Recent instructions for registration of private fund managers

In 7 December 2018, the Asset Management Association of China (AMAC) updated the Instructions for the Registration of Private Fund Managers, making the regulatory requirements in respect of reviews by the AMAC for the registration of managers more stringent from several perspectives, to avoid their having non-compliance issues at the time of registration.

In addition to beefing up existing provisions, the instructions also set out new provisions. These changes reflect the tightening of reviews by the AMAC for the registration of private fund managers, moving from simple basic criteria for applying entities to a more stringent detailed level.

Requirements on the shareholders and equity structure of applying companies. The instructions set out the requirements on the shareholders’ capital contribution capacity and capital contribution methods, and require applying companies to maintain “simple and clear” equity structures, that is to say that issues such as an excess of layers, circular capital contributions, cross shareholdings, etc., are not acceptable.

For the first time, the instructions expressly prohibit nominee equity holder arrangements and require shareholders to provide documents evidencing their true identities, making the past practice of shareholders faking their identities impossible.

The instructions require that investors in an applying company make their capital contributions in cash, warrant that the source of their funds is genuine, lawful and not subject to the control of any third party, and provide supporting documents evidencing that they have a capital contribution capacity consistent with the capital amount subscribed for by them. In terms of actual controllers, the instructions require that where an applying company does not have an actual controller, its largest shareholder is to bear the responsibilities of an actual controller. Furthermore, the instructions prohibit an asset management product from serving as an investor in, or the actual controller of, an applying company.

It should be noted that the new instructions set out requirements for the stability of the equity of an applying company, more specifically, where a change in equity occurred during the year prior to the application for registration, the applying company is required to give a detailed explanation of the reason for the change, and the AMAC will prudently check to see whether a special equity design has been carried out to circumvent the provisions on investors.

Requirements in respect of affiliates of an applying entity. The AMAC clarifies the definition of affiliate of an applying company in the new instructions, namely a financial institution, private fund manager, investment enterprise, enterprise with conflicting business, investment consulting enterprise, financial service enterprise, etc., under the common control of the same controlling shareholder/actual controller. The investment and financial service categories are included in the definition for the first time.

In respect of competition with affiliates and avoiding their homogenization, the AMAC sets out new provisions:

First, competition in the same industry with affiliates is prohibited. If an affiliate of an applying firm is a private fund manager, the applying company is required to wait until the affiliate has completed recordal of its first private fund before it can submit a manager registration application. Second, if an affiliate of an applying company is an investment company that has yet to register as a private fund manager, it is required to carry out manager registration for the affiliate first.

Third, the AMAC strictly prohibits circumventing affiliation through a special equity design. Finally, to avoid a situation where competition arises among multiple private fund managers controlled by the same actual controller, the actual controller and the affiliated private fund managers controlled by it are required to bear joint and several liability for violations of laws or regulations by the applying company. If, subsequently, another company under the same actual controller applies for registration, the largest shareholder and actual controller of that company are required to undertake to continue holding equity of the company/actually controlling the company for not less than three years.

Suspension of procedure. The instructions set out 11 circumstances under which the procedure is to be suspended, including the specific criteria for such particulars as the applying company’s name, place of business, conduct of business, financial position, investors and actual controller, equity structure and affiliates, and personnel. If any two or more of the matters characterizes an applying company, the AMAC will suspend the handling of that company’s application for registration of a private fund manager for six months. This is an indicator of the further improvement of the AMAC’s regulatory technology. The addition by the new instructions of the 11 circumstances under which the procedures are suspended is in reality the creation of a reasonable buffer zone between registration and denial of registration, where the handling of certain applications that present not too serious issues is suspended to spur the applying company to self-examine and optimize until it ultimately completes recordal.

Changes in material particulars. The instructions mainly provide for changes in the material particulars of private fund managers that have already been registered in the following ways: (1) expressly set out the time limit for changes in material particulars and the upper limit on the number of rectifications; (2) require the submission of a complete written opinion when a substantive change occurs; and (3) require a private fund manager to engage a replacement within three months after a senior officer leaves office.

It should be noted that the instructions require that if a substantive change in a manager occurs within one year, it will be treated as a new applying company during the check and should submit a legal opinion on the registration of a manager (previously, the instructions only mentioned that the AMAC, with respect to a change in a material particular, would conduct a comprehensive check according to the requirements for a new applying company, without requiring the submission of a legal opinion on the registration of a manager).

The objective of this is to crack down on the buying and selling of shells. Furthermore, the AMAC’s provision on the timely filling of a vacancy after a senior officer leaves office also reflects its upgraded requirements in respect of the “continuing compliance” of private fund managers.

The new instructions for the registration of private fund managers strengthen the compliance requirements for private fund managers and have strong malleability. Private fund managers and relevant intermediary service companies will have to do better preparation.

Wu Jiayin is a partner and He Tangqin is a legal assistant at Boss & Young

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