CSRC Seeks to Revise Key Rules Regulating Fund Management Companies in China
The CSRC has issued for consultation amendments to the rules regulating fund management companies (“FMCs”) in China with the aim of revising the regulatory regime (Administrative Measures on Securities Investment Fund Management Companies). A number of new measures are proposed to be introduced to, on one hand, strengthen the management of FMCs, (for example, more stringent corporate governance requirements are imposed) and on the other hand, promote the development of FMCs (for example, allowing fund management companies to establish specialised subsidiaries focusing on high-end asset management business). The rules will apply to both domestic FMCs and foreign invested FMCs, and some of the new requirements (e.g. corporate governance requirements) will have retrospective effect. The consultation period ends on 20 July 2012.
Shareholding structure: new measures are proposed and more flexibilities in the shareholding structure of an FMC would be possible:
- a shareholder (together with its connected persons) may hold more than 49% of shareholding in a domestic FMC. Currently, connected parties cannot have an interest in the same FMC and, except in the case of foreign invested FMCs, no shareholder can hold more than 49% of an FMC;
- a person (together with its connected persons) holding less than 5% of a domestic FMC will not be subject to any qualification requirements or CSRC’s approvals, and only post-filing is required for such investments, but this proposal does not extend to shareholders of foreign invested FMCs; and
- the range of qualifying financial asset management experience for a foreign shareholder of an FMC has been expanded from management of mutual funds to include management of other funds such as pension funds, charity funds and endowment funds, potentially enlarging the pool of eligible foreign investors.
Calculation of foreign shareholding: the draft amendments re-iterate that the aggregate (direct and indirect) foreign interest in an FMC must not exceed 49% of the registered capital of the FMC. However, for the first time, the draft amendments expressly provide for two helpful exceptions where the indirect foreign interest in an FMC does not need to be aggregated when calculating the total foreign interest in an FMC:
(i) any indirect foreign interest in the FMC via holding overseas-listed shares of the FMC’s PRC shareholder or actual controller, unless the overseas listing results in a change of control over such shareholder or actual controller (as the case may be) in favour of foreign parties; and
(ii) any interest held indirectly by a qualified foreign institutional investor (“QFII”) via its investment in an A-share listed PRC shareholder of the FMC, unless the QFII’s total investment in such shareholder results in a change of control over such shareholder in favour of foreign parties. The same rule also applies to QFII’s indirect interest in the FMC via its investment in the A-share listed actual controller of the FMC.
Non-compete restriction: the CSRC proposes that a shareholder (together with its connected persons) holding 50% or more of the shares in an FMC must not, by itself or with its controlled entities, engage in securities asset management business which is the same or similar to that carried on by the FMC. However, since this non-compete restriction will not have retrospective effect, foreign investors in existing foreign invested FMCs are unlikely to benefit from this restriction unless the controlling shareholder seeks to further increase its shareholding in the FMC.
Extension of Lock-up period: the lock-up period for the major shareholder (i.e. the single largest shareholder holding a minimum interest in an FMC of 25%) will be extended from one year to three years.
Corporate governance: new measures will be introduced to enhance the corporate governance of an FMC, including:
- an FMC who has a shareholder who, together with its connected persons, holds 50% or more of the FMC, cannot have more than 1/3 of its directors or independent directors recommended, nominated, employed or rewarded by, or otherwise connected with, such controlling shareholder;
- at least half of the members of the supervisory board of an FMC must be employee representative(s); where no supervisory board is set up, the company must have at least one employee representative as a supervisor; and
- the general manager of an FMC must also be a director of the FMC.
Establishment of subsidiaries and outsourcing: FMCs will be allowed to establish subsidiaries to engage in specific business which is relevant to fund management, e.g. one-to-one client asset management, fund product development, sales and client services. An FMC must have a controlling shareholding in each such subsidiary. Detailed rules for setting up the subsidiaries will be issued separately by the CSRC. In addition, subject to post-filing requirements, FMCs may outsource part of their activities, including fund units sales, registration, valuation and IT systems maintenance to third party service providers. These proposals should allow FMCs to focus on their core business and provide more customised services.
Corporate form: the draft amendments envisage that an FMC will be able to be incorporated as a company limited by shares, allowing FMCs to conduct a public offer of shares and be listed, which would be a fundamental change. Under the current regime, FMCs can only take the form of a limited liability company and cannot therefore under PRC law conduct any public offering or be listed.
Miscellaneous: the CSRC has proposed the adoption of a risk-based supervisory approach for management of FMCs, introducing a risk control indicator system and comprehensive supervisory assessment system. These systems are likely to be similar to those currently applicable to securities companies and futures companies.
Reference: Consultation Draft of Administrative Measures on Securities Investment Fund Management Companies (《证券投资基金管理公司管理办法（征求意见稿）》) and the consultation draft of its implementation rules(《关于实施<证券投资基金管理公司管理办法>有关问题的规定（征求意见稿）》)
Issuing authority: China Securities Regulatory Commission (the “CSRC”)