Client Alert – How Soon Will WFOEs be Registered as PFMs?

Many foreign fund managers recently revisited a niche-market topic emerging in China’s extensive capital markets — when WFOEs (Wholly Foreign-Owned Enterprises) will be widely accepted as PFMs (Private Securities Investment Fund Managers). Such question, we presume, might arise from the report about the achievements presented at the recent China-UK Economic and Financial Dialogue as well as international media reports on the Chinese subsidiary of Aberdeen Asset Management Limited PLC (Aberdeen) being granted a business license.
On July 1, 2015, the Chinese Government announced, among its eight commitments for opening up the financial services sector, which were achievements of the 2015 China-US Strategic and Economic Dialogue, that it will allow qualified locally-incorporated wholly foreign-owned or joint-venture private fund management institutions to engage in private securities fund management businesses, including the trading of securities on secondary markets, according to local regulations. More than two months later, on September 21, 2015, the same outcome was announced at the 7th China-UK Economic and Financial Dialogue. There is no difference between the two announcements, which both allow wholly foreign-owned or joint-venture private fund management institutions to offer private securities fund management services.
However, it is interesting to see that the policy outcome announced at the China-UK Dialogue specially mentioned that, “the UK welcomes this development, and supports Aberdeen Asset Management (Shanghai), which has received a license from the State Administration of Industry & Commerce (“SAIC”) to operate as a wholly foreign-owned enterprise, to apply to be registered with the Asset Management Association of China (“AMAC”)”. This announcement seems to have attracted considerable attention from the international media. For example, in an article entitled China Grants Aberdeen Asset Management Business License (dated September 22, 2015), Reuters referred to a statement by the British Business Department that, “[Such] license was issued to a newly-created Aberdeen subsidiary and will enable it to set up an office in China under a pilot free trade scheme”. This reference is ambiguous, however, in that the meaning of such “license” is unclear.
In our opinion, from the literal meaning of the China-UK announcement, Aberdeen Shanghai has merely obtained an enterprise business license (Business License) from the SAIC, and the British Government supports the company in its application for PFM registration with AMAC (PFM Registration) in addition to the Business License.
Pursuant to Article 12 of the Law on Securities Investment Funds (the Fund Law) and Article 2 of the Interim Measures for the Supervision and Administration of Private Investment Funds (the Interim Measures), the incorporation of a company or partnership (evidenced by the issuance of a Business License) is a prerequisite for such entity to apply for PFM Registration; but, being issued a Business License does not equal being granted a PFM Registration. Article 91 of the Fund Law and Article 38 of the Interim Measures further clarify that a company or partnership will be allowed to engage in the private securities investment fund management business only upon its PFM Registration. Without such registration, no company or partnership shall conduct the private securities investment fund management business. We surmise that certain international publications may have failed to understand and correctly distinguish the “Business License” from the “PFM Registration” and that the reports equate the granting of a Business License to Aberdeen Shanghai with PFM Registration, which might be misleading.
It is noteworthy that the commitments made at both the China-UK dialogue and the China-US dialogue included the phrase “according to domestic regulations”. In other words, the Chinese Government will “according to the regulations of China”, decide whether it will grant PFM Registration to WFOEs. As we observe, the time span between the issuance of a commitment or policy and its implementation in practice will likely be subject to certain factors. To our knowledge, the China Securities Regulatory Commission is still soliciting comments from industry members on relevant key issues regarding the regulatory and supervisory framework of private funds. Although we are very much looking forward to the equal and fair treatment between WFOEs and domestic-owned enterprises in terms of registration, filing and supervision of private funds, we cannot exclude the possibility that a new regulation or its implementing rule may impose additional conditions or requirements on WFOEs applying for PFM Registration. On such basis, the Chinese regulatory authorities may need to, in the first instance, improve their supervisory and regulatory rules and norms, and put such commitment into practice thereafter. It seems reasonable for the Chinese regulators to “clean up the house before entertaining guests”; in particular under the circumstance that the amendment and improvement of the related regulatory rules have already been put on their agenda. The only expectation is that the waiting period for WFOEs’ PFM Registrations will not be dragged on for too long, due to the proposed modification of the regulatory rules.
As for foreign fund managers, it will be a long-term and significant commitment to enter the Chinese market and launch private securities investment fund management businesses. Despite the ability of foreign fund managers to set up wholly-owned or majority-owned subsidiaries in China and initiate all preparatory work to apply to AMAC for PFM Registration, it is important for planning purposes to take into account the time impact due to the currently proposed changes to the regulatory rules.