The Legislative Affairs Office of the State Council (the "LAO") issued the draft Interim Regulations on the Administration of Privately Placed Investment Funds (the "Draft Regulations") on August 30, 2017. The Draft Regulations are open for public comments between August 30, 2017 and September 30, 2017. The major aspects of the Draft Regulations are highlighted below.

1. Restating Relevant CSRC and AMAC Rules

The Draft Regulations cover a broad spectrum of issues, including issues relating to private fund manager ("PFM") registration and private fund filing, custodian, fund-raising, investment operation, information disclosure, and regulatory sanctions. Most provisions of the Draft Regulations resemble the relevant provisions of the Interim Measures for Supervision and Administration of Privately-Placed Investment Funds and the other relevant rules (the "Relevant Previous Rules") issued by the China Securities Regulatory Commission (the "CSRC") and the Asset Management Association of China (the "AMAC"). Because the Draft Regulations were issued by LAO, restating the Relevant Previous Rules by the Draft Regulations has the effect of elevating the legislative status of the Relevant Previous Rules issued by CSRC and AMAC.

2. Sanctions on Noncompliance and Violations

While most provisions of the Draft Regulations resemble the Relevant Previous Rules, the Draft Regulations have strengthened sanctions for noncompliance and violations. The Draft Regulations include sanctions and penalties such as confiscation of illegal gains, and fine up to RMB1 million or 5 times of illegal gains, and contain thirteen articles relating to sanctions and penalties on various illegal activities, which include the following: failing to abide by the investor suitability obligations, unfairly treating the assets of different funds under common management, tunneling, violating information disclosure rules, and failing to establish measures to counter tunneling and conflicts-of-interest.

3. Redefining Scope of Privately Placed Funds and Permitted Assets

According to the Draft Regulations, privately placed funds include privately placed securities investment funds and privately placed equity investment funds. Such categorization does not cover the privately placed funds that invest in other types of assets, such as non-standardized debt assets. The Draft Regulations also limit the permitted investment assets to securities and their derivatives, equity interests in limited liability companies, fund shares and other investments permitted by CSRC. Such scope does not cover shares in companies limited by shares. The market expects that the scope of permitted investments might likely be expanded in the final version of the Draft Regulations or in supplemental CSRC rules.

4. Eligible Investment Advisors

Article 25 of the Draft Regulations states that a PFM may engage a CSRC-approved financial institution or a registered PFM to provide investment advisory services. Article 52 further states that a breach of Article 25 may lead to confiscation, fine and warning.

In contrast, under the Interim Rules on Administration of Private Asset Management Business Operation of Securities and Futures Business Institutions issued by CSRC in 2016, eligible investment advisors to private securities investment managers are limited to securities and futures business institutions approved to conduct the asset management business and private securities fund managers meeting certain criteria. The market expects that AMAC will likely further clarify the investment advisor eligibility requirements.

5. Regulating Foreign Asset Managers

The Draft Regulations contain the following two provisions on foreign asset managers: (i) administrative measures on foreign-invested PFMs shall be formulated by CSRC and (ii) overseas institutions shall not directly raise funds from domestic investors to set up privately placed funds. Given that AMAC began to accept WFOE PFM registration applications since January 2017, such provisions indicate that CSRC and AMAC may further strengthen the regulation of foreign asset managers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.