On 23 February 2012, the China Securities Regulatory Commission (the "CSRC") issued mutual fund distribution licences to four independent financial advisors in Mainland China. These are the first independent third-party mutual fund distributors ("MFDs") to be so licenced since the implementation of the revised "Measures for the Administration of the Sale of Securities Investment Funds"1 (证券投资基金销 售管理办法) (the "Revised Fund Sale Measures") on 1 October 2011. The Revised Fund Sale Measures stipulated the detailed qualifications required of MFDs, the first official indication of a sanctioned deviation from the current monopoly by banks of the fund distribution business in Mainland China.
Eligibility Requirements of a Third-Party Mutual Fund Distributor
In order to carry out mutual fund distribution activities, MFDs, as all other financial institutions (including, without limitation, commercial banks, securities firms and securities investment consulting firms), must comply with certain general requirements as set out in the Revised Fund Sale Measures. The MFD must:
- have an appropriate name, organizational structure and business scope, in compliance with relevant regulations;
- have registered capital of at least RMB 20 million (approximately US $3.2 million) that is fully paid up;
- not have experienced any major change, legal proceeding, arbitration or other significant event that has, or may have, a serious impact on the ordinary business operations of the MFD;
- have senior managers who have obtained the requisite fund practice qualification certificates, D and have at least two years' experience working in the fund industry or at least five years' experience working in other financial institutions;
- have at least 10 staff members who have obtained the requisite fund practice qualification certificates;
- have a corporate governance structure and a complete internal control, anti-money laundering and risk management programme;
- maintain sound financials and stable business operations;
- maintain a system for assessing investors' risk tolerance level and classifying the risk level of each mutual fund, as well as a complete set of internal operational policies and procedures;
- have a place of business and the necessary security, technology and other resources suitable for an MFD; and
- establish a settlement process that is in compliance with the relevant requirements set out by the CSRC.
An MFD can take the form of a limited liability company, a partnership or other form as permitted under the relevant regulations promulgated by the CSRC.
These are the first independent third-party mutual fund distributors to be so licenced since the implementation of the revised "Measures for the Administration of the Sale of Securities Investment Funds".
The shareholders of an MFD may be corporations or individuals. When determining whether or not to issue an MFD licence, the CSRC will assess whether the shareholders:
- have sound financials or prior working experience in the fund business;
- have had any criminal or administrative penalties imposed on them in the preceding three years;
- have any adverse financial records or credibility records at commercial banks or other self-regulating institutions; or
- are under any investigation by any regulatory authority.
Going Forward: Foreign Participation?
The Revised Fund Sale Measures are silent as to whether third-party foreign fund distributors may apply for MFD licences. It is also unclear at this stage whether the CSRC will approve foreign financial institutions to form MFD joint ventures with domestic partners or to be shareholders of MFDs. The first four approved MFDs are all either subsidiaries of domestic securities firms or listed companies or are owned by a local national engaged in the domestic fund business.
Currently, foreign participants can engage in fund distribution in Mainland China either: (i) by forming a joint venture fund management company with a domestic fund manager; or (ii) in the case of a foreign bank, by applying for a commercial bank licence.
The Explanatory Notes on the Revised Fund Sale Measures (《证券投资基金销售管理办法》修订说明) issued by the CSRC on 22 June 2011 indicate the CSRC's desire to increase the professionalism of MFDs in Mainland China and to broaden distribution channels. There is speculation that the Mainland Chinese authorities may in time allow foreign participants to enter into the independent MFD business to help achieve these goals.
Increasing the number and type of entities approved as MFDs (whether local or foreign) will enhance competition and diversity in the fund distribution market; however, it will be difficult for these new entrants to challenge the current dominant position of commercial banks in the mutual fund distribution business.
1 The concept of "securities investment fund" under Mainland Chinese laws has the equivalent meaning to "mutual fund" in Hong Kong.
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