On August 28, 2020, the China Securities Regulatory Commission (“CSRC”) promulgated the Measures for Supervision and Administration of Fund Distributors of Public Securities Investment Funds (the “Distribution Measures”) and its implementation measures (collectively, the “New Measures”). The New Measures will come into effect as of October 1, 2020 and the Measures for the Distribution of Securities Investment Funds amended and implemented by the CSRC in 2013 (the “Old Measures”) will be repealed concurrently. Previously, the CSRC issued a consultation paper on amending the Old Measures (the “Consultation Paper”) in early 2019.

 

Since 2013, there have been significant changes in the field of fund distribution. The New Measures are aimed at many angles to regulate the obvious problems in this business sector, including:

 

• Strengthening the licensing requirements for fund distribution activities, and clarifying the division of duties between the fund distributors and relevant fund servicing institutions;

 

• Optimizing the entry and exit mechanisms for fund distributors, and making endeavors to build an ecology featuring orderly entering and exiting the fund distribution sector and sound development;

 

• Consolidating business norms and institutional regulation requirements, and promoting the construction of systems and mechanisms which deem investors’ interests as the core value and further the long-term rational investment;

 

• Improving the regulations on the independent fund distributors and advancing its professional and stable development in compliance with regulations.

 

This article will briefly analyze some key points of the New Measures, mainly from the perspective of distributing private asset management products (“Private AMPs”) issued by such securities and futures operators as public fund management companies (“FMCs”), securities companies, futures companies and their asset management subsidiaries, and private funds (“Private Funds”) issued by private fund managers registered with the Asset Management Association of China (“AMAC”).

 

1. Regulation on Distribution of Private AMPs and Private Funds Written into the New Measures

 

The New Measures stipulate that Chapter III (Norms for Fund Distribution Business) and Chapter IV (Internal Control and Risk Management) of the Distribution Measures shall apply, by reference, to the fund distributors legally engaging in the distribution of Private AMPs and Private Funds in addition to their distribution of public funds, unless otherwise prescribed by laws, regulations and the CSRC.

 

It indicates that different from the Old Measures, which is merely applicable to the distribution of public funds, the New Measures will regulate the distribution of Private AMPs and Private Funds as well. Please find the table below with respect to the applicable regulations on distribution of Private AMPs and Private Funds.

 

	Before the New Measures	After the New Measures
Private AMPs	the Measures for the Administration of the Privately–raised Asset Management Business of Securities and Futures Operators, the Provisions on the Administration of Operation of Privately-raised Asset Management Schemes of Securities and Futures Operators, etc.	Chapter III and Chapter IV of the Distribution Measures (unless otherwise prescribed by laws, regulations and the CSRC)   The provisions on the left column
Private Funds	the Interim Provisions on the Administration of Operation of the Private-raised Asset Management Business of Securities and Futures Operators (it shall apply, by reference, to private securities investment funds), the Measures for the Administration of the Fundraising of Private Investment Funds, etc.	Chapter III and Chapter IV of the Distribution Measures (unless otherwise prescribed by laws, regulations and the CSRC)   The provisions on the left column

 

Please note that according to the definitions in the New Measures, the term “Private Funds” in the New Measures refers to two types of products, namely Private AMPs and Private Funds. In this article, with the purpose of better comparing the Old Measures, the Consultation Paper and the New Measures, we distinguish between Private AMPs and Private Funds. Meanwhile, we understand such a distinction is also more in line with the industry practice in China.

 

2. Product Varieties Available for the Independent Fund Distributors to Distribute Reduced

 

1. Classifications of Fund Distributors

 

The New Measures define the fund distributors into two main categories:

 

• Financial institution fund distributors, referring to the fund distributors that have obtained relevant financial licenses before applying for fund distribution license, including commercial banks, securities companies, futures companies, insurance companies, insurance broker companies, insurance agency companies, and securities investment advisory institutions.

 

• Independent fund distributors, referring to the fund distributors other than those aforementioned.

 

A fund distribution subsidiary of FMC (the “FMC Distribution Subsidiary”) is deemed as an independent fund distributor when applying for the fund distribution license in the past. However, the New Measures provide that the FMC Distribution Subsidiary shall be subject to the same eligibility requirements as those financial institution fund distributors.

 

2. Product Varieties Distributed by Independent Fund Distributors

 

According to the definition in the New Measures, the term “independent fund distributors” refers to those institutions specializing in the distribution of the public funds and private securities investment funds. The independent fund distributors shall not engage in any other businesses, unless otherwise prescribed by the CSRC.

 

Compared to the Old Measures and other applicable rules, the New Measures obviously narrow the varieties of products allowed for the independent fund distributors to distribute by means of excluding private equity funds and venture capital funds (collectively, the “PE/VC Funds”) and Private AMPs from the clearly listed varieties available for distributions. Even compared with the Consultation Paper, there are some changes. Please find the table below for the summary of product varieties allowed for the independent fund distributors to distribute.

 

Old Measures	Consultation Paper	New Measures
Public funds Private securities investment funds PE/VC Funds Private AMPs	Unless otherwise permitted or recognized by the CSRC, the varieties are only limited to:   Public funds Private AMPs	Unless otherwise prescribed by the CSRC, the varieties are only limited to:   Public funds Private securities investment funds

 

3. Impact on the Private AMPs and Private Funds

 

In accordance with the Measures for the Administration of the Privately–raised Asset Management Business of Securities and Futures Operators (“Private AMP Measures”) issued by the CSRC in 2018, securities and futures operators may sell Private AMPs on its own or entrust the institutions with fund distribution licenses (independent fund distributors included) to distribute. Considering that there is still some room in the New Measures (i.e., “unless otherwise prescribed by the CSRC”), it remains to be clarified by the CSRC how the Private AMP Measures (“old law” but a “special law” in terms of AMP distribution) and the New Measures (“new law” but a “general law” on fund distribution) shall apply, and whether independent fund distributors are still allowed to distribute Private AMPs.

 

Currently, the legal basis for the independent fund distributors to distribute PE/VC Funds is anchored in the Measures for the Administration of the Fundraising of Private Investment Funds issued by the AMAC, which is not a regulation promulgated by the CSRC. Therefore, the New Measures shall prevail. Consequently, it will adversely affect those PE/VC fund managers mainly relying on the independent fund distributors to distribute their funds.

 

Independent fund distributors distributing the private securities investment funds will not be affected by the New Measures.

 

4. Possible Changes

 

According to the legislation plan for 2020 released by the CSRC, the “Key Rules to be launched within this year” include amending the Measures for the Administration of the Privately–raised Asset Management Business of Securities and Futures Operators and the Interim Measures for the Supervision and Administration of Private Investment Funds. Moreover, the “Rules requiring being Researched and Launched at an Appropriate Time” include formulating the Measures for the Supervision and Administration of the Distribution Businesses of the Private Investment Funds.

 

The abovementioned amendments/formulations are likely to involve adjustments to the current distribution channels or policies for Private AMPs and Private Funds, which we shall follow closely. In particular, it remains to be seen whether the Measures for the Supervision and Administration of the Distribution Businesses of the Private Investment Funds proposed to be drafted by the CSRC, will reopen the door for the independent fund distributors to distribute PE/VC Funds satisfying certain conditions.

 

3. Strengthening Qualification Requirements and Shareholding Management of Shareholders of Independent Fund Distributors.

 

According to the Old Measures, the same type of the shareholders shall be subject to the same qualification requirements, without any distinctions based on the differences concerning the shareholding ratio or domestic or foreign shareholders. In comparison, the New Measures made some distinctions.

 

1. Domestic Natural Persons as Shareholder

 

Please find the table below for the comparison concerning certain important quantitative indicators (not a complete comparison on all the qualification requirements).

 

Types of Shareholders	Old Measures	New Measures
Shareholding ＜ 5%	(i) having been engaged in the securities, funds, or other financial businesses for more than ten years, (ii) having managed a securities or fund business department for more than five years, or (iii) having served as a senior management personnel in the securities or fund industry for more than three years.	None
Shareholding ≥ 5%		Having the experience of (i) serving as the management personnel for a securities fund business department for more than five years or (ii) serving as a senior management personnel in the securities fund industry for more than three years.
Controlling shareholder		The individual’s financial assets shall not be less than RMB30 million; having the experience of (i) serving as the management personnel for a securities fund business department for more than ten years, or (ii) serving as a senior management personnel in the securities fund industry for more than five years.

 

2. Domestic Legal Person or Non-legal Person as Shareholder

 

Please find the table below for the comparison concerning certain important quantitative indicators (not a complete comparison on all the qualification requirements).

 

Types of Shareholders	Old Measures	New Measures
Shareholding ＜ 5%	None	None
Shareholding ≥ 5%		Having net asset more than RMB50 million, unless otherwise prescribed by the CSRC
Controlling shareholder		Having being profitable in the recent three fiscal years consecutively; having net asset more than RMB200 million and sound financial conditions and capacity to make capital injection continuously; its assets liabilities and leverages shall be moderate; its net assets shall not be less than 50% of the paid-in capital contributed by shareholders; its contingent liabilities shall not attain to 50% of the net assets; and there is no significant unpaid due debt.

 

3. Foreign Shareholder

 

In addition to meeting the same qualification conditions set forth for the domestic investors, a foreign shareholder is also required to meet the following conditions according to the New Measures:

 

• It shall be a financial institution duly incorporated and legally existing in accordance with the laws of the country or region of its domicile, with the asset management or investment advisory experience.

 

• The securities regulator of the country or region of its domicile shall have signed a memorandum of understanding on cooperation regarding the securities regulation with the CSRC or other institutions as recognized by the CSRC, and have maintained an effective regulatory cooperation relationship with the CSRC.

 

Presently, there are only two foreign invested independent fund distributors, namely, iFAST in Shenzhen and Yicai (INTESA SANPAOLO invested) in Qingdao.

 

We anticipate that, with the implementation of the New Measures, more foreign investors will initiate application for the independent fund distributor license.

 

4. “Participating in One plus Controlling One” Principle

 

The New Measures require that the shareholder of an independent fund distributor or such shareholder’s controlling shareholder or the actual controller shall not invest in more than two independent fund distributors, and only one of the two is permitted to be controlled by them, unless otherwise prescribed by the CSRC.

 

5. Stable Shareholding

 

The New Measures require the independent fund distributors to have a stable shareholding structure. The shareholder shall make a commitment in writing that there shall be no change in the controlling shareholder or the actual controlling relationship within three years after an independent fund distributor obtains the qualification for the fund distribution business.

 

Where a shareholder pledges the shares held by it, it may neither agree that the pledgee or any other third party exercises the voting right and other shareholder rights, nor transfer its control over the shares indirectly. The proportion of shares pledged by a shareholder holding more than 5% of shares may not exceed 50% of the total shares held by it.

 

6. Filing of Change of Shareholding

 

Upon the occurrence of any of the following shareholding changes, the independent fund distributor shall report to the local CSRC office within five business days:

 

• Having a new shareholder holding more than 5% of shares, or changing its controlling shareholder or actual controller;

 

• The shareholder holding more than 5% of shares changes its name or pledges its shares.

 

4. Significantly Raised Eligibility Requirements of Independent Fund Distributors

 

In addition to the qualification requirements for the shareholders, an independent fund distributor shall also satisfy certain conditions, such as the following:

 

1. Registered Capital

 

Old Measures	New Measures
The registered capital shall not be less than RMB20 million, and shall be contributed in cash.	The net assets shall not be less than RMB50 million.

 

2. Number of Fund Practitioners

 

Old Measures	New Measures
10	20

 

3. Senior Management Personnel Qualification Requirement

 

Old Measures	New Measures
Qualified as a fund practitioner, being familiar with the fund distribution business, and having engaged in the fund business for two years or more, or having worked in other relevant financial institutions for five years or more	Qualified as a fund practitioner, being familiar with the fund distribution business, satisfying the requirements for being a senior management personnel in the fund industry as prescribed by the CSRC

 

According to the Administrative Measures for Post-holding of Senior Management Personnel of Securities Investment Fund Management Companies, a senior management personnel shall “have more than three years of work experience in funds, securities, banking and other financial related sectors and management experience commensurate with the position to be held” and meet other qualification requirements.

 

4. Qualification Requirements for Person in Charge of Compliance and Risk Control
4.  

The New Measures requires the independent fund distributors to specify in their articles of association that the person in charge of the compliance risk control is one of the senior management personnel. The person in charge of compliance and risk control shall possess competent professional knowledge and skills for the job, and shall have one of the following work experiences:

 

• Having been engaged in the securities fund industry for more than five years;

 

• Having been engaged in the securities fund industry for more than three years and having passed the BAR examination in China; or

 

• Having been in any post relating to regulation of securities funds for more than three years.

 

5. Organizational Forms

 

Old Measures	New Measures
Limited liability company, partnership or other CSRC permitted organizational forms	Limited liability company, joint-stock limited liability company or other CSRC permitted organizational forms

 

5. Fund Distribution Licenses to be Renewed

 

According to the New Measures, the fund distribution license is valid for three years as of the date of the issuance. Where a fund distributor is not under any of the following circumstances, the term of its license may be extended, and each extension shall be valid for three years:

 

• The basic conditions (such as requirements on financial conditions, business premises, security facilities, information management platform for fund distribution business, business management and risk management systems and the number of practitioners) for carrying out the businesses are unsustainable and have not been effectively rectified;

 

• Seriously lacking internal compliance control, being ordered to suspend relevant business operation by the CSRC or local CSRC office, as a kind of administrative regulatory measures, and failing to rectify effectively within the required period;

 

• It fails to substantially carry out the business of distributing public funds, and the average daily retention volume of public funds (excluding money market funds) in the most recent fiscal year is less than RMB500 million;

 

• Other circumstances stipulated by the CSRC.

 

6. Regulating Cooperation between Fund Distributors and Internet Platforms

 

Regarding the use of the third-party network platform to display fund information and attract business in practice, the New Measures have made more regulations.

 

Fund managers and fund distributors shall disclose clearly to investors which one is the entity providing fund distribution services, and continuously track and evaluate the compliance and security of the third-party online platforms. Third-party institutions shall not get involved in any phase of the fund distribution business, and shall not collect, transmit or retain any fund trading information of the investors.

 

As a fund servicing institution providing information technology system services, the third-party institution shall file with the CSRC pursuant to the PRC Fund Law and the Administrative Measures on Information Technology of Securities Fund Business Organizations. If the fund manager or the fund distributor cooperates with such a third-party institution, it shall report to the local CSRC office within ten business days after the execution of service agreements.

 

We understand that the above requirements are mainly applicable to the distribution of public funds. Private placement is the basic principle for raising Private Funds, and the New Measures also stipulate that Private Funds shall not be promoted publicly through the internet platforms or channels such as WeChat in one way or another. Therefore, it is relatively difficult to utilize third-party internet platforms for the distribution of Private AMPs and Private Funds, and fund managers and fund distributors shall carry out prudent evaluations to avoid overstepping the line.

 

7. Licensing Procedures

 

In fact, the CSRC improved the examination and approval procedures for fund distributors (including the FMC Distribution Subsidiaries) in 2018, without revising the Old Measures.

 

Now, the New Measures further confirm such improved examination and approval procedure and provide detailed provisions. The applicant shall apply for the registration at the local CSRC office in the region of its domicile and the local CSRC office will solicit opinions from relevant department of the CSRC during the procedure. After a fund distributor completes the registration, it shall finish the preparation work within six months and pass the on-site inspection of the local CSRC office before it may obtain a securities and futures business license.

 

8. Strengthening Compliance Requirements for Fund Distributors

 

Some provisions on the distribution of public funds in the New Measures are not applicable to distribution of Private AMPs or Private Funds. It remains to be seen, in the future legislation and practice with respect to Private AMPs and Private Funds distribution, whether the CSRC and the AMAC will follow the same way. For example:

 

In terms of investor suitability, when the fund distributor promotes fund products to the investors, the risk rating of such fund products used by the fund distributor shall not be lower than those declared by the fund managers.

 

As to the trailing fee, for the retention volume formed due to the distribution to individual investors, the agreed ratio of client maintenance fee to the fund management fee shall not exceed 50%; for the retention volume formed due to the distribution to non-individual investors, the agreed ratio of client maintenance fee to the fund management fee shall not exceed 30%.

 

In addition, independent fund distributors shall comply with other certain requirements. For instance:

 

Regarding the use of proprietary funds, an independent fund distributor is allowed to invest in financial assets, among which the net value of the investment in highly liquid assets shall not be less than RMB20 million. Unless otherwise stipulated by laws and regulations and the CSRC, it shall not provide loans, advance funds or guarantees, etc. to its affiliates, and shall not make any equity investments.

 

In terms of establishing branches, the thresholds have been raised significantly. To be qualified to establish a branch, an independent fund distributor shall carry out fund distribution business for more than three full fiscal years, and have an average daily fund distribution retention volume of no less than RMB10 billion in the latest fiscal year. In addition, it may only establish branches within the regions of its domicile (provincial level) unless stipulated otherwise by the CSRC.

 

9. Equity Incentive and IPO to be Expected

 

The New Measures explicitly refer to the concept of Employee Stock Ownership Plan (typically referred to as the “ESOP”) and clear some obstacles for the implementation of ESOP at the regulatory level. For example:

 

• Compared with the Old Measures, the New Measures no longer set any qualification requirements for shareholders holding less than 5% of shares;

 

• Compared with the Old Measures, the New Measures no longer require that the shareholders shall be legal persons or natural persons, which means that an ESOP platform in the form of a limited partnership and other common unincorporated forms will be allowed to hold shares in the independent fund distributors;

 

• The ESOP platform of the independent fund distributor is exempted from the requirement of a minimum net asset value of RMB50 million for a legal person or non-legal person as the shareholder holding more than 5% of the shares.

 

Furthermore, an independent fund distributor is permitted to be formed as a joint-stock limited company, which paves the way for its IPO in the further if allowed by the CSRC then.

 

10. Grace Period

 

After the implementation of the New Measures, the rectification of the previous arrangements not conforming to the New Measures shall be completed within the grace period. For example, where an independent fund distributor engages in the distribution of products other than the public funds and private securities investment funds, it shall complete rectification within two years from the implementation of the New Measures. During such period, the scale of such products not conforming to the New Measure retained by the independent distributor shall be orderly reduced.

 

*  *  *

 

Please kindly note that this Memo is rendered mainly with respect to relevant laws and regulations of the PRC (for purposes of this Memo only, the PRC does not include Hong Kong, Taiwan or Macau) in effect as of the date of this Memo. This Memo is being furnished solely to you for your reference purposes only.

 

Jingtian & Gongcheng Investment Funds & Asset Management Group has vast experience with setting up various foreign-invested financial institutions, asset management companies and other regulated entities in the PRC, as well as their ongoing regulatory matters. In September 2019 and March 2020, Jingtian & Gongcheng received international recognition by garnering the China Investment Fund Law Firm of the Year Award from China Law & Practice and Asia Firm of the Year from The Asian Lawyer under leading international legal publishing group ALM, respectively.

 

Should you have any further questions, please feel free to contact Messrs. James Yong Wang and Eric Ye Zou below.