Tighter filing for private funds: three key changes

A change of related parties must be filed as a major change

In the association's AMBERS system, the "related party update" that used to sit under the heading "manager information update" has been moved into the module for "major changes for managers". That amounts to the association telling every private fund manager, through the operating system itself, that from now on a change in a manager's related parties counts as a major change

requiring manual review by the association before it can pass.

According to the association's guidance, related parties are financial enterprises, asset management institutions, institutions carrying on conflicting business (including private lending, private financing, margin financing, small-scale wealth management, small loans, P2P/P2B, crowdfunding, factoring, guarantees, real estate development and trading platforms) and related service institutions that are controlled by the same controlling shareholder or actual controller.

In practice some private fund institutions have a great many related parties, and a change will undoubtedly cost them more effort. For investors, however, the change in filing requirements should be good news, since it can at least effectively prevent conflicts of business, related-party transactions

or transfers of benefit arising between private fund managers, or between a manager and its affiliates, once the related parties have changed, especially where a related party carries on private lending, P2P, margin financing or other business that may conflict with the nature of a private fund; it therefore helps protect the interests of private fund investors.

An unfinished major change holds up new filings

In May this year the association published a "solemn statement" through its official WeChat account, making clear that applications by a private fund manager to change its legal representative, actual controller or controlling shareholder would be handled by reference to the registration requirements and procedure for new applicants, and that the compliance and information disclosure of existing products would be checked accordingly.

Recently the association has imposed a new requirement for major changes, advising institutions to submit a change involving a legal opinion prudently: where a submission has not been processed within six months of first filing, or has been returned for correction more than five times, the institution will be unable to file new products.

That means that from now on the number of times a major change, including the legal opinion, may be returned is measured against the feedback allowed on manager registration: more than five returns, and new products cannot be filed.

A reader may ask: if a major change is half done, or has been returned several times, can it be cancelled in the meantime?

Yes. The association's system provides a "cancel change" button. Institutions should note, however, that where a private fund manager has completed the industrial and commercial change registration and then cancels the change with the association, it must restore the registered information to its previous state, since otherwise, on inspection by the regulator, it may be penalised for failing

to update its registration and filing information in good time.

On-site interviews with private fund managers become routine

Recently several private fund managers served by this firm received emails summoning them to an on-site interview at the association. In the past such interviews generally followed a problem in an institution's operations, or intended operations, that had drawn the association's attention, but recently managers operating entirely normally have also frequently received such

notices.

The emails show that the association asks the manager to provide written material for the interview, covering its operations and the particular products it has issued, in detail, for example:

1. Verification of basic information, including shareholder and industrial background, related parties, the business actually carried on, whether it has related private fund managers or quasi-financial institutions, and whether its registered information is complete and accurate and has been changed in good time.

2. Compliance in the filing, issuance and operation of products, for example:

where investors, the manager and its related parties account for a large share at the time of filing, whether the fundraising was completed;

an account of the specific investment arrangements and investment logic, the reasonableness of the valuations and the adoption and implementation of risk control measures;

verification of product updates and information disclosure;

the progress of industrial and commercial confirmation of title in invested projects and the arrangements for exit;

verification and detailed explanation of whether what was filed matches the business actually carried on;

… …

3. The identity and position of those attending the interview.

Compared with the earlier selective interviews at the time of registration and filing, or for particular purposes during operations, the routine and general use of interviews is an upgrade in the supervision of the subsequent operation of private fund enterprises, attending to their continued lawful and compliant operation and to the management ability of their senior officers.

That is all Minton has to share this time. Whatever the policy changes, the intention, it is believed, is the healthy and long-term development of the private fund industry. Supervision is tightening, with ever stronger requirements of regularity and professionalism from registration and filing through to actual operation, screening the industry round after round and leaving behind the sound and substantial institutions. That helps control risk at its source, and so helps control investor risk effectively, and all of it will in the end

safeguard the development of the private fund industry.