Member Article

On 1 October 2004, two new sets of regulations became effective under PRC Law: • Regulations on Securities Investment Fund Management Companies (FMC Regulations); and • Regulations on Senior Management Personnel of Securities Investment Fund Management Companies (Senior Management Regulations). The China Securities Regulatory Commission (CSRC) also issued two related notices, one in respect of the application of each of the Regulations. The requirements relating to the establishment of fund management companies, the process and documentary requirements on making applications to the CSRC and ongoing requirements for fund management companies are set out in the FMC Regulations. These FMC Regulations also cover applications to CSRC for approval of foreign shareholders acquiring stakes in existing fund management companies. The Senior Management Regulations set out detailed requirements relating to the qualifications, application to CSRC for approval and ongoing supervision by CSRC, and duties and responsibilities of senior management personnel of fund management companies and certain senior officers of fund custodians, fund managers and the directors (including independent directors) of fund management companies. The Regulations supersede the Rules for the “Establishment of Fund Management Companies with Foreign Participation” issued in July 2002 and the “Provisional Measures on Qualification of Funds Personnel” (CSRC No. 53 of 1999) (together, the Old Rules), and enshrine a number of previously “unwritten” policies of the CSRC in its application of the Old Rules. The FMC Regulations formalise the one-stage application process for the establishment of fund management companies, and stipulate that a shareholder may not have an interest in more than two fund management companies of which it may hold controlling stake in only one. The Regulations make no distinction between wholly local owned fund management companies and fund management companies with foreign participation, or between local and foreign personnel, other than the requirements for foreign shareholders in a fund management company and the recognition of the overseas experience and credentials of foreign personnel. Notable changes made by the Regulations include: 1. the shareholding structure of a fund management company must comply with CSRC prescribed requirements. Significantly, the CSRC notice relating to the FMC Regulations stipulates that this means “no shareholder shall hold more than 49%, Chinese shareholders not being subject to this restriction”. Therefore, foreign investors may now apply to the CSRC to hold a stake of up to 49% of a fund management company, which is in line with the anticipated higher limit becoming applicable under China’s commitment to WTO. Previously, foreign investors were limited to holding up to 33%. 2. the provision that a foreign investor in a fund management company must be a financial institution with experience in asset management. The related notice issued by the CSRC provides that “experience in asset management” means actual experience in the management of retail public funds, and the size, type and performance of the public funds managed are relevant factors. In the Old Rules, a foreign investor was only required to be a financial institution in terms of industry background. 3. extensive requirements relating to the local Chinese shareholders of fund management companies. Previously these requirements had to be gathered from different sets of rules or notices or were set as a matter of CSRC policy. The requirements are: a. the key Chinese shareholder with at least a 25% stake in the fund management company and having the highest stake or, in the case of a fund management company with foreign investor, the one having the highest stake among the Chinese shareholders: i. must have at least RMB 300 million registered capital; ii. may be securities companies, securities investment consultants, trust management companies or other “financial asset management enterprises” approved by CSRC; iii. must have “good operating results” and “good quality of assets”; iv. must have operated for at least three consecutive full financial years, with comprehensive systems of corporate governance and internal compliance and control; v. must not have been subject to administrative or criminal penalty for any conduct in breach of law for the past three years; vi. must have no incidence over the past one year of misappropriating client assets or of prejudice to client’s interest (excluding any earlier incidence which has been corrected); vii. must not be under investigation or reformation by reason of any conduct in breach of law; and viii.must possess a good social reputation and not have a bad record at any tax, trade or commercial administrative body, bank, financial or industry self-regulation supervisory body over the past three years. “Good operating results”, means a net profit over the most recent three financial years. Previously, CSRC imposed a more stringent requirement of net profit in each of the consecutive past three financial years. “Good quality of assets”, for shareholders that are securities companies means a net capital of not less than 70% of the net assets, having a value of at least RMB 300 million, while trust investment companies must have a capital adequacy ratio of not less than 30% and net current assets of not less than RMB 300 million. Securities investment consultants and other “financial asset management enterprises” will be subject to requirements to be separately issued. b. other Chinese partners may be from any industry, and must comply with requirements (iv) to (viii) in paragraph (a) above and have at least RMB100 million in registered capital and net assets. 4. The Senior Management Regulations set out the requirements that senior management personnel of securities investment funds (Senior Management Personnel) must fulfil. The term “Senior Management Personnel” includes the chairman, general manager, deputy general manager, head of compliance, and also persons actually in charge of sales or marketing, operations or investments, as well as the general manager and deputy general manager of a fund custodian. Senior Management Personnel are required to have obtained the “qualification to engage in funds business”, have at least three years relevant experience and passed an exam on securities investment law administered by CSRC or its appointed agency. The CSRC notices relating to the Senior Management Regulations set out a number of criteria the satisfaction of any one of which would be regarded as having obtained the “qualification to engage in funds business”. One of the criteria for qualifying is if a person: i. has the relevant overseas licence or otherwise being exempted from licence in the relevant overseas jurisdiction where he or she operates; ii. has been engaged in the relevant asset management, securities investment analysis or fund sales or marketing business over the past five years; and iii. passed relevant examination or assessment administered by the CSRC. This will also apply to foreign personnel that a foreign investor may wish to appoint to the management of a fund management company in which it invests.

 

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