Introduction:

This article examines the regulatory framework outlined in the “Regulations on the Supervision and Administration of Privately-Offered Investment Funds” in China. It provides an overview of the new regulations and their implications for privately-offered fund managers, custodians, and service agencies. Understanding and complying with these regulations is essential for stakeholders in the Chinese investment fund industry.

The Regulation on Supervision and Administration of Privately-offered Investment Funds recently promulgated by the State Council, marks a significant milestone in the development of the privately-offered fund industry in China. The regulation, effective from September 1, 2023, aims to regulate the business activities of privately-offered investment funds, safeguard the rights and interests of investors, and promote a standardized and healthy industry landscape. This article provides an overview of the key provisions outlined in the regulation and their implications.

Enhancing Investor Protection and Promoting Industry Standards

The regulation places a strong emphasis on protecting the legitimate rights and interests of investors and maintaining market integrity. Privately-offered fund managers, custodians, service agencies and employees are required to adhere to the principles of voluntariness, fairness, and integrity. Compliance with laws, administrative regulations, and national policies is mandatory, while acting against public order, good morals, or damaging state interests and public interests is strictly prohibited. This implicates that privately-offered fund managers need to ensure compliance with investment level regulations to maintain regulatory compliance.

Independent Fund Property and Risk Distribution

To ensure the separation of privately-offered fund property from the assets of fund manager and custodians, the regulation establishes the principle of independence for fund property. Except as otherwise stipulated by law, the debts of privately-offered fund property are to be borne solely by the fund property itself. This provision protects investors by ensuring that their investments are not jeopardized by the financial situations of fund managers of custodians.

Differentiated Supervision and Administration:

Recognizing the diverse nature of privately-offered funds, the regulation introduces differentiated supervision and administration. The securities regulatory authority of the State Council will implement this approach based on factors such as the type of business, scale of assets under management, compliance record, risk control capabilities, and investor service capacity of fund managers. This tailored approach allows for more effective oversight while accommodating the specific needs and characteristics of different types of privately-offered funds, including venture capital, equity investment, and securities investment.

Additionally, fund managers must establish an affiliated transaction management system to prevent improper transactions. Which means that the disclosure of relevant information and adherence to decision-making procedures are required. Ultimately, the goal is to ensure transparency in affiliated transactions and comply with disclosure requirements.

Requirements for Fund Managers and Custodians

The regulation sets forth stringent requirements for privately-offered fund managers and custodians. Privately-offered fund managers must be legally established corporations or partnerships, and the registration and record-filing agency will ensure compliance with these criteria. Furthermore, individuals or entities seeking to become shareholders, actual controllers, or general partners of fund managers must meet certain qualifications, including sound financial status and adherence to prescribed requirements by the securities regulatory authority.

Furthermore, fund managers must hire senior executives with relevant experience to handle investment management, risk control, compliance, etc. The goal is for fund managers to prioritize investor interests and establish robust governance.

Fundraising and Investor Protection

The regulation establishes guidelines for fundraising and investment operations. Privately-offered fund managers are prohibited from entrusting others to raise funds, ensuring that they assume full responsibility for the fundraising process. Funds can only be raised from qualified investors who meet prescribed asset size or income level requirements. In addition, the regulation emphasizes the importance of risk disclosure and matching investment products to the risk identification ability and tolerance of investors, promoting transparency and informed decision-making.

Monitoring and Enforcement

To maintain market stability and protect investors’ interests, the regulation institutes a comprehensive monitoring mechanism for privately-offered funds. This mechanism facilitates centralized monitoring of fund activities and investor holdings. The securities regulatory authority of the State Council will oversee this monitoring system and take appropriate actions to enforce compliance with the regulation’s provisions.

The fund managers are to engage an accounting firm to audit fund property and provide audit results to investors. Further, information on investment operations must be submitted to the registration and record-filing agency. The implications of these policies are to ensure that fund managers fulfill audit and reporting obligations to ensure transparency and accountability.

Various violations, such as improper use of fund property, disclosure of non-public information, and non-compliance with regulations may lead to fines, warnings, or suspension of business activities.

Conclusion

The Regulation on Supervision and Administration of Privately-offered Investment Funds represents a significant step towards creating a transparent and healthy environment for the privately-offered fund industry in China. By safeguarding investor rights, promoting industry standards, and implementing differentiated supervision, the regulation aims to enhance market integrity and foster the long-term development of the industry. With its emphasis on compliance, risk control, and investor protection, this regulation establishes a solid foundation for the growth and stability of privately-offered investment funds in China.

Erica Li is an intern in the firm’s Shanghai office and contributed to the article.