The AMAC issues a fourth licence to a wholly foreign-owned private fund manager: how overseas managers queue up to enter the Chinese market

The world's largest listed hedge fund company has succeeded in registering with the Asset Management Association of China as a wholly foreign-owned private fund manager. According to the public register of private fund managers kept by the AMAC, Man Group (Shanghai) Investment Management Co., Ltd was registered on 7 September 2017, its enterprise nature being a wholly foreign-owned enterprise and its institutional type a private securities investment fund manager. The company was incorporated in May 2017 with paid-in capital of USD 1 million.

Man Group (Shanghai) Investment Management Co., Ltd is a company within the Man Group. It is understood that Man Group is at present the world's largest listed hedge fund company; founded in 1783, it has a history of more than 200 years and manages assets of nearly USD 100 billion. In 2012 Man Group opened an office in China, and afterwards obtained a quota to raise funds from qualified domestic limited partners (QDLP) for investment abroad.

Li Yifei, chairman of Man Group China, told reporters that the first product they issue in China may be a quantitative equity product, and that in future they will also lay stress on quantitative investment strategies.

Foreign private funds are eager to try the Chinese market

As at the date of publication, four foreign private funds have successfully registered as private fund managers: Fidelity (registered as Fidelity Litali Investment Management (Shanghai) Co., Ltd), UBS (registered as UBS Asset Management (Shanghai) Co., Ltd), Man Group (registered as Man Group (Shanghai) Investment Management Co., Ltd) and Fullerton (registered as Fullerton Investment Management (Shanghai) Co., Ltd).

It is understood that more and more foreign asset management institutions intend to register as private fund managers in China and to enter the Chinese market. It is not hard to foresee that the influx of foreign private funds will in the near future bring more possibilities to China's investment environment, deepen its internationalisation, broaden the vision of investment decisions, and at the same time produce a "catfish effect".

The policy on the entry of foreign private funds is clear, and their entry is encouraged

On 30 June 2016 the CSRC stated expressly that qualifying wholly foreign-owned and Sino-foreign equity joint ventures may apply to register as private fund managers and carry on private securities fund management business within China.

On the same day the CSRC published the AMAC's Questions and Answers on Registration and Filing of Private Funds (No. 10) (the Q&A No. 10), which further clarified the requirements that foreign private funds and institutions must satisfy in registering and filing. They are:

(1) the company is incorporated within China;

(2) the institution's offshore shareholder is a financial institution approved or licensed by the financial regulatory authority of its country or region, and the securities regulator of the country or region where the offshore shareholder is located has signed a memorandum of understanding on securities regulatory cooperation with the CSRC or with another body recognised by the CSRC;

(3) neither the institution nor its offshore shareholder has received a major penalty from a regulatory or judicial body in the last three years.

Where a private securities fund management institution has an offshore ultimate controller, that controller must also satisfy conditions (2) and (3) above.

(4) the use of its capital and of the renminbi obtained by converting it shall comply with the relevant provisions of the State administration of foreign exchange;

(5) in carrying on securities and futures trading within China it shall make investment decisions independently, and may not place trading instructions through an offshore institution or an offshore system, unless the CSRC provides otherwise.

On 5 January this year the AMAC published the Notes on Completing Registration and Filing for Wholly Foreign-Owned and Sino-Foreign Equity Joint Venture Private Securities Investment Fund Managers (the Notes), which refined the requirements for registering and filing a foreign enterprise and gave detailed explanations respectively of the application materials, the procedure, the registration system, fund filing and the disclosure of fund information.

As to the legal opinion on the registration of a manager, the Notes adjust the Guide to the Legal Opinion on the Registration of a Private Fund Manager to take account of foreign private securities investment fund managers. Having sorted through them, Minton's lawyers suggest that, when issuing the legal opinion, the following matters in particular should be verified and, if necessary, rectified:

1. "For a foreign institution that has already established within China a business of managing funds for overseas investment, the business of managing funds for overseas investment shall be properly segregated from its other private fund management business within China; the fund property of different products shall be kept separate and held in separate custody, and measures shall be taken to avoid conflicts of interest."

This provision imposes requirements to verify the related parties of the institution applying to file, the company's internal control and risk control, and any outsourcing services.

2. "The offshore shareholder of the applicant institution shall be a financial institution approved or licensed by the financial regulatory authority of its country or region, and the securities regulator of the country or region where the offshore shareholder is located shall have signed a memorandum of understanding on securities regulatory cooperation with the CSRC or with another body recognised by the CSRC"; and "the offshore ultimate controller of the applicant institution shall be a financial institution approved or licensed by the financial regulatory authority of its country or region, and the securities regulator of the country or region where the offshore ultimate controller is located shall have signed a memorandum of understanding on securities regulatory cooperation with the CSRC or with another body recognised by the CSRC."

As to the ultimate controller of the institution applying to file, the Notes also give clear directions: where there is an offshore ultimate controller, that controller must meet the same requirements as the offshore shareholder, namely a. it must be a financial institution; b. it must be approved or licensed by the financial regulatory authority of its country or region; c. the securities regulator of that country or region must have signed a memorandum of understanding on securities regulatory cooperation with the CSRC or with another body recognised by the CSRC. While making clear what the lawyer acting must verify and to what extent, this requirement also goes some way to preventing foreign enterprises that do not yet meet the conditions for filing from trying to register with the AMAC by "borrowing" or "buying" a shell, joining hands with other foreign asset management institutions, and controlling the operation of the fund manager from behind the scenes, or doing anything similar. It thus preserves the regulatory pressure on foreign enterprises applying to file, and helps strangle in the cradle any potential negative effect on the order and environment of China's capital markets.

3. "The applicant institution shall make investment decisions independently and may not place trading instructions through an offshore institution or system; a system terminal shall be installed within China; the path of a trade shall be transparent and traceable, the trading data complete and verifiable, the trading process clear and controllable, and the trading record retained throughout; a person responsible for investment decisions and a person responsible for trade execution shall be appointed. The staff of the applicant institution shall hold the domestic fund practising qualification. The use of the institution's capital and of the renminbi obtained by converting it shall comply with the relevant provisions of the State administration of foreign exchange."

This provision refines the requirement of "making investment decisions independently" mentioned in the Q&A No. 10, and sets more detailed requirements for verifying the decision-making process and the staff appointed to it; the Notes also restate the matters concerning foreign exchange settlement that should be verified in relation to corporate governance. At the beginning of this year the People's Bank of China issued the Measures for the Administration of Reports of Large-Value Transactions and Suspicious Transactions of Financial Institutions, in force from 1 July 2017, which lay down new rules on the purchase of foreign exchange, cash withdrawal and cross-border remittance; bearing these together with the foreign exchange and foreign investment rules at present in force, Minton's lawyers consider that, in issuing the legal opinion, the lawyer acting should verify the institution applying to file against the relevant laws and regulations and the local rules and policies of the place where it is registered, in matters including foreign exchange administration and foreign investment, and verify it against this requirement of the Notes for the registration of a foreign private fund manager.

The successful filing of four foreign private fund managers shows that China has genuinely opened registration to offshore private fund managers, and that more foreign asset management companies will inevitably take part in China's capital markets as private fund managers; besides competing ever more fiercely with mainland enterprises in the same arena, as the CSRC spokesman Zhang Xiaojun put it, "this helps to draw on advanced overseas asset management models, investment philosophy, investment strategy and compliance and risk control practice, and to raise the standard of regularity and the standard of investment management of China's private fund industry", while institutional investors of every kind in the overseas capital markets are likewise, quietly and imperceptibly, deepening the breadth and depth of the opening of China's capital markets.