economic restructuring and rising household demand for wealth management products, privately placed funds have grown rapidly in China. FURTHER DETAILS ON PRIVATE FUNDS 41

42 Further Details on Private Funds The lack of express legal standing Before, most privately placed funds were formed by means such as collective fund trust schemes (a.k.a. sunshine funds ) and securities investment consulting arrangements (where fund managers allege that they are consultancies rather than fund managers, their services to investors are investment consultancy services, and investors manage their own investments based on their own discretion), with no or limited regulatory supervision. Absent appropriate governmental supervision, investors in privately placed funds have been exposed to excessive risk and potential fraud. Now, Funds Manages as trustees FURTHER DETAILS ON PRIVATE FUNDS 42

43 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 43

44 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 44

45 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 45

46 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 46

47 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 47

48 Further Details on Private Funds Private Funds vs. Public Funds (for draft version) FURTHER DETAILS ON PRIVATE FUNDS 48

49 Further Details on Private Funds Securities Investment Fund Law Public funds (mentioned above) Private funds: funds which are offered to 200 or fewer qualified investors and which trade in publicly offered shares, bonds and fund units and other securities and derivatives approved by the China Securities Regulatory Commission (the CSRC ). no longer contemplates investment in unlisted shares by private funds and hence PE/VC, which generally invest in shares of unlisted companies, will remain outside of the scope of the New Fund Law. FURTHER DETAILS ON PRIVATE FUNDS 49

50 Further Details on Private Funds Securities Investment Fund Law (1) Relaxing private funds filing obligations: Before, a fund manager of a private fund was required to register with the CSRC or make a filing with the Asset Management Association of China (AMAC). The New Fund Law requires only filing with AMAC. Similarly, the requirement to make a post-launch filing with the CSRC has also been removed and managers of private funds are merely required to make this filing with AMAC. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 50

51 Further Details on Private Funds Securities Investment Fund Law (1) Relaxing private funds filing obligations: Once the capital raising for a non-publicly raised fund is completed, the fund manager shall report the information to AMAC for record-filing. In the event that the total amount of capital raised by a fund reaches the prescribed threshold, or the number of fund unit holders within a fund reaches the prescribed threshold, the AMAC shall report the relevant information to the SRA (under CSRC). FURTHER DETAILS ON PRIVATE FUNDS More on the next page 51

52 Further Details on Private Funds Securities Investment Fund Law (1) Relaxing private funds filing obligations: In contrast to the record filing system for private equity investment enterprises that is provided under the Notice of the General Office of the National Development and Reform Commission on Promoting the Standardized Development of Equity Investment Enterprises, the record-filing system under the 2012 Securities Investment Funds Law focuses on fund product record-filing. The fund managers do not need to establish an entity (a company or limited partnership enterprise) for capital raising. However, some practical issues of the fund product recordfiling system remain to be dealt with, such as account opening. FURTHER DETAILS ON PRIVATE FUNDS 52

53 Further Details on Private Funds Securities Investment Fund Law (2) Simplifying forms of funds: expressly provided for council form funds and unlimited liability form funds on top of contractual form funds. simplifies this and allows these structures to be achieved under the umbrella of contractual form funds. FURTHER DETAILS ON PRIVATE FUNDS 53

54 Further Details on Private Funds Securities Investment Fund Law (3) A special chapter of non-publicly raised funds The development of non-publicly raised funds is significant in promoting economic restructuring, relieving the difficulty of financing faced by small and medium sized enterprises, etc. Notwithstanding, the Securities Investment Fund Law does not provide any regulation on non-publicly raised funds, and due to the absence of an explicit legal basis for and effective supervision over the establishment and operation of nonpublicly raised funds, the infringement of investors interest occurs from time to time. In order to effectively regulate nonpublicly raised funds, the 2012 Securities Investment Funds Law has created a chapter discussing the non-publicly raised funds. FURTHER DETAILS ON PRIVATE FUNDS 54

55 Further Details on Private Funds Securities Investment Fund Law (4) Establish a Qualified Investors System Non-publicly raised funds shall only raise capital from qualified investors, and the number of such qualified investors shall not exceed 200 on an accumulative basis. The qualified investors shall refer to the entities and individuals that possess the required asset size or income level, have the appropriate risk identification capabilities as well as risk tolerance, and subscribe for fund units in an amount not lower than the prescribed minimum amount. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 55

56 Further Details on Private Funds Securities Investment Fund Law (4) Establish a Qualified Investors System The specific criteria of qualified investors shall be formulated by the SRA. However, for the purpose of calculating the number of investors, it remains to be clarified whether the ultimate investors of the funds of funds, collective fund trusts, and other institutions without legal person status shall be counted in the total number.. FURTHER DETAILS ON PRIVATE FUNDS 56

57 Further Details on Private Funds Securities Investment Fund Law (5) Mechanism for Fund Unit Holders that Assume Unlimited Joint & Several Liabilities A non-publicly raised fund may stipulate that part of the fund unit holders can manage the investment activities of the fund as the fund manager, and assume unlimited joint and several liabilities when the fund assets can t repay its debts in the fund contract.. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 57

58 Further Details on Private Funds Securities Investment Fund Law (5) Mechanism for Fund Unit Holders that Assume Unlimited Joint & Several Liabilities With respect to such non-publicly raised fund, the fund contract shall also specify the names and domicile of the fund unit holders that assume unlimited joint and several liability, the conditions for expulsion and procedures for the replacement of fund unit holders that assume unlimited joint and several liability, as well as the conversion procedure between fund unit holders that assume unlimited joint and several liability and other fund unit holders.. FURTHER DETAILS ON PRIVATE FUNDS 58

59 Further Details on Private Funds Securities Investment Fund Law (6) Specify the Definition of Securities Investment Made with the Assets of Non-Publicly Raised Funds Securities investments made with the assets of the nonpublicly raised funds include dealing in stocks publicly issued by companies limited by shares, bonds, fund units, or other securities and their derivatives as prescribed by the SRA. Further specifies that stocks herein only refers to stocks publicly issued by a company limited by shares, and doesn t include the equity of companies with limited liability. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 59

60 Further Details on Private Funds Securities Investment Fund Law (6) Specify the Definition of Securities Investment Made with the Assets of Non-Publicly Raised Funds Thus, private equity investment funds that invest in the equity of companies with limited liability and non-publicly issued stocks of companies limited by shares are not likely to be subject to the regulatory supervisions under the 2012 Securities Investment Funds Law. (As mentioned above) However, as the SRA is authorized to define the other securities and their derivatives according to the 2012 Securities Investment Funds Law, we can t rule out the possibility that the SRA may expand its regulatory supervision by defining the scope of other securities and their derivatives. FURTHER DETAILS ON PRIVATE FUNDS 60

61 Further Details on Private Funds Securities Investment Fund Law (7) Further Investor-Protection Measures Introduced To uphold the fundamental spirit of investor-protection, the law also tightens control over operational risks, strengthen supervision and regulation and enhance the sanction regime. For example, the following additional restrictions have been imposed on Publicly-offered Funds: Both shareholders and the actual controllers of the fund managers will be regulated. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 61

62 Further Details on Private Funds Securities Investment Fund Law (7) Further Investor-Protection Measures Introduced Fund managers and their employees are prohibited from, among other things, insider trading and interest transfer. Fund managers and fund custodians should draw risk reserve funds from the relevant remunerations which will be used in priority to pay the indemnity against fund assets or fund unitholders. Enforcement and sanction measures are further enriched. Risk resolution measures, such as receivership, custody and termination, are now made available to fund managers. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 62

63 Further Details on Private Funds Securities Investment Fund Law (7) Further Investor-Protection Measures Introduced Moreover, the law introduces a "second unit-holders meeting" mechanism which is intended to facilitate the unit-holders' meetings. If the number of attendees of a unit-holders' meeting is fewer than that representing a half of the fund units which is the statutory quorum, a second unit-holders' meeting with the same agenda can be held within six months and the quorum can be reduced to that representing only a third of the fund units. Such mechanism will make convening a unitholders' meeting much easier in practice and therefore provide more opportunities to fund unit-holders to gain an insight into the fund operations and to better supervise fund managers and fund custodians. FURTHER DETAILS ON PRIVATE FUNDS 63

64 Further Details on Private Funds Securities Investment Fund Law (8) Service Providers Gaining More Support The Funds Law Amendment contains an enhanced set of rules regulating intermediary entities providing services to securities investment funds, such as fund sales companies, fund unit depositories, law firms and accounting firms etc. The law permits fund managers to outsource non-core businesses (i.e., those irrelevant to investment decisionmaking) to such service providers in fund sales, payment, fund units registration, valuation, appraisal, IT support, legal and auditing, etc. FURTHER DETAILS ON PRIVATE FUNDS More on the next page 64

65 Further Details on Private Funds Securities Investment Fund Law (8) Service Providers Gaining More Support By virtue of the wide participation of various service providers, the legislator expects to see a more mature fund market with specialized divisions, so that fund managers may better focus on what they are good at and develop more products. Meanwhile, service providers will be able to act as "doorkeepers" through their independent roles to ensure that the funds operate in a secure, lawful and transparent manner. FURTHER DETAILS ON PRIVATE FUNDS 65

66 Further Details on Private Funds Securities Investment Fund Law (9) Pilot Program The Funds Law Amendment expressly provides that raising funds in China for investment in offshore securities and onshore securities investments by qualified foreign investors must be subject to the CSRC s approval. This requirement appears to aim at pilot programs launched or to be launched by local authorities in these areas, such as the well-reported but non-published Shanghai Qualified Domestic Limited Partners program permitting the establishment of Shanghai registered hedge funds that will make investments in offshore secondary markets. FURTHER DETAILS ON PRIVATE FUNDS 66

67 Reference Charles Qin, Leo Wang and Ketsu Wei, An Approach to the Amended Measures on the Asset Management Business of Securities Companies, Links Asset Management Bulletin, July 2013 Xiaowei Ye, Jin Wang, Rob Bond and Anne-Marie Godfrey, Chinese Asset Management Industry Waits for the Amended Securities Investment Fund Law and Supporting Regulations to Come into Effect, Bingham Legal Alerts, April

68 Disclaimer The information in this presentation is CONFIDENTIAL. It is intended solely for use by the person to whom it is given and may not be reproduced or redistributed. This presentation is not for distribution to the general public but for intended recipients only and may not be published, circulated, reproduced or distributed in whole or part to any other person without the written consent of Limited. In addition, this presentation is for informational and illustrative purposes only and should not be construed as legal, tax, investment or other advice. This presentation does not constitute an offer to provide legal and accounting services and opinion by Limited. All Copyrights reserved. 68

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