The new private fund rules take effect this month: compliance management keeps rising

Two new policies issued on compliance management in securities investment bring private asset management institutions within their scope as well, to apply the two sets of rules by reference, and make clear that "compliance staff in the compliance department do not include persons in posts such as risk management". The words compliance management, compliance department, compliance officer and compliance staff have once again set the industry talking, after the earlier topic of the requirements for regularising and professionalising private funds. Minton's lawyers will in this article give a brief summary and analysis chiefly of compliance staff and compliance management.

[Compliance staff]

Setting up the department

A compliance department shall be set up. It is responsible to the compliance officer, and performs compliance management duties in accordance with the company's rules and as arranged by the compliance officer. The compliance department may not undertake other duties that conflict with compliance management.

Staffing

- Proportion and number: the compliance department must have at least two compliance officers with more than three years' working experience in securities, finance, law, accounting, information technology or a related field, and the compliance staff of the department do not include persons in posts such as risk management.

- Full-time officers: departments of a fund management company where compliance risk is harder to control, such as the investment management department, and its branches, shall be staffed with full-time compliance officers.

The compliance officer

- The nature of the post: the compliance officer is a senior manager, responsible directly to the board of directors, and reviews, supervises and inspects the compliance of the company's business management and of the practice of it and its staff.

- Conditions for holding the post:

1. more than ten years in securities or fund work, and having passed the competence examination for compliance officers organised by the Securities Association of China or the Asset Management Association of China; or more than five years in securities or fund work, and having passed the legal professional qualification examination; or more than five years in the securities regulatory body or a self-regulatory organisation of the securities and fund industry;

2. not having been subjected to an administrative penalty or a major administrative regulatory measure by a financial regulator in the last three years;

3. other conditions provided by the CSRC.

Remuneration

- Definition: total annual remuneration includes basic salary, performance salary, bonuses and all other income, on a full-scope basis.

- Level of income: where the chief supervisor has been appraised as competent, the ranking of his total annual remuneration among the total annual remuneration of the company's senior managers shall not be lower than the median; where a compliance officer has been appraised as competent, his total annual remuneration shall not be lower than the average of persons at the same level in the company.

[Compliance management]

Assessment of the effectiveness of compliance

- Who assesses: a body or department within the company, or an external professional institution with the relevant qualifications.

- How often: a comprehensive assessment of the effectiveness of the company's compliance management shall be made not less than once a year. A comprehensive assessment entrusted to an external professional institution with the relevant qualifications shall be made not less than once every three years.

The annual compliance report

An annual compliance report shall be submitted together with the annual report. It includes the following:

1. the basic position of compliance management in the securities fund operator and its subsidiaries at every level;

2. how the compliance officer has performed his duties;

3. breaches of law and regulation and latent compliance risks, and how they were discovered and rectified;

4. the assessment of the effectiveness of compliance management, and rectification;

5. the staffing of compliance officers, the special assessment of compliance, and how the remuneration of the compliance officer and compliance staff has been secured;

6. other content that the CSRC or its local offices require to be reported, or that the securities fund operator considers should be reported.

7. other content that the CSRC, the association or the fund management company considers necessary.

Compliance management of subsidiaries

- A unified compliance system: a fund management company shall bring its subsidiaries at every level into a unified compliance management system, ensuring consistency of compliance culture.

- The main methods of management:

1. requiring subsidiaries to submit compliance reports periodically;

2. requiring subsidiaries to report major compliance risk matters promptly;

3. supervising and inspecting the compliance management of subsidiaries and the compliance of their business management;

4. reviewing the basic compliance management systems of subsidiaries;

5. where a major compliance risk matter arises in a subsidiary, holding its principal officers to compliance accountability under the relevant system, and requiring the subsidiary to hold the persons responsible to compliance accountability;

6. appraising the compliance management of subsidiaries each year;

7. other compliance management matters required by the regulators;

8. urging overseas subsidiaries to meet the regulatory requirements of the place where they are situated.

The formal implementation of the Measures and the Standards distinguishes "risk control" from "compliance" for the first time, and lays down more specific requirements for the staffing of compliance officers. Minton's lawyers suggest that institutions intending to register and file as private fund managers, and those already registered, should pay greater attention to raising the quality of their compliance management.

Minton's lawyers remind private asset management institutions that, while staffing compliance officers as the rules require, they must not neglect to foster and raise awareness of compliance throughout the institution and among its staff. Led by the senior managers, the compliance officer among them, they should establish and improve compliance systems as required, carry out compliance assessments periodically, and put the recommendations of those assessments into effect. Once the internal structure of the institution has been further regularised, its own operating efficiency will rise of itself, which serves the long-term development of the private asset management institution.