Recent instructions for registration of private fund managers

In 7 December 2018, the Asset Management Association of China (AMAC) updated the Instructions for the Registration of Private Fund Managers, making the regulatory requirements in respect of reviews by the AMAC for the registration of managers more stringent from several perspectives, to avoid their having non-compliance issues at the time of registration.

In addition to beefing up existing provisions, the instructions also set out new provisions. These changes reflect the tightening of reviews by the AMAC for the registration of private fund managers, moving from simple basic criteria for applying entities to a more stringent detailed level.

Requirements on the shareholders and equity structure of applying companies. The instructions set out the requirements on the shareholders’ capital contribution capacity and capital contribution methods, and require applying companies to maintain “simple and clear” equity structures, that is to say that issues such as an excess of layers, circular capital contributions, cross shareholdings, etc., are not acceptable.

For the first time, the instructions expressly prohibit nominee equity holder arrangements and require shareholders to provide documents evidencing their true identities, making the past practice of shareholders faking their identities impossible.

The instructions require that investors in an applying company make their capital contributions in cash, warrant that the source of their funds is genuine, lawful and not subject to the control of any third party, and provide supporting documents evidencing that they have a capital contribution capacity consistent with the capital amount subscribed for by them. In terms of actual controllers, the instructions require that where an applying company does not have an actual controller, its largest shareholder is to bear the responsibilities of an actual controller. Furthermore, the instructions prohibit an asset management product from serving as an investor in, or the actual controller of, an applying company.

It should be noted that the new instructions set out requirements for the stability of the equity of an applying company, more specifically, where a change in equity occurred during the year prior to the application for registration, the applying company is required to give a detailed explanation of the reason for the change, and the AMAC will prudently check to see whether a special equity design has been carried out to circumvent the provisions on investors.

Requirements in respect of affiliates of an applying entity. The AMAC clarifies the definition of affiliate of an applying company in the new instructions, namely a financial institution, private fund manager, investment enterprise, enterprise with conflicting business, investment consulting enterprise, financial service enterprise, etc., under the common control of the same controlling shareholder/actual controller. The investment and financial service categories are included in the definition for the first time.

In respect of competition with affiliates and avoiding their homogenization, the AMAC sets out new provisions:

First, competition in the same industry with affiliates is prohibited. If an affiliate of an applying firm is a private fund manager, the applying company is required to wait until the affiliate has completed recordal of its first private fund before it can submit a manager registration application. Second, if an affiliate of an applying company is an investment company that has yet to register as a private fund manager, it is required to carry out manager registration for the affiliate first.

Third, the AMAC strictly prohibits circumventing affiliation through a special equity design. Finally, to avoid a situation where competition arises among multiple private fund managers controlled by the same actual controller, the actual controller and the affiliated private fund managers controlled by it are required to bear joint and several liability for violations of laws or regulations by the applying company. If, subsequently, another company under the same actual controller applies for registration, the largest shareholder and actual controller of that company are required to undertake to continue holding equity of the company/actually controlling the company for not less than three years.