Avoiding inconsistencies with affiliation in insurance fund investment

By Qi Zhanyong & Chen Jie, DOCVIT Law Firm
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China’s laws and regulations covering investment in insurance asset management products fail to provide a clear consensus on the definition and application scope of affiliation. So, what guidance can be drawn from the array of disparate rules?

Article 10 of the Interim Measures for Real Estate Investment with Insurance Funds issued by the China Banking and Insurance Regulatory Commission (CBIRC) (Circular No. 80) clearly provides that “a professional institution that provides relevant services for real estate investment with insurance funds shall meet the following conditions: … (4) It shall not be affiliated with any interested party involved in real estate investment with insurance funds”.

Article 11 of the Interim Measures for Equity Investment with Insurance Funds (Circular No. 79) states that “a professional institution that provides relevant services for equity investment with insurance funds shall meet the following conditions: … (4) It shall not be affiliated with any interested party involved in the equity investment with insurance funds”.

The most widely applicable definition of affiliation can be found under the Administrative Measures for Indirect Investment of Insurance Funds in Infrastructure Projects (Order No. 2), stating that “the trustee shall not be affiliated with the independent supervisor or the financing party”; “the custodian shall not be the same person as the trustee or the financing party, and shall not be affiliated with the financing party”; and “the independent supervisor shall not be the same person as the trustee or the financing party, and there shall be no affiliation”.

Qi Zhanyong
Partner
DOCVIT Law Firm

It can be seen that regulators generally prohibit any affiliation between managers and professional institutions that provide product-related services, as well as the subjects or underlying assets in which products are invested.

However, these requirements are not absolute. Article 43 of the Interim Measures for Business Management of Asset Support Plans (Circular No. 85) provides that “if the trustee is affiliated with the original stakeholder, or if the trustee subscribes for beneficiary certificates with its own funds and assets of its other clients, effective measures shall be taken to prevent possible conflicts of interest”, which does not absolutely prohibit affiliation between the trustee and the original stakeholder.

The Notice on Relevant Matters Concerning Investment of Insurance Funds in Collective Funds Trusts (the Trust Plan Notice) stipulates that, “if an insurance institution invests in a collective funds trust, it shall report to the CBIRC within 15 working days following the investment if: … (4) there is an affiliation between the trust company or the financing party to which the underlying assets belong and the insurance institution”. Similar situations are not wholly prohibited when it comes to asset support plans and trust plan products.

Order No. 2

Regarding insurance asset management products, only Order No. 2 relates to the specific definition of affiliation. Article 82 of Order No. 2 specifies that: “The affiliation herein shall refer to parties having a controlling relationship or under common control by a third party in terms of shares and capital contribution.” Article 85 further clarifies that: “Indirect investment of insurance funds in non-infrastructure real estate and other projects in the form of investment plans shall be implemented with reference to these measures.”

According to the definition in Order No. 2, affiliation emphasises the controlling relationship between two parties or the common control under other third parties. This clarification serves as a legal and regulatory bottom line for insurance fund investment in infrastructure and real estate projects by means of equity, creditor’s rights and property rights, while also leaving room for different investment subjects and targets.

Circular No. 79 mainly regulates insurance fund investment through equity. Since Circular No. 79 did not explicitly define affiliation, considering that the forms of investment plans under Order No. 2 also include equity, as well as the gradual unification of insurance asset management products under the Measures for Product Management, instead of trying to stretch the definition under Circular No. 79, applying the definition provided under Order No. 2 seems a much safer and more rational bet.

Apply with caution

Article 20 of the Company Law provides that: “Controlling shareholders, actual controllers, directors, supervisors and officers of a company shall not use their affiliations to harm the interests of the company.” Article 216 states that: “Affiliation refers to the relationship between the controlling shareholders, actual controllers, directors, supervisors and officers of the company and the enterprises directly or indirectly controlled by them, as well as other relationships that may lead to any transfer of the company’s interests.”

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Chen Jie
Senior Partner
DOCVIT Law Firm

It can be inferred that the purpose of the provision is to prevent the affiliation from causing any harm to company interests, while the affiliation itself, being a matter of fact, is neither inherently good nor bad.

Article 5 of the Administrative Measures for Connected Transactions of Insurance Companies (Circular No. 35) sheds light on the affiliated legal persons of insurance companies. While not prohibiting connected transactions, Circular No. 35 imposes different internal approvals or reporting procedures, depending on whether the connected transaction is deemed material.

The laws and regulations are intended to prevent inappropriate connected transactions caused by affiliations. Even if the insurance asset management institution, acting as the manager, is affiliated with the underlying assets or subjects, the affiliation between the trustee and the original stakeholder, as well as between the trust company or the financing party to which the underlying assets belong and the insurance institution, is not explicitly prohibited by Circular No. 85 or the Trust Plan Notice.

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For affiliation between investors and prospective targets in equity investment, the advice is to carefully gauge the nature of risks involved, and neither over-constrain nor deliberately relax the prevention and control measures against illegitimate interests. It is recommended to combine the affiliation of equity investment with that under Order No. 2 and limit it to “direct affiliation” with controlling or significant influences, or adopt practices in reporting and information disclosure to prevent interest transfer and other risks.

Qi Zhanyong is a partner and Chen Jie is a senior partner at DOCVIT Law Firm

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