After 14 days consultation, the China Securities Regulatory Commission (the "CSRC") has finalised the regulation called the Pilot Measures on the Business of Asset Management for Specific Clients of Fund Management Companies (the "New Pilot Measures") which regulates the asset management business of fund management companies in the PRC. This regulation was issued on 25 August 2011 and is set to take effect on 1 October, 2011.
Fund Management Companies in the PRC have been allowed to engage in the business of asset management for specific clients since 2007 when the CSRC issued the first version of the Pilot Measures on the Business of Asset Management for Specific Clients of Fund Management Companies (the "Current Pilot Measures"). Such private asset management business started with the model of "one to one", i.e. one manager manages one client's assets and after one year, expanded to cover the model of "one to multiple", i.e. one manager manages multiple clients' assets. After three years pilot period, the CSRC has accumulated certain administration experience and therefore began to consider the amendments necessary to improve the previous regulation to meet the development of this industry. From 2 November to 16 November, 2010, the CSRC published a consultation draft of a revised version of the Current Pilot Measures. The New Pilot Measures is a result of the CSRC's listening to and partial adoption of various suggestions and comments made by the public on the consultation draft.
Highlights of Change
The major changes introduced by the New Pilot Measures can be summarised as follows:
1. Integration of previous two separate legislation lines
Currently, the asset management business of fund management companies for one specific client and for multiple specific clients is regulated by two sets of legislation. In the past three years, apart from the Current Pilot Measures which regulate both "one to one" and "one to multiple" models of business, separate legislation has been developed specifically to address the "one to multiple" business model. The New Pilot Measures makes effort to optimise the legislative frame by integrating the rules for the two business models in one legislation. The advantage of this change is clear that it unifies the rules that can be applied to both "one to one" and "one to multiple" models of asset management business of fund management companies and makes the reference to the rules by the parties concerned easier and more efficient.
2. Lowering the access entry criteria for private asset management business of fund management companies
The Current Pilot Measures requires the fund management company intending to engage in the private asset management business to satisfy certain operational conditions including having over two years experience in managing securities investment fund, possessing net assets of more than RMB 0.2 billion and having asset under management of more than RMB 20 billion. The New Pilot Measures have, however, abandoned these conditions, thus making it possible for small-scaled or newly-founded fund management companies to enter into this business sector.
This change shows the CSRC's attitude towards the access entry issue, which will encourage more companies to participate in this business sector. Such change will bring benefit to not only those small-scaled or newly-founded fund management companies but also customers. Obviously, with the opening of the market to more fund management companies, the competition in the market will consequentially become hotter. The increased competition among the market players is expected to result in higher quality of service and lower service fee for customers.
3. Enlarging the scope of permitted investments
The New Pilot Measures have added the commodity futures into the scope of permitted investments. This is a break-through in the investment sector of fund management companies. Currently, some other financial institutions, who are also able to undertake private asset management business, like securities companies and commercial banks, which can not invest into commodity futures and it is actually the first time that fund management companies are allowed to invest into products falling outside the scope of securities. CSRC's efforts to diversify the products that fund management companies can invest into can be seen clearly via this change and it is reasonable to expect that further expansion is likely at some time in future with the growth of the sector of private asset management business.
4. Loosening the restriction on the scale of assets managed by fund management companies
In the Current Pilot Measures, the amount of the assets initially entrusted to a fund management company for management is required not to be lower than RMB 50 million for both "one to one" and "one to multiple" models of business in order to activate the business. The New Pilot Measures brings this down to RMB 30 million. This is, so far as we are aware, the lowest threshold for establishment of individual asset management business among the institutions in different industries which are permitted to engage in this business. CSRC seems to have determined to promote the business of fund management company through lowering the threshold and a prediction naturally following this change is that such threshold may be further reduced at some point in future if CSRC continues to adopt the policy of encouragement.
5. Revising a couple of details of the rules relevant to the operation of the business
The detailed rules to which certain revisions have been made under the New Pilot Measures mainly include the following:
- taking out the restriction that different portfolio investments are not allowed to conduct reverse trading on the same trading day;
- raising the upper limit for investment into shares of a listed company from 10% of the net assets of an asset management plan to 20%;
- increasing the frequency of participation and redemption by investors by changing it from "once a year at most" to "once a quarter at most";
- increasing the flexibility in the charging of remuneration by managers by leaving these issues unaddressed in the New Pilot Measures, thus allowing the freedom to the parties concerned to discuss separately;
- lowering the requirement for renewing the asset management contract by requiring the consent of "the holders of the plan representing 2/3 shares of the plan" , instead of "the entire holders of the plan" ; and
- simplifying the filing procedure for client data by changing the requirement that the filing should be made within five working days from each change of client data to the requirement that the filing should be made within 15 working days from the end of each quarter.
The publication of the New Pilot Measures is undoubtedly welcomed by many in the industry. Both those considering undertaking private asset management business through forming a fund management company in PRC and those who have already set up its fund management company in PRC should note this new legislation and explore the opportunities it offers.
1. Concurrently with the promulgation of this regulation, two pieces of ancillary regulations are also published, one being the Rules on the Content and Form of Fund Management Companies' Asset Management Contract with Multiple Specific Clients (the "Multiple Clients Contracting Rules ") and the other being the Rules on the Content and Form of Fund Management Companies' Asset Management Contract with Single Specific Client. to replace the existing counterparts.