On November and December 2015, the Ministry of Finance issued the Interim Administrative Measures for Government Investment Funds and the Guiding Opinions on the Funding of Government Investment Funds with Fiscal Funds to Support Industrial Development. Due to the special fiscal and leverage attributes of government guidance funds, this article will only address a legislative flaw, multiple applicable regulation and compliance risks, which such funds face in practical operation.
Legislative flaw risk. Government guidance funds have both a policy nature and a capital profit-seeking nature, and both the above-mentioned measures and the opinions place limits at the operating stage of government guidance funds, from different levels and different perspectives. Compared to those on government industry investment funds, the restrictions on government guidance funds are much more stringent.
Additionally, the opinions emphasize “strengthening top-level design” multiple times, that is to say, provincial-level governments may, depending on their own circumstances, issue and revise the measures for the administration of government investments at their level. On this basis, provincial-level governments and the finance authorities of municipalities with independent development plans may formulate implementing regulations for their region in light of the measures for the administration of government investment funds and the practical situation in their region.
Taking the manager as an example, neither the measures nor the opinions addresses the investment entity conditions that the government as funder is required to satisfy, nor do either specify the qualifications or access conditions of custodians. Instead, they authorize each region to set different access thresholds in light of their own realities.
Multiple applicable regulation risk. Several authorities have issued several sets of regulations on government investment funds at different times. With these, the regulations on industry investment funds and government guidance funds contain numerous points of overlap in terms of establishment conditions, operation and management, asset custody, etc., but also differing markedly in terms of fund provenance, investment methods, sectors invested in, evaluation, prohibited matters and divestment arrangements.
Item (2) of article 2 of the opinions specifies: “For key industrial fields and weak links, support may be given in the form of venture capital guiding funds, industrial investment funds, or otherwise as the case may be.” In practice, the overlap of government guidance funds, industry investment funds and other government funded funds also causes overlap in the application of the various regulations. The complexity of the application of multiple regulations undoubtedly increases the compliance risks that participants in government guidance funds face.
Due to the immense gaps with operating rules in the measures and opinions, government guidance funds lack practical compliance guidelines for target selection, determination of investment plans, formulation of investment strategies, compliance with investment standards, investment procedures, subsequent management, profit distribution and fund liquidation arrangements, and, in the course of post-investment management, information disclosure, divestment and contingency response. All of these make it easy to fall into the maelstrom of risks that referring to regulations for other government funds, or simply fumbling around, throw up.
Prudential compliance risk. Equity investment is the principal mode of investment by government guidance funds, and each of “fundraising, investment, management and divestment” heavily involves compliance such as: An investment plan, investment structure and investment scheme compliance; custodian, fund and target company qualification compliance; registration, filing and review compliance; equity transfer, asset sale, security mortgage, financing and divestment compliance; information disclosure and announcement compliance; and investment project-related conflict of interest, investment restriction exemption, key personnel change and key personnel replacement compliance.
Given the special nature of, and restrictions on, government guided funds, and the nature of the measures and opinions as general statements of principle, in the above-mentioned compliance matters reside the risks associated with compliance clause ambiguity.
Risk constraint recommendations. That the legislation level emphasizes restriction and downplays regulation signifies that current rules for government guidance funds focus on regulation of the entity that is the government, while ignoring regulation of the overall operations of government guidance funds. Against a backdrop of vague regulations and policies, lawyers should recommend – on the basis of a thorough analysis of the legislative trends in, and regulatory stance toward, government guidance funds and existing cases – that participants in government guidance funds familiarize themselves with industry trends and select more stringent risk control standards.
In the face of multiple applicable regulation risks, and in a situation where the background of regulations and policies is unclear, lawyers should assist the various entities involved in government guidance funds in prudently identifying the applicable regulations in light of their own circumstances, actively analyzing and studying relevant fund operation and management cases, and familiarizing themselves with the regulatory approach of the legislators and regulators in the region.
With respect to the risk presented by unclear compliance, reference may be made to relevant government-funded fund regulations for general compliance matters not expressly addressed by the measures, e.g., for credit information disclosure, reference may be made to the Guidelines for the Registration of Credit Information on Government Funded Industry Investment Funds (for Trial Implementation).
For special compliance matters not expressly addressed by the measures, such as the qualifications of participants and early divestment, lawyers should assist participants in government guidance funds in seeking and summarizing relevant government guidance fund cases in the region and sector in question, as well as timely communication with and confirmation from the regulator in the region, and prudently selecting the compliance basis in light of their own realities and development plans, so as to avoid compliance risks.
Qiao Zhaoshu is a senior partner at DOCVIT Law Firm
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