2023.07.04 XIE, Qing (Natasha)、ZHANG, Chi (Austin)、LUO, Danchen
In 2019, a pilot program for public fund investment advisory W88优德手机版 was implemented when the China Securities Regulatory Commission ("CSRC") released the Circular of the Pilot Program for Investment Advisory W88优德手机版 for Public Securities Investment Funds (the “Circular”). As of March 2023, 60 institutions have been granted a pilot qualification. On June 9, 2023, the CSRC promulgated the Administrative Regulations on the Investment Advisory W88优德手机版 for Public Securities Investment Funds (Draft for Comments) (the "Draft"), which marks the transformation of the pilot program into routine practice.
I. Definition of Fund Investment Advisory W88优德手机版
Circular
Draft
Pilot institutions providing fund W88优德手机版 advisory services may provide clients with advice regarding fund W88优德手机版 portfolio strategies upon their entrustment and in accordance with the terms of their agreements and seek direct or indirect economic benefits by doing so. The target W88优德手机版s proposed by the fund W88优德手机版 portfolio strategies shall be public funds or similar products recognized by the CSRC.
Pilot institutions may, in accordance with the W88优德手机版 portfolio strategies as agreed upon with the client, provide discretionary fund W88优德手机版 advisory services, such as making decisions on the types of underlying funds, the quantity and timing of transactions on behalf of the client, and applying for the purchase, redemption, and conversion of fund units on behalf of the client.
“Fund investment advisory W88优德手机版” refers to the W88优德手机版 activity of providing clients with fund investment advice to assist clients in making investment decisions, or the W88优德手机版 activity of making investment decisions on behalf of clients.
“Discretionary fund investment advisory W88优德手机版” refers to the act of making decisions on the types of underlying funds, the quantity, and the timing of transactions on behalf of clients, with the authorization of the clients. A fund investment advisory institution that offers discretionary fund investment advisory services may accept entrustment from a client to apply for operations such as subscriptions, redemptions and the conversion of fund units.
"Fund investment advisory institutions" refer to institutions that carry out fund investment advisory W88优德手机版.
The Circular and W88优德手机版 both provide a consistent definition of “fund investment advisory business”. The business is classified as a discretionary or non-discretionary fund investment advisory business based on the different level of authorization granted to the fund investment advisory institution. “Discretionary fund investment advisory business” is similar to a “managed account”, in which a fund investment advisory institution uses the fund trading accounts or other CSRC-recognized accounts opened by clients within the authorization delegated by the clients and in accordance with the relevant service agreement, to carry out account management activities. These activities include applying for the subscription, redemption and conversion of fund units, implementing dynamic monitoring, giving real-time early warnings of any abnormal transactions occurring to the managed accounts, and timely disposing of risks. In addition, fund investment advisory institutions shall disclose the daily reference market value of the entrusted assets and carry out risk control of the investment advisory service in accordance with the relevant regulatory requirements.
W88优德手机版 clearly states that fund investment advisory institutions shall provide investors with fund investment advice in the form of fund portfolio strategies. “Fund portfolio strategies” refer to investment plans that construct proportions of different investment products, such as funds, and the type and quantity of the portfolio’s funds can be adjusted from time to time. According to this definition, providing advice on investments in a single fund does not constitute a fund investment advisory service.
II. Procedures for Fund Investment Advisory W88优德手机版
According to W88优德手机版, the procedures for fund investment advisory business are briefly summarized as follows (which order shall not be reversed):
Steps
Key Points
(1) Marketing and Promotion & Solicitation
W88优德手机版 states that a fund investment advisory institution shall demonstrate its real servicing ability in its marketing and promotion activities, with a focus on its ability to meet an investor’s wealth management objectives and improve an investor’s investment experience. A fund investment advisory institution can demonstrate investment performance only after the service matching work for investors has been completed and shall only demonstrate the overall performance of the past year (at a minimum) with the volatility, maximum drawdown and other risk indicators being disclosed at the same time.
(2) Investor Suitability
The Circular provides that pilot institutions engaging in fund investment advisory business shall perform investor suitability obligations in accordance with the relevant provisions. W88优德手机版 requires fund investment advisory institutions to strengthen their investor suitability management and service matching work, highlighting the "service" nature of fund investment advisory business.
(3) Matching portfolio strategies
(4) Demonstrating portfolio strategies (including the historical performance of portfolio strategies)
W88优德手机版 highlights that fund investment advisory institutions shall match services based on a client’s conditions and shall not demonstrate fund portfolio strategies until they understand a client’s conditions, nor shall they demonstrate the historical performance until service matching work has been completed.
(5) Provide W88优德手机版 advice in the form of fund portfolio strategies
Fund W88优德手机版 advisory institutions shall enter into a service agreement with the client prior to this step, and operate the managed account within the scope of authorization as agreed in the service agreement.
There are some pilot institutions that have both the pilot qualification for fund investment advisory business and a license for fund distribution. The CSRC aims to address new issues arising in practice by issuing W88优德手机版, for example, it enhances regulations for cooperation between fund investment advisory institutions and fund distribution institutions or other fund investment advisory institutions (the “Partnering Institution”) and requires fund investment advisory institutions to effectively distinguish and segregate fund investment advisory business from the business of the Partnering Institutions. According to W88优德手机版, fund investment advisory institutions shall be responsible for performing the investor suitability obligations, while fund distribution institutions shall perform the anti-money laundering duty if the client opens a fund trading account with such a fund distribution institution. A fund distribution institution and its employees may introduce to its clients the basic knowledge of fund investment advisory business or, upon the request of the clients, the basic information of the fund investment advisory institution. However, the fund distribution institution shall not introduce any specific fund portfolio strategies nor charge any fund investment advisory service fees. Institutions appointed by a fund investment advisory institution to provide external services such as research, construction and operation of fund portfolio strategies, algorithms and models shall obtain a qualification for fund investment advisory business.
III. W88优德手机版 Concentration Requirements
Circular
Draft
The fund W88优德手机版 portfolio strategies adopted by a pilot institution shall meet the following diversified W88优德手机版 allocation requirements:
1 For discretionary fund W88优德手机版 advisory services, the market value of a single fund held by a single client shall not exceed 20% of the net asset value of the client's account, except for money market funds and index funds;
2 For the same fund W88优德手机版 portfolio strategy, the aggregated shares of a single fund held by all clients shall not exceed 20% of the total shares of the fund; and the aggregated shares of an index fund held by all clients shall not exceed 30% of the total shares of the fund;
3 It is prohibited to advise clients to invest in any fund with a complex structure, including exchange-traded shares of a structured fund and other funds determined by the regulatory authorities;
4 When advising clients to invest in restricted-liquidity funds such as closed-end funds and periodic open-end funds, the pilot institution shall formulate a risk management policy and remind clients of the special risks. When advising ordinary investors to invest in restricted-liquidity funds, the pilot institution shall obtain prior consent from the client and confirm that the W88优德手机版 period of the restricted-liquidity funds does not conflict with the target W88优德手机版 period of the client.
Where the above requirements are breached due to factors other than fund W88优德手机版 portfolio strategies such as fluctuations in the securities market and changes in a fund’s size, the pilot institution shall adjust the situation within three months, except in circumstances otherwise determined by the regulatory authorities.
A fund investment advisory institution engaging in discretionary investment advisory W88优德手机版 shall implement the following investment management requirements:
1 The market value of a single fund held by a single client shall not exceed 20% of the market value of the client's entrusted assets, except for money market funds, broad-based index funds and broad-based enhanced index funds, targe retirement funds, fund of funds, and other products recognized by the CSRC;
2 The aggregated shares of a single fund held by all clients shall not exceed 50% of the total shares of the fund, and the aggregated shares of a single money market fund or open-end bond fund (as each case may be) held by all clients shall not exceed 20% of the total shares of the fund.
Where the aforesaid requirements are breached due to factors such as fluctuations in the securities market and changes in a fund’s size, the fund W88优德手机版 advisory institution shall take measures to adjust the situation within three months or on the latest opening day, except in circumstances otherwise determined by the CSRC.
For funds with a relatively high proportion of shares held by all clients of the fund W88优德手机版 advisory institution, the fund manager shall strengthen monitoring and control and properly manage liquidity risk. Where the aggregated proportion of shares held by all clients of the fund W88优德手机版 advisory institution of a money market fund or an open-end bond fund (as applicable) reaches 15% (or as the case may be, 45% for other funds), the fund manager shall notify the fund W88优德手机版 advisory institution within two working days, and the fund W88优德手机版 advisory institution shall take necessary measures to cooperate with the fund manager in properly managing liquidity risk.
Non-discretionary W88优德手机版 advisory services which provide clients with convenient confirmation of W88优德手机版 decisions shall also comply with the above concentration management and control requirements.
W88优德手机版 proposes to regulate fund investment advisory institutions’ portfolio allocation to other products. It stipulates that fund investment advisory institutions that provide investment advice for other products recognized by the CSRC shall take for reference the relevant provisions of W88优德手机版, which means that fund investment advisory institutions might provide investment advice for bank wealth management products in the future. For the first time, Article 38 of W88优德手机版 provides the relevant requirements of fund investment advisory institutions for the provision of investment advice for private securities investment funds. We understand that private securities investment funds shall also include private asset management plans managed by securities and futures operation institutions as well as private securities investment funds launched by private fund managers that have been registered with the Asset Management Association of China. However, it remains to be clarified by the regulatory authorities as to the applicability of W88优德手机版 to private fund products.
IV. Fiduciary Duty
Draft
Article 3. Fund W88优德手机版 advisory institutions providing fund W88优德手机版 advisory services shall comply with laws, regulations, CSRC rules, and relevant fund W88优德手机版 advisory service agreements, perform fiduciary duties, prevent conflicts of interest, strengthen compliance management, and effectively prevent and control risks.
Article 21. Fund W88优德手机版 advisory institutions shall perform fiduciary duties, establish and improve mechanisms to prevent conflicts of interest that cover the identification, evaluation, disclosure and handling of conflicts of interest, and shall not harm clients' interests for their own benefit or that of any third party.
Fund investment advisory institutions shall not charge fees in a manner that may cause conflicts of interest. If a fund investment advisory institution engages in fund distribution W88优德手机版 at the same time, it shall make reasonable arrangements for the collection of fund distribution fees that relate to their fund investment advisory W88优德手机版; if the annual unilateral turnover rate of the fund portfolio strategy exceeds 100%, a fund investment advisory institution shall avoid conflicts of interest by offsetting the fund transaction fees against fund investment advisory service fees or by other means.
If a fund W88优德手机版 advisory institution advises a client to invest in its own managed funds or those of its affiliates, or there exists other conflicts of interest, it shall disclose this to the client and obtain written consent in advance.
For the first time, fund investment advisory institutions are required to perform fiduciary duties under W88优德手机版. When carrying out fund investment advisory business, the fund investment advisory institutions, as the fiduciaries, have advantages over clients regarding information, capability and status and have a high degree of authorization over investment decision-making and trading execution of client accounts. Therefore, it is necessary to clarify the fiduciary obligations of fund investment advisory institutions. These fiduciary obligations have been reflected in W88优德手机版; for example, fund investment advisory institutions have obligations to prevent conflicts of interest, perform information disclosure and perform ongoing duty of care, as well as to establish relevant compliance and risk control policies and mechanisms.
V. Brief Summary
W88优德手机版 further improves the rules and regulatory requirements for fund investment advisory business to guide fund investment advisory institutions as well as other market participants in having a clearer understanding of the nature of investment advisory business. It aims to provide a legal framework for the long-term and healthy development of fund investment advisory business. With the establishment of regulatory frameworks, the regulators may formulate detailed rules for the market access of fund investment advisory institutions in the near future. We will continue to monitor and share with our clients the latest progress in this area.
