China’s private fund industry includes foreign and domestic mutual fund asset management firms, hedge funds, private equity and venture capital firms.
Only qualified investors, such as institutional and high net worth investors, are allowed to participate in the private fund industry.
The provisional rules (link in Chinese) proposed by Chinese authorities, which were released yesterday and are open for consultation for a month, cover various areas that both foreign and domestic private fund managers should comply with. They include rules for fundraising, the mechanisms required in an investment operation and the duties and responsibilities of fund managers and sales staff.
For example, private fund managers may be punished if they raise funds from retail investors and not from qualified investors. In addition, the number of investors in a single private fund should not exceed the number of persons required by law.
On the investment operations front, managers should establish mechanisms to prevent conflict of interest. For example, a management system that requires employees to disclose their investments should be in place.
Firms should also fully reveal the investment risks of their products to their clients, as well as sell products in accordance to the risk appetite of investors.
Fund malpractices
The new regulations come during increased regulatory scrutiny of the industry. Last year, up to 10,000 private funds had their licenses revoked as malpractices were revealed throughout the industry, according to a Knect365 report.
Funds were found to have substandard operational processes, engagement in criminal activities and illegal fundraising, according to the report.
The fund closures were initially prompted by the actions of the Asset Management Association of China (AMAC), which demanded firms disclose information on their products and audit reports.
Last year, the AMAC also introduced a qualification exam for these firms to filter out unqualified fund managers from joining the industry.
China’s fund industry is huge, with around 20,000 registered private fund managers who collectively manage RMB 9.95trn in assets, according to data from AMAC.
“For global managers racing to build and operate a private fund business in China, there is an ever present need for greater regulatory clarity,” Shanghai-based Z-Ben Advisors said on a LinkedIn post in reaction to the new regulations.
“An initial taste of what it is to come was just made public, with more to follow in the not-too-distant future,” the firm added.
Foreign asset managers seeking entry into China’s private fund industry must first obtain an investment management type of Wholly Foreign Owned Enterprise (IM WFOE) and register as a private fund firm with the AMAC. So far, only Fidelity and UBS are the foreign players with private fund licences, with Fidelity being the first to launch a product in the market.
