In line with our expectation, the first foreign-owned private securities investment fund manager ("WFOE PFM") - FIL Investment Management (Shanghai) Company Limited, a wholly foreign-owned enterprise ("WFOE") of Fidelity, obtained the registration at the beginning of 2017, six months after the WFOE PFM policy was announced in June 30, 2016. On January 4, 2017, the Asset Management Association of China ("AMAC") announced the registration of the first WFOE PFM.  Meanwhile, the AMAC published the Illustrative Guidance for the Registration and Filling of WFOE and Joint Venture Private Securities Investment Fund Managers ("Illustrative Guidance") on its website. The Illustrative Guidance provides guidance through illustration on the registration and filing related matters of WFOE PFM, and sets out detailed requirements for the legal opinion on the registration of a WFOE PFM.

It is anticipated that an increasing number of qualified foreign institutions will apply for the PFM registration in 2017. We also believe that Chinese regulators will honor their commitments to welcome more foreign securities fund managers to enter the Chinese market.

To register as a WFOE PFM, an applicant shall first log into the Asset Management Business Electronic Registration System (, and according to the Illustrative Guidance, enter the following information, (1) basic information of applicant; (2) business rules; (3) financial license and affiliates of applicant; (4) credit information; (5) financial information; (6) foreign shareholder information; (7) de facto controller information; (8) senior executive information; and (9) a legal opinion on PFM registration.

Compared to the requirements for the legal opinion on the registration of domestic-invested PFM, the Illustrative Guidance, based on the special characteristics of WFOE PFM, adds additional requirements and makes certain adjustments to the Guide on Legal Opinions for Registration of Private Fund Managers applicable to domestic-invested PFM.

A. Establishment of the Entity

Same as the requirement for domestic-invested PFM, the Illustrative Guidance requires a WFOE PFM to obtain a corporate name and have a defined scope of business, which explicitly encompasses "investment management", "asset management" and/or "fund management". WFOE PFMs are required not to concurrently engage in any businesses that may have conflict of interest with their private fund management business, or any non-financial businesses. For foreign institutions engaging in the overseas investment fund management businesses in China, e.g., QDLP, the Illustrative Guidance emphasizes that such institutions' overseas investment fund management businesses shall be properly segregated from other private fund management businesses. This requirement set out in the Illustrative Guidance supports the view that the QDLP business is a type of private fund management business, and at the same time, clarifies that "proper segregation" of the two businesses aims to prevent conflict of interest. Our understanding is that, at the least, the Illustrative Guidance does not expressly prohibit a WFOE PFM from engaging in QDLP business and private fund management business at the same time.

B. Foreign Shareholder and Foreign De Facto Controller

The Q&A Regarding Registration and Filing of Private Funds (X) ("AMAC Q&A (X)") provides that both the foreign shareholder and the foreign de facto controller of a WFOE PFM shall be overseas licensed financial institutions.  With regard to how to identify the foreign de facto controller of a WFOE PFM, the de facto controller shall be traced to the ultimate individual or overseas institution regulated by overseas financial regulators. If, when tracing the de facto controller, the shareholding ownership appears to be dispersed, e.g. the de facto controller is traced to be an overseas listed company with a relatively dispersed shareholding structure, the WFOE applicant may be deemed as having no de facto controller. Our suggestion to this point is that, in case that an applicant has a foreign de facto controller while such de facto controller is not a licensed financial institution, the WFOE applicant shall truthfully disclose such information in its application so that the relevant Chinese regulators can exercise their discretion to decide whether to allow an exception.

C.Independent Investment Decision Making

According to the AMAC Q&A (X), when a WFOE PFM trades securities or futures in China, its investment decisions shall be made independently, and trading orders shall not be delivered by an institution or system located outside of China.  As for such widely concerned requirement on independent investment decision making, the Illustrative Guidance further clarifies that WFOE PFMs shall locate their system terminals within the territory of China; all trading paths shall be transparent and traceable; all trading data shall be complete and available for inspection; all trading procedures shall be clear and controllable; and all trading records are to be kept in entirety during the whole process. WFOE PFMs shall also appoint persons-in-charge for both the investment decision making and the trade execution. We feel that the aforementioned detailed requirements have already considered the need for the WFOE PFMs to leverage their global investment and research resources, infrastructure and risk control system of their overseas groups.

D. Fund-related Business Practitioners and Concurrent Positions of Senior Executives

The Illustrative Guidance requires fund-related business practitioners of a WFOE PFM to obtain the qualifications for practicing fund-related business. The fund-related business practitioners shall include not only senior executives of the WFOE PFM, but also investment managers, persons-in-charge for investment decision making or trade execution, and other practitioners engaging in the daily private fund operation and management.

In addition to the requirements for senior executives as set out in the Guide on Legal Opinions for Registration of Private Fund Managers, the Illustrative Guidance clearly requires that senior executives of a WFOE PFM shall enter into employment contracts with the entity he/she serves, and undertake to contribute appropriate working time to this WFOE PFM when he/she takes any concurrent position in other affiliates of this entity. The Illustrative Guidance does not prohibit senior executives from taking concurrent positions in an affiliate of a WFOE PFM, but requires the WFOE PFM to formulate relevant internal rules and take relevant measures to avoid any potential conflict of interest arising from senior executives taking concurrent positions.

E. Disclosure of Relevant Information of Affiliates, Foreign Shareholders, and Foreign De Facto Controllers

The Illustrative Guidance only requires WFOE PFMs to disclose their subsidiaries, branch offices, and other affiliates within China, or any overseas affiliates having a potential material impact on the onshore fund management business of such WFOE PFM.  When compared to domestic-invested PFMs, a WFOE PFM shall disclose whether its foreign shareholder or de facto controller is subject to any material punishments or any litigation or arbitration procedures within the latest three years, and whether a senior executive of the foreign shareholder or the foreign de facto controller is subject to any disciplinary punishment or has any adverse credit record, in addition to the disclosure of any punishment on the WFOE PFM itself.

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.