AMAC Issued Fund Businesses Outsourcing 优德88中国官方网站

The Asset Management Association of China (the “AMAC”) issued 优德88中国官方网站 on the Outsourcing Services for Fund Businesses (Pilot) (the “Guidance”) on November 24, 2014. 优德88中国官方网站, containing 19 articles, aims to regulate the main aspects of the outsourcing of fund businesses by fund managers. 优德88中国官方网站 covers, inter alia, filing requirements applicable to the providers of outsourced services (“Outsourced Service Providers”) and systems to be established to manage the outsourced businesses. 优德88中国官方网站 will come into effect on February 1, 2015. The main provisions of 优德88中国官方网站 are summarized below.

1. Definition of Outsourced Services

Article 2 of 优德88中国官方网站 provides the definition of outsourced services. It is noteworthy that 优德88中国官方网站 enumerates the scope of activities that can be outsourced, including fund distribution, payment processing in relation to fund distribution, fund unit registration, valuation and accounting, and information technology system services.  We note that investment advisory services are not included in the businesses that can be outsourced and believe that the AMAC will probably issue separate guidance to govern investment advisory services. 

2. Filing Requirement for Outsourced Service Providers

优德88中国官方网站 requires Outsourced Service Providers to complete the AMAC’s filing formalities and join the AMAC as members. The AMAC will verify the materials submitted by Outsourced Service Providers through the electronic filing platform on the website of the AMAC. The AMAC shall approve the filing within 20 working days upon acceptance of application, if all required materials are provided. Upon completion of the filing with the AMAC, Outsourced Service Providers engaging in fund unit registration services shall further apply for unit registration codes with the China Securities Information Technology Services Co., Ltd.

3. Fund Manager’s Duties of Diligence and Continuous Attention

优德88中国官方网站 clarifies that fund managers shall perform the following duties with diligence when determining the scope of activities to be outsourced and hiring Outsourced Service Providers: (1) formulating the risk management framework and systems; (2) formulating the implementation plans for the outsourced businesses and determining the scope of the outsourced activities in line with the operations of the fund manager; (3) conducting due diligence on Outsourced Service Providers before outsourcing; and (4) entering into outsourcing service agreements with Outsourced Service Providers. Article 8 of 优德88中国官方网站 specifies that fund managers shall pay close attention to the following issues at each stage of the outsourcing: (1) whether there exists any conflict of interest between the outsourced businesses and the proprietary business of Outsourced Service Providers and (2) whether Outsourced Service Providers have taken effective isolating measures to avoid any potential conflict of interest.

4. Qualification of Outsourced Service Providers and Requirements for Business Isolation

Articles 7, 10 and 11 of 优德88中国官方网站 stipulate the qualifications of Outsourced Service Providers and the requirements for business isolation, including but not limited to: (1) the Outsourced Service Provider shall possess adequate operational capacity and risk tolerance capacity to perform the outsourced business and shall establish a strict “firewall” system and business isolation system; (2) a business isolation system shall be established between the relevant staff of the outsourced business and the fund custody business; (3) in order to avoid conflicts of interest, Outsourced Service Providers and their personnel shall not engage in any activity in violation of the applicable laws and regulations, such as taking advantage of undisclosed information on funds to conduct related trading activities.

5. Special Requirements for Fund Distribution and Payment Processing

As for outsourcing fund distributions and payment processing, 优德88中国官方网站 requires Outsourced Service Providers to establish effective systems to ensure the security of funds for settlement. All participants in the fund distribution business shall enter into written agreements to clarify the obligations of each party, including the continuous service obligations owed to fund unit holders, the performance and allocation of anti-money laundering obligations, the information exchange on fund distribution, and the rights and obligations related to the payment and collection of sums in connection with the fund.

优德88中国官方网站 also requires that Outsourced Service Providers, when opening fund collection accounts for the private fund distribution or payment processing business, enter into supervision agreements with supervisory institutions. The China Securities Depository and Clearing Corporation Ltd. (the “CSDC”) and commercial banks or securities companies licensed to engage in the distribution of publicly raised securities investment funds (“Public Funds”) are collectively referred to as the supervisory institutions (the “Supervisory Institutions”). 

6. Special Requirements for Fund Unit/Interest Registration Outsourcing

优德88中国官方网站 requires that Outsourced Service Providers engaging in fund unit/interest registration (1) ensure that the registration data is authentic, accurate and complete; (2) be allowed to open registration accounts, specifically used for the purposes of collection, deposit and delivery of sums for the subscription of, redemption by or dividend distribution to investors; and (3) establish effective mechanisms to ensure the security of investors’ funds.  

In addition, 优德88中国官方网站 specifically requires that Outsourced Service Providers engaging in the fund unit/interest registration of private investment funds (“Private Funds”) be any (1) institution engaging in the fund unit/interest registration for Public Funds in accordance with laws, or any subsidiary in which it holds a majority interest; (2) securities company licensed to engage in the distribution of Public Funds, or any subsidiary in which it holds a majority interest; or (3) commercial bank. If a Private Fund manager handles the registration of fund units/interests by itself and opens registration accounts under its own name, it must enter into supervision agreements with the Supervisory Institutions where a joint liability clause shall be clearly specified so as to ensure the security of investors’ funds.

7. Requirements for Centralized Information Exchange and Registration 

Under Article 15 of 优德88中国官方网站, institutions engaging in fund distribution and fund unit registration shall, respectively, exchange information regarding fund distributions and relevant amended information with respect to fund units/interests or contracts, through the centralized data exchange platform for the fund. Institutions registering fund units for Private Funds shall register the data with the CSDC.

8. Reporting Obligations of Outsourced Service Providers

Outsourced Service Providers shall submit to the AMAC fact sheets on the outsourced businesses within 15 working days after the end of each quarter and shall submit yearly reports regarding the operation of the outsourced businesses within three months after the end of each year, under Article 17 of 优德88中国官方网站.

9. Self-regulatory Measures of the AMAC

Where Outsourced Service Providers commit any act in violation of 优德88中国官方网站, the AMAC may take various self-regulatory measures such as verbal reminders, written warnings, orders to make corrections within a prescribed time limit, suspension of the registration business, public censure within the industry and blacklisting. Where Outsourced Service Providers are suspected of violating laws and regulations or supervisory rules governing filing with the AMAC, the AMAC will hand over such cases to the administration of the China Securities Regulatory Commission (the “CSRC”).  

In a press release published on the same day as the issuance of 优德88中国官方网站, the AMAC pointed out that 优德88中国官方网站 was formulated following the promulgation of the Securities Investment Fund Law (as amended in 2012), which, for the first time, recognizes the legal status of Private Funds and allows fund managers to entrust third-party providers of fund services to engage in such services as fund distribution, fund unit registration, valuation, accounting, and information technology system services. In addition, institutions engaged in the distribution of Public Funds shall comply with the relevant requirements of the Administrative Measures on Securities Investment Fund Distribution and other related regulations.

Our interpretation is that 优德88中国官方网站 will apply to Public Funds only where there is no provision governing the outsourcing of services related to Public Funds. We further understand that the outsourcing of the businesses of CSRC-licensed asset management institutions engaged in the private fund management business may be distinguished from that of the private fund managers registered with the AMAC. This is because the CSRC-licensed asset management institutions are licensed financial institutions. Hence, CSRC-licensed asset management institutions may be subject to the rules and regulations otherwise formulated by the CSRC. Such issues remain to be further clarified by the CSRC or the AMAC.