August 2017
The China Securities Investment Fund Industry Association Promulgated Measures to Manage Placement of Private Investment Funds(Mainland China)
Zoe Qiao
On April 15, 2016, the China Securities Investment Fund Industry Association (hereinafter, the "Association") promulgated the Administrative Measures for Managing Placement Activities of Private Investment Funds (hereinafter, the "Placement Measures"), which are self-regulation provisions of the industry formulated with authorization under the Interim Measures for the Supervision and Administration of Private Investment Funds (hereinafter, the "Regulatory Rules") promulgated by the China Securities Regulatory Commission. The Placement Measures primarily set out the scope and eligibility of the placement entity of a private investment fund and clearly stipulate the relevant obligations so as to resolve the persistent legality issues in current private placement, such as unclear responsibilities over management and fundraising, and false advertising.
Pursuant to the definition under Article 2 of the Placement Measures, placement activity includes recommendation, sales, handling the acquisition (subscription) of fund shares (equity) and their redemption (exit).
Under Article 16 of the Regulatory Rules, a private investment fund manager may sell (place) the fund on its own or entrust a distribution (placement) agency to sell a private fund. The Placement Measures specifically provide that a fund manager that places and sets up a private fund on its own needs to be registered with the Association, and the placement entity that has been entrusted to handle the sale should be registered with the China Securities Regulatory Commission to obtain the qualifications for engaging in the fund placement business, as well as become a member of the Association. In addition, personnel engaging in the business of placing private investment funds should also be qualified to work in the mutual fund industry.
In practice, when the placement is being entrusted, the placement entityÕs staff often fails to disclose to the investor that the placement entity is not the investment manager of the fund product. Should the private fund encounter a redemption crisis or any other issue, investors would often approach the placement entity for redemption, thereby confusing a fund manager with a placement entity.
Therefore, Article 7 of the Placement Measures provides that a private fund manager should assume the obligations of a trustee pursuant to law, and it will not be released from such contractual obligations as a result of entrusted placement. Article 8 provides if a private fund manager entrusts a private fund placement to a placement entity, a placement agreement should be executed, and provisions concerning the differentiation of the rights and obligations of the private fund manager and the placement entity, as well as other provisions involving the interest of the investors, should be attached to the agreement. The placement agreement should specifically define the rights and obligations of the manager and those of the placement entity so that both parties are clear on the issue and the investorÕs right to know is being protected
To strengthen investor protection, the Placement Measures set out six obligations of fund placement in detail. When placing a fund, a placement entity should (1) select potential customers only from those who have been assessed for investor risk identification and risk tolerance capability; (2) recommend private fund products that match the risk identification ability and risk tolerance capability of the target customers; (3) disclose the risks; (4) sign a contract only when the placement entity has been substantively reviewed by a qualified investor; (5) do not actively contact investors during the cooling-off period; and (6) arrange for non-placement personnel to complete the revisit program to further confirm the identity of investors and their true willingness to invest.
The Placement Measures contain two schedules, namely, the Guidance on the Contents and Format of the Private Investment Fund Investor Risk Survey (For Individuals) and the Guidance on the Contents and Format of Risk Disclosure Documents of Private Investment Funds. The Placement Measures will go into effect on July 15, 2016.
On April 15, 2016, the China Securities Investment Fund Industry Association (hereinafter, the "Association") promulgated the Administrative Measures for Managing Placement Activities of Private Investment Funds (hereinafter, the "Placement Measures"), which are self-regulation provisions of the industry formulated with authorization under the Interim Measures for the Supervision and Administration of Private Investment Funds (hereinafter, the "Regulatory Rules") promulgated by the China Securities Regulatory Commission. The Placement Measures primarily set out the scope and eligibility of the placement entity of a private investment fund and clearly stipulate the relevant obligations so as to resolve the persistent legality issues in current private placement, such as unclear responsibilities over management and fundraising, and false advertising.
Pursuant to the definition under Article 2 of the Placement Measures, placement activity includes recommendation, sales, handling the acquisition (subscription) of fund shares (equity) and their redemption (exit).
Under Article 16 of the Regulatory Rules, a private investment fund manager may sell (place) the fund on its own or entrust a distribution (placement) agency to sell a private fund. The Placement Measures specifically provide that a fund manager that places and sets up a private fund on its own needs to be registered with the Association, and the placement entity that has been entrusted to handle the sale should be registered with the China Securities Regulatory Commission to obtain the qualifications for engaging in the fund placement business, as well as become a member of the Association. In addition, personnel engaging in the business of placing private investment funds should also be qualified to work in the mutual fund industry.
In practice, when the placement is being entrusted, the placement entityÕs staff often fails to disclose to the investor that the placement entity is not the investment manager of the fund product. Should the private fund encounter a redemption crisis or any other issue, investors would often approach the placement entity for redemption, thereby confusing a fund manager with a placement entity.
Therefore, Article 7 of the Placement Measures provides that a private fund manager should assume the obligations of a trustee pursuant to law, and it will not be released from such contractual obligations as a result of entrusted placement. Article 8 provides if a private fund manager entrusts a private fund placement to a placement entity, a placement agreement should be executed, and provisions concerning the differentiation of the rights and obligations of the private fund manager and the placement entity, as well as other provisions involving the interest of the investors, should be attached to the agreement. The placement agreement should specifically define the rights and obligations of the manager and those of the placement entity so that both parties are clear on the issue and the investorÕs right to know is being protected
To strengthen investor protection, the Placement Measures set out six obligations of fund placement in detail. When placing a fund, a placement entity should (1) select potential customers only from those who have been assessed for investor risk identification and risk tolerance capability; (2) recommend private fund products that match the risk identification ability and risk tolerance capability of the target customers; (3) disclose the risks; (4) sign a contract only when the placement entity has been substantively reviewed by a qualified investor; (5) do not actively contact investors during the cooling-off period; and (6) arrange for non-placement personnel to complete the revisit program to further confirm the identity of investors and their true willingness to invest.
The Placement Measures contain two schedules, namely, the Guidance on the Contents and Format of the Private Investment Fund Investor Risk Survey (For Individuals) and the Guidance on the Contents and Format of Risk Disclosure Documents of Private Investment Funds. The Placement Measures will go into effect on July 15, 2016.
