The China Securities Regulatory Commission (the “CSRC”) promulgated the Measures for the Administration of the Private Placement Asset Management Business of Securities and Futures Business Institutions (the “Measures”) on October 22, 2018. Effective on the day of their promulgation, the Measures primarily consist of provisions on business entities, business forms, private placement, investment operations, information disclosure, changes, termination and liquidation, risk management and internal control, supervision, administration, and legal responsibilities. The Measures regulate the management of private placement assets by securities and futures business institutions and contain the following specific provisions:
1. Business entities
Pursuant to the Measures, the securities and futures business institutions referred to in the Measures refer to securities companies, fund management companies, futures companies and subsidiaries set up by such institutions to engage in private placement asset management. The asset securitization business carried out by securities and futures business institutions through private placements shall be separately prescribed by the CSRC.
Meanwhile, the Measures provide that unless stipulated otherwise in the law, administrative regulations or by the CSRC, securities and futures business institutions shall obtain the approval of the CSRC to engage in the private placement asset management business.
To carry out the private placement asset management business, a securities and futures business institution shall meet the following conditions:
(1) Its net assets, net capital and other financial and risk control indicators comply with the laws, the administrative regulations and the CSRC’s requirements.
(2) It has sound corporate governance structure, and complete internal control, compliance management, and risk management systems.
(3) It employs qualified senior executives and more than three investment managers.
(4) It has an investment research department and employs no less than three full-time employees dedicated to investment research.
(5) It has business premises, security facilities, and an information technology system that satisfy relevant requirements.
(6) It has not been subject to any administrative penalty or criminal punishment for a major violation of law in the last two years, has not been subject to any administrative regulatory measure by a regulatory authority for a major violation in the most recent year, nor is it under investigation by a regulatory authority or an appropriate authority for a suspected major violation.
(7) Other conditions prescribed by the CSRC under the principle of prudential regulation.
Securities companies, fund management companies and futures companies that setup subsidiaries to carry out private placement asset management, while using their investment research departments to provide investment research services for the subsidiaries, shall be deemed as meeting the conditions set forth in Subparagraph (4) of the preceding paragraph.
2. Private placement
Pursuant to the Measures, an asset management plan shall be offered to qualified investors in a non-public manner.
To this end, the Measures provide that a securities and futures business institution or sales agency shall not publicize or effectively publicize any asset management plan, or promote any specific asset management plan to unspecified persons through newspapers, radio stations, television, the Internet or any other communications media, or lectures, seminars, flyers, bulletins, self-published media, or any other method. A securities and futures business institution shall not establish multiple asset management plans while concurrently investing in the same non-standardized assets in an attempt to bypass the limit on the number of investors or other regulatory requirements. Non-standardized assets of a single entity and its affiliated parties shall be deemed as the same non-standardized assets. The Measures also provide that no entity or individual may bypass the threshold standards for qualified investors or the limit on the number of investors by dividing shares or transferring the beneficiary’s right of shares and other methods.
3. Information disclosure
With respect to information disclosure, the Measures provide that a securities and futures business institution, custodian, sales agency and any other information disclosure obligor shall disclose information about its asset management plan as required by law, guarantee the authenticity, accuracy, completeness and timeliness of the disclosed information, and ensure that the investors can review or copy the information and materials so disclosed during the time period and in the manners stipulated under the asset management contract.
Specifically, the Measures provide that an asset management plan shall provide the following information disclosure documents to the investors:
(1) The asset management contract, plan description and risk disclosure statement.
(2) The net asset of the asset management plan, and the cost for enrolling in and withdrawing from the asset management plan.
(3) Regular reports under the asset management plan, which shall at least include quarterly and annual reports.
(4) Interim reports on major issues.
(5) Liquidation reports under the asset management plan.
(6) Other matters required by the CSRC.
Meanwhile, the Measures also require the information disclosure documents that the securities and futures business institutions provide to investors to be promptly submitted to the relevant agencies dispatched by the CSRC and the Asset Management Association of China.
4. Risk management and internal control
In terms of risk management, the Measures stipulate that securities and futures business institutions shall establish and improve the management systems for their private placement asset management business with respect to investor suitability, investment decisions, fair transactions, accounting, risk control, compliance management, and complaint handling, which cover elements such as product design, offering, research, investment, trading, accounting, information disclosure, liquidation, information technology, investor services, etc., of the private placement asset management business. The Measures also clarify the job responsibilities and accountability mechanisms to ensure effective implementation of each institutional process.
In general, these Measures contain more detailed provisions concerning asset management by securities and futures business institutions. In addition to the points covered in this article, the Measures also provide for matters such as the formulation of an asset management plan, the use of raised funds, and changes and termination of the asset management plan, so as to play a stronger guiding role for both investors and managers.