On April 3, 2020, the Asset Management Association of China (AMAC) issued the Guidelines for Public Fund Portfolio Managers to Concurrently Serve as Portfolio Managers for Private Asset Management Plans (for Trial Implementation) ("Guidelines"), which will be officially implemented on May 1, 2020.
The general approach taken under the Guidelines is to moderately relax the prohibition on public fund portfolio managers concurrently serving as portfolio managers for private asset management plans (AMPs), on condition that the securities investment fund management companies (FMCs) can duly control and manage the relevant risks arising therefrom. We believe this reform will help improve the overall investment management capabilities and efficiency of FMCs with respect to various products, especially for those small or medium-sized FMCs or newly established FMCs which usually encounter shortages of portfolio managers. Furthermore, such reform, in our belief, is also in line with the common practices in mature markets.
Below is our briefing of the key points of the Guidelines:
Ⅰ. Requisite Conditions for the FMC and their Portfolio Managers
The Guidelines do not allow a full liberalization without condition, but rather stipulate specific conditions for both FMCs and portfolio managers:
The Guidelines underscore the importance of having good capabilities to ensure continuous risk control and compliance management for FMCs intending to implement such arrangement. The Guidelines also list out the compliance requirements by using a 「negative list」, that is, the FMC has not been subject to (i) any criminal penalties or administrative penalties during the most recent year; or (ii) any administrative regulatory measures (i.e. suspension of product registration or suspension of filing) due to lack of internal control, violations related to investment management or unfair treatment of investors.
For a portfolio manager who intends to concurrently serve as an AMP portfolio manager, the Guidelines set forth requirements regarding his/her professional ethics and expertise, namely, (i) the portfolio manager has not been subject to any criminal penalties, administrative penalties, administrative regulatory measures or self-disciplinary measures over the past three years; and (ii) the portfolio manager possesses good investment management capabilities, and has more than five years of investment management experience in equity-type public funds, equity-type private AMPs, annuity portfolios or social security portfolios.
The Guidelines require the FMCs and portfolio managers to stay in continuous compliance with the aforesaid requirements. If an FMC no longer meets the aforesaid requirements, the portfolio managers of such FMC shall be prohibited from managing new private AMPs concurrently. If a portfolio manager of an FMC no longer meets the aforesaid requirements, such portfolio manager shall be banned from managing new private AMPs.
Ⅱ. Continuous Requirements of Prudent Operation and Compliance and Risk Control
The rationale behind previous regulatory prohibition on public fund portfolio managers concurrently serving as portfolio managers for private AMPs was to prevent interest tunneling and information leakage between public funds and private AMPs by separation of relevant personnel. Therefore, the prerequisite for the moderate relaxation of the prohibition proposed by the Guidelines is still that relevant FMCs shall follow the principle of prudent operation and improve the relevant internal control systems, decision-making procedures and control mechanisms to avoid violations such as conflict of interests, interest tunneling and front running while allowing the portfolio managers to take concurrent positions. Specifically, the requirements include the following:
First, before implementation, the FMCs shall carefully assess all possible conflict of interests, improve relevant internal management systems, work procedures and system settings, as well as specify the responsibilities of relevant departments and personnel. Meanwhile, it shall prudently assess several factors such as investor needs, product investment strategies, compliance and risk control capabilities, and portfolio manager’s management capabilities, and decide whether to implement such arrangement only after all the necessary internal decision-making procedures have been taken. In other words, whether, and to what extent, the FMC allows a public fund portfolio manager to concurrently serve as the portfolio manager of private AMP shall reflect the actual business needs of the FMC, as well as the portfolio manager’s management capabilities, time commitment, and compliance/risk-control capabilities.
Second, in the process of implementation, an FMC shall strictly adhere to the relevant rules on internal control management, fair trading, and information disclosure, improve the fair trading analysis and abnormal trading monitoring mechanism with respect to multiple investment portfolios managed by the same portfolio manager, and enhance the information disclosure and abnormality reporting systems. Moreover, if the FMC proposes to appoint a public fund portfolio manager to concurrently serve as portfolio manager for a private AMP, it shall also perform the filingformalities for thechangeof filing of portfolio manager with the AMAC.
Third, the FMC is also required to strengthen the incentive-deterrence and accountability mechanisms, and conduct long-term assessments on portfolio managers who take concurrent positions for more than five years. In addition to the long-term performance of all portfolios that a portfolio manager manages concurrently, the key performance indicators shall also include other compliance related matters, such as regulatory compliance, good faith and fair execution of trades.
Ⅲ. Relevant Issues and Our Observations
We recommend each FMC, in compliance with the relevant requirements stipulated under the Guidelines, to prudently evaluate whether, and to what extent, to implement such an arrangement according to its actual business development and status of investment management personnel. It shall also consider whether there may be related problems or obstacles in practice by referring to the Guidelines. For example, to ensure the performance of a portfolio manager, the Guidelines require that the number of public funds and private AMPs managed by a single portfolio manager shall not exceed 10 in total in principle (products completely index-tracked will not be considered in this count). In this case, there may be a limit on the number of public funds managed by a portfolio manager. Moreover, the Guidelines require the deployment of a deferred income payment mechanism (in principle, in no less than three years, and the amount of deferred income payment is not less than 40%) for the portfolio managers who take portfolio manager positions concurrently. In this case, how to incentivize the portfolio managers while striking a balance between incentives and restraints is another problem worth considering.
Notably, the Guidelines have not yet allowed the portfolio managers of fixed-income products to concurrently serve as portfolio managers for private AMPs. We understand the reason may be that concern over the risk of interest tunneling in OTC bond transactions is relatively high, and correspondingly it is more difficult to ensure full compliance and achieve risk control and therefore, the regulatory authorities incline to take a more cautious approach in this regard.
We also note that the Guidelines are silent on the issue of whether a public fund portfolio manager may participate in investment advisory business concurrently, which remains to be further clarified by the competent regulatory authorities.
According to the Circular on Regulating the Bond Trading Business of Bond Market Participants (Yinfa [2017] No.302) jointly issued by the People’s Bank of China, the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission (now the China Banking and Insurance Regulatory Commission) in 2017, participants in the bond market shall separate the front end businesses of proprietary trading, asset management, and investment advisory business from each other and establish effective firewalls with respect to relevant assets, personnel, IT systems, and internal policies. If in the future public fund portfolio managers are permitted to participate in the investment advisory business concurrently,In light of the above regulatory restriction related to bond products, we would recommend the regulators may considerto allowstart with the equity-type products first if allowing portfolio managers to concurrently participate in investment advisory businesses related to equity-type products only in order to remain consistent with the above regulatory requirement related to bond productsin the future.
Moreover, from a practical perspective, since an FMC only provides investment recommendations to the products that it advises, and trades of such products will not be executed via the investment management system of the FMC, the relevant FMC may face greater difficulty in incorporating the investment advisory products within the scope of its compliance and risk management, which may therefore raise higher standards for the FMC's compliance and risk control capabilities correspondingly.
In addition, Article 59 of the Administrative Measures on Private Asset Management Business of Securities and Futures Business Institutions (China Securities Regulatory Commission Order No. 151) provides that securities and futures business institutions shall take effective measures to ensure that private asset management businesses and other businesses are firewalled from each other with respect to work space, personnel, accounts, funds, information, etc. Given the moderate relaxation of the prohibition on public fund portfolio managers concurrently serving as portfolio managers for private AMPs under the Guidelines, another issue that needs to be clarified is how to interpret and implement the aforesaid business segregation requirement stipulated in Article 59. Currently regulatory authorities are generally taking a cautious approach for the supervision of FMCs, and in our view, unless it is explicitly allowed by the regulatory authorities, FMCs are recommended to take a more conservative approach when interpreting and enforcing the relevant regulatory requirements.
We will continue to monitor the situation and keep our clients apprised of any important developments.
Practice Area：
Capital Market
Private Equity/Venture Capital
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