III. The qualification requirements to be satisfied by a WFOE in order to engage in private securities fund management business
- Common Requirements
Pursuant to Article 89 of the Law of the People's Republic of China on Securities Investment Funds, anyone who acts as the manager of a non-publicly-raised fund shall register with AMAC according to relevant rules. Accordingly, a WFOE shall complete its registration with AMAC before it engages in private fund management business in China. A WFOE shall not engage in any fund raising or management activities with respect to any private fund before it completes the registration with AMAC.
In consideration of all the relevant self-disciplinary rules that came into force from the year of 2014, and the Notice on Relevant Matters Regarding the Further Standardization of Private Fund Manager Registration, an important rule that came into force upon 5 February 2016, generally speaking, a WFOE applying to AMAC for the private securities fund manager registration shall satisfy the following requirements:
(a) Company name
Relevant Chinese characters such as “fund management (基金管理)”, “investment management (投资管理)”, “asset management (资产管理)” shall be included in the company name of the WFOE.
(b) Business scope
The permitted business scope of the WFOE only includes “investment fund”, “fund management”, “investment management”, “asset management” or the like. Other items that are irrelevant to the private fund management business such as “business information consulting”, “corporate management consulting”, “international economy information consulting” shall not be included in the business scope of the WFOE.
The business scope of a private securities investment fund manager that consists of only two items: “investment management” and “asset management” is typical and precise qualified business scope of a WFOE.
(c) Capital
The shareholder of the WFOE shall give consideration to the following matters when determining the capital of the WFOE:
(i) Even though there is no specific requirement imposed by AMAC on minimum registered capital of a private fund manager, a private fund manager shall ensure that its actual paid-in capital is capable of covering all the operating cost before its obtained management fee could meet its operating expenses.
(ii) Where the paid-in capital funds of a private fund manager come under 25% of its subscribed registered capital or under RMB 1 million, the private fund manager shall be “expressly marked up” and disclosed on the website of AMAC.
(d) Business premises
Currently, AMAC has no compulsory requirement on the site selection and floor area of the private fund manager’s business premise, but the site selection and floor area shall be suitable for its private fund management business. Please also note that, it is permissible from AMAC’s perspective that the private fund manager may have business premises different from its domicile, however in which case, the WFOE shall carefully assess the potential risks it may encounter from the Administration for Industry and Commerce (“AIC”).
(e) Senior management personnel and their practitioner qualification
Anyone acting as the senior management personnel of the WFOE shall satisfy the following requirements:
(i) The senior management personnel of the WFOE shall include but without limitation to its legal representative, general manager, deputy general manager (if any) and compliance/risk control officer.
(ii) There is no restriction imposed on the nationality of the senior management personnel of the WFOE.
(iii) The WFOE shall have at least two (2) senior management personnel. The compliance/risk control officer is a must and shall not concurrently act in other positions with investment functions.
(iv) All senior management personnel of the WFOE shall have fund practitioner qualification and may acquire the fund practitioner qualification if he/she satisfies any of the followings:
Having passed the fund practitioner qualification examination and the fund practitioner qualification examination includes Subject One (“Fund Laws and Regulations, Professional Ethics and Business Norm”) and Subject Two (“Basic Knowledge of Securities Investment Fund”).
Having been engaged in the relevant investment management business in the most recent three (3) years, or having passed the securities practitioner qualification examination or the futures practitioner qualification examination or the banking practitioner qualification examination and satisfied certain conditions; or having passed relevant qualification examinations such as the certified public accountant qualification examination or the legal professional qualification examination or the public valuer qualification examination and satisfied certain conditions. Senior management personnel having satisfied those conditions will only be required to pass Subject One of the fund practitioner qualification examination, namely the “Fund Laws and Regulations, Professional Ethics and Business Norm”, and may be exempted from taking Subject Two of the fund practitioner qualification examination, namely the “Basic Knowledge of Securities Investment Fund”, to be deemed as having obtained the fund practitioner qualification.
It is our estimate that the foreign institution may need to designate persons that have asset management experience in the overseas market or foreign licensed persons to act as the senior management personnel of the WFOE. Whether such persons could be exempted from taking Subject Two of the fund practitioner qualification examination, namely the “Basic Knowledge of Securities Investment Fund” shall be further clarified and confirmed with AMAC.
(f) Identification of actual controller
When processing the private fund manager registration with AMAC, the WFOE shall provide a statement as to whether it has an actual controller and provide the relevant information of the actual controller if it does have one. For more information on the identification of actual controller as well as the qualification requirement for the actual controller, please refer to the “Special requirements” part of this article.
(g) Risk management and internal control systems
When applying to AMAC for the private fund manager registration, the WFOE shall formulate a complete set of risk management and internal control systems that cover key operational processes including but not limited to:
•Operational risk control system
•Information disclosure system
•System of record-keeping for internal transaction
•Investment and trading system to prevent insider dealing and conflicts of interests
•Risk disclosure system for qualified investors
•Procedures and relevant system concerning the internal check of qualified investors
•Relevant standards and system concerning the marketing, promotion and fund-raising of a private fund
•Fair trade system
•Reporting system for the securities traded by the employees of the WFOE
Please note that all the above-mentioned risk management and internal control systems shall be in compliance with the Guidelines on the Internal Control of Private Investment Fund Managers released by AMAC and be duly approved by the internal decision-making organ of the WFOE (such as the board of directors of the WFOE). Besides, the WFOE shall be properly equipped with all the relevant practicality in respect of the above-mentioned systems and shall establish those systems which can fit in the organizational structure and staffing conditions as well as the actual operational needs of the WFOE.
Additionally, pursuant to FAQ No. 10, a WFOE engaging in private fund management business shall make investment decisions independently, and shall not place trading orders through foreign institution(s) or foreign-based system(s). This requirement may have profound impact on the foreign asset management institutions that have asset management business all over the world and might change the global trading systems and trading modes of these foreign institutions.
(h) Requirements for outsourcing service
The WFOE may choose a qualified outsourcing institution to provide services such as sales, settlement, TA, valuation and accounting, trading and IT system etc.
The outsourcing institution engaged by the WFOE shall have record-filed with AMAC as an outsourcing institution. The list of qualified institutions is available at http://fo.amac.org.cn/amac/allNotice.do.
(i) Compliance status of the WFOE and its senior management personnel
In respect of the compliance status, the WFOE and its senior management personnel shall satisfy the following requirements:
(i) The WFOE shall not be subject to any criminal penalty or any administrative penalty by any financial regulator or any administrative regulatory measure;
(ii) The WFOE and its senior management personnel shall not be subject to any disciplinary punishment by AMAC or any associations of other industries;
(iii) The WFOE and its senior management personnel shall not bear any negative information contained in the Capital Market Integrity Database maintained by the CSRC;
(iv) The WFOE and its senior management personnel shall not be included in the List of Dishonest Persons Subject to Enforcement maintained by the Supreme People’s Court of China;
(v) The WFOE and its senior management personnel shall not be included in the List of Abnormal Operation Enterprises or the List of Enterprises Having Committed Serious Violation against the Law as disclosed via the National Enterprise Credit Information Publicity System maintained by the State AIC; and
(vi) The WFOE and its senior management personnel shall not have any bad credit records posted on the “Credit China” website (www.creditchina.gov.cn).
The WFOE shall give full consideration to the above-mentioned requirements when employing senior management personnel.
(j) Involvement in litigation or arbitration
When processing the registration, the WFOE shall provide information about its litigation or arbitration involvement in the recent three (3) years, and the PRC lawyer shall fully assess the information and confirm whether the situation would have any influence on the qualification required for the private fund manager registration when issuing legal opinion.
(k) Please also note that a registered private fund manager, which fails to launch its first private fund with AMAC within six (6) months upon the completion of its private securities investment fund manager registration, will be deregistered from the registry of private fund managers by AMAC. This means that a WFOE has to formulate a stage-by-stage business strategy before it comes into existence and also has to commence preparation work to launch a fund as early as possible. - Issuance of PRC legal opinion
Pursuant to the Notice on Relevant Matters Regarding the Standardization of Private Fund Manager Registration and FAQ No.10, a competent PRC law firm and its lawyers shall issue a legal opinion on whether the WFOE satisfies all the registration requirements set out by AMAC. The legal opinion is one of the required documents that shall be submitted to AMAC for private fund manager registration purposes. Therefore, the PRC law firm and its lawyers shall conduct due diligence on the WFOE, keep and archive all the working papers and documents generated therewith, and give conclusive legal opinion as to whether the WFOE satisfies all the requirements regarding the private securities investment fund manager independently and objectively. - AMAC’s examination of the applications for private fund manager registration
Where the materials for the application for registration provided by the WFOE are complete, AMAC will complete the registration procedures within twenty (20) working days upon the acceptance of all the required documents and make a public disclosure of the basic information of the private fund manager on its official website (http://www.amac.org.cn).
IV. Incorporation of WFOE
The WFOE shall first be incorporated in China before it could file an application to AMAC for the private fund manager registration. Along with the improvement of PRC laws and regulations in relation to foreign investment, the procedures for setting up a WFOE in China have become increasingly straightforward and transparent, and its corresponding workflow is stated as follows: - Acquiring the company name pre-approval from AIC
- Acquiring the foreign investment approval from local Ministry of Commerce
- Registering with local AIC
If the WFOE is to be set up in China (Shanghai) Free Trade Pilot Zone, the above-mentioned steps 2 and 3 will be combined.
During the WFOE set-up process, the following matters shall be fully considered and prepared in accordance with the above-mentioned AMAC requirements on the private fund manager registration: - Determining the board of directors / executive director, legal representative, general manager, deputy general manager, compliance / risk control officer, finance officer of the WFOE;
- Determining the articles of association of the WFOE;
- Determining the capital of the WFOE;
- Determining the registered address and business premises; and
- Preparing the documents required for the WFOE set-up such as the power of attorney that authorizes a handling person, the incorporation certificate or business license of the WFOE’s shareholder etc.
V. Outlook and suggestion
FAQ No.10 is not only a significant measure China took to meet its open-up commitment, but also a long-awaited major policy to foreign financial institutions. In the near future, China will definitely see many resourceful foreign financial institutions coming into the Chinese asset management and financial market through this channel.
However, the selection of foreign shareholder, setting up the WFOE, application for the private fund manager registration as well as the commencement of the private securities investment fund management business together form a “systematic project”. We suggest that any foreign financial institution with interests should combine all the resources it has internally and acquired externally from its intermediary agents, and start early on its research and study of the relevant laws and regulations and self-disciplinary rules, conduct self-assessment and form practical plans for the private fund to be launched and managed in China, so as to complete the business layout in the area of private securities fund in China as early as possible.