The eight core effects of the new asset management rules on private fund management (Part One)

The People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange have recently jointly issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (the Guiding Opinions). The Guiding Opinions unify regulatory standards according to the type of product, and lay down requirements on investment scope, leverage constraints and information

disclosure; they hold to the principle that products and investors must match, and strengthen the management of investor suitability; they make clear that asset management business may not promise principal or return, so ending implicit repayment; they tighten the requirements for investment in non-standardised credit assets and prohibit capital pools; and they classify and unify the requirements on liabilities and on tiered leverage, eliminate multi-layer nesting and curb channel business. The issue of the Guiding Opinions

has undoubtedly caused no small tremor in the capital markets as a whole; as far as private funds are concerned, it clarifies the regulatory requirements in many areas that practice had left grey, and encourages and supports private institutions to carry on business in accordance with law. Minton's lawyers analyse briefly below the principal effects of the Guiding Opinions on the investment business of private funds.

1. Strengthening the awareness that the investor bears the investment risk, and ending guarantees, buy-backs and implicit repayment

Articles 2, 13 and other provisions of the Guiding Opinions already make clear the nature of asset management business: a financial service in which a private institution, commissioned by investors, invests and manages the entrusted assets (the private institution discharging towards investors the duties of honesty, good faith and diligence, and being entitled to a management fee and a performance fee), while investors should establish the basic investment awareness that they bear the risk themselves, and give up expectations of a floor, of guaranteed return, or of an implicit

repayment guarantee.

As for private institutions, the Guiding Opinions state that they may not provide any direct or indirect, express or implicit guarantee, buy-back or similar promise to bear risk on behalf of the non-standardised credit assets or equity assets in which an asset management product invests. At the same time the Guiding Opinions define the prohibited implicit repayment: "(1) the issuer

or manager of an asset management product, in breach of the principle of determining net value truly and fairly, promises principal and return on the product; (2) by rolling issuance or other means, the principal, return and risk of an asset management product are made to shift between different investors, so achieving promised principal and return; (3) where an asset management product cannot be repaid on time or repayment is difficult, the financial

institution issuing or managing it raises funds itself to pay, or entrusts another institution to pay on its behalf; (4) other circumstances identified by the financial regulatory authorities."

Anyone who provides implicit repayment in breach of the rules will be pursued for legal liability in accordance with law, and an external audit institution that fails in its duty of diligence in auditing will also be entered on the national credit information sharing platform and bear the consequences of joint sanctions.

2. Clarifying the standard for qualified investors and the amount required for a single product

Under article 5 of the Guiding Opinions, a qualified investor must have the corresponding ability to identify and to bear risk, and must invest not less than a certain amount in a single asset management product. The specific requirements are: A. at least two years' investment experience, plus (family net financial assets of not less than RMB 3 million, or family financial assets of not less than RMB 5 million, or average annual income of the individual of not less than RMB 400,000 over the last three years

); B. a legal person entity whose net assets at the end of the most recent year are not less than RMB 10 million; C. other circumstances in which the financial regulatory authorities regard a person as a qualified investor.

The amounts a qualified investor must put into a single asset management product are: not less than RMB 300,000 for a fixed income product, not less than RMB 400,000 for a single mixed product, and not less than RMB 1 million for a single equity product or a single commodity and financial derivatives product. It should be noted that the Guiding Opinions also make clear that an investor may not

use funds that are not its own, raised by borrowing or by issuing bonds, to invest in asset management products.

3. Strictly regulating investment management, prohibiting split sales and eliminating capital pool business

Besides prohibiting fraud and misleading means, the Guiding Opinions expressly forbid a private institution to sell, by splitting an asset management product, a product that does not match the investor's ability to identify and to bear risk; the composition of the assets in which each product invests must be clear and the risk identifiable.

On the other hand, under the Guiding Opinions a private institution must manage the funds of each asset management product separately, keep separate books and account for them separately, and may not carry on or take part in capital pool business marked by rolling issuance, pooled operation and separate pricing. At the same time a private institution should determine the term of the invested assets reasonably and strengthen the duration management

of its products, so as to reduce the risk of maturity mismatch.

4. Further quantifying the qualification requirements for practitioners

At the time a private fund manager registers and files, comparatively high requirements are already imposed on the qualifications of its senior officers, and professional practitioners with industry experience are favoured for such posts. The Guiding Opinions go further, requiring that everyone engaged in asset management business should have the necessary professional knowledge, industry experience and management ability, and should fully

understand the relevant laws and regulations, the regulatory provisions, and the legal relationships, transaction structures, principal risks and risk control methods of asset management products.

At the same time a private institution must establish and improve, correspondingly, a system for the qualification, training, appraisal and accountability of its asset management personnel. This is a further compulsory system, over and above the eight risk control and internal control systems that a private fund manager must have in place when it registers and files, and private institutions should complete it promptly and so raise their own standards of risk control and internal control.