Private fund managers and the requirement of specialised management

The Interim Measures for the Supervision and Administration of Private Investment Funds, the Measures for the Registration of Private Investment Fund Managers and the Filing of Private Funds (Trial) and the Asset Management Association of China's Questions and Answers on the Registration and Filing of Private Funds all emphasise, again and again, that private fund institutions should put specialised management in place and guard against the transfer of benefits and conflicts of interest. Minton's lawyers analyse below, point by point, how a private fund manager is to achieve specialised management, in two broad respects.

I. Specialisation of the private fund manager's business

1. Standardising the name and the business scope

The name and business scope of a private fund manager should contain words such as "fund management", "investment management", "asset management", "equity investment" or "venture capital investment"; where they do not, the Asset Management Association of China will not file the manager.

A private fund manager is prohibited from carrying on, in addition, private lending, private financing, margin financing, small-sum wealth management, small-sum lending, P2P/P2B, crowdfunding, factoring, guarantees, real estate development, trading platforms and similar businesses. Those businesses conflict with the nature of a private fund and readily mislead investors. The Association will accordingly refuse to file any private fund manager that carries them on as well.

2. Standardising the business

(1) Registering a single institution type and a single business type

On applying for registration, a private fund manager shall select, from among the institution types — "private securities investment fund manager", "private equity and venture capital investment fund manager" and others — and the business types corresponding to those institution types, one institution type and one business type only, and register on that basis;

(2) A filed private fund shall correspond to the business type already registered by the institution

A private fund manager may file only private funds that correspond to the business type it has registered, and may not manage private funds that do not correspond to that business type;

(3) One private fund manager may not carry on several types of private fund management business at the same time.

3. How is a private fund manager to rectify its business so as to comply with specialised operation?

(1) Establish several private fund managers separately and register a different business type with each, so as to carry on different types of business.

(2) Change the business type

A private fund manager already registered for several types of business may answer a "single-choice question" and reconfirm its own institution type by choosing one from among several, that is, select one business type and one only from among the several it has registered, as the scope within which it will operate. In practice the institution may submit an application to change its institution type and business type through the Comprehensive Asset Management Business Platform; until the rectification is complete, no application to file a new fund may be made.

(3) Where a private fund already filed and in operation is of a fund type that does not correspond to the business type the manager has selected on the Comprehensive Asset Management Business Platform, it may continue to invest and operate until the fund contract, the articles of association or the partnership agreement (together, the fund contract) expires, but may not open for further subscriptions or increase the amount raised before that date; on expiry the fund shall be wound up or liquidated and may not be extended; the Association will in addition give a special note of the position in the public information it publishes on the fund.

At a stage when risks in private funds are frequent, the regulators' emphasis on specialised operation by private fund managers, and on building effective mechanisms to prevent the transfer of benefits and conflicts of interest that may arise, helps to raise the standard of internal control across the industry and to reduce the risks in the operation and management of private funds.

II. Specialisation of the private fund manager's senior management

1. Regulating concurrent posts held by senior management

The regulators have stressed repeatedly that the senior management of a private fund manager (the "senior management") should act diligently and discharge its duties faithfully. In view of the number of private fund managers whose senior management hold posts elsewhere, the answers on registration and filing of private investment funds lay down rules on such concurrent posts:

(1) Senior management may not hold a concurrent post at an unaffiliated private fund institution.

(2) Where senior management hold a concurrent post at an affiliated private fund institution, they shall explain why the concurrent post is reasonable, that they are competent for it, and how they will treat the clients they serve fairly.

(3) Where senior management change employer frequently — that is, where they change the institution they serve more than twice within one year — the Association will look closely at the reasons for the change and at their record of integrity.

2. Prohibition of "affiliation"

"Affiliation" of senior management to a private fund institution — lending one's name and qualifications to an institution where one does not in fact work — is absolutely prohibited by the Asset Management Association of China. First, the senior management of a private fund institution should actually perform duties there, be responsible for the relevant business and operations and bear a measure of legal risk. Second, affiliation carries a latent risk of transferring benefits and a moral hazard that is hard to detect and control, and may infringe the lawful rights and interests of investors and disturb the stability of the private fund market. In essence, affiliation supplies false materials and information to the Association and is a serious breach of the self-regulatory code.

Against senior management who lend their names, the private fund institutions that accept them and the intermediaries involved, the Asset Management Association of China has announced a series of penalties, including:

(1) The person lending his name is recorded in his personal integrity file and, depending on the seriousness of the case, subjected to disciplinary measures such as censure within the industry, inclusion on a blacklist or cancellation of his fund practitioner qualification.

(2) The manager that accepts the affiliation will be publicly censured by the Association, and the false particulars it filed will be made public; in serious cases the Association will suspend acceptance of its fund filings and revoke the registration of the manager.

(3) Intermediary service providers supplying legal, accounting, outsourcing and other services will be publicly censured by the Association and, in serious cases, have acceptance of the relevant business suspended and be placed on a blacklist.

At present the private fund market is growing steadily larger, and both private fund managers and investors in that market are increasing in number. In response to the risks that have emerged, the regulators' review and penalties are becoming stricter. A private fund institution should therefore rectify its position promptly in accordance with the relevant rules and standards, so as to avoid being penalised by the regulators.