Mainland investment fund market set for reforms

The investment funds sector on the mainland could soon face a major overhaul. Two pieces of long-waited legislation, the amended Securities Investment Funds Law (SIF Law) and the amendments to the Administrative Measures on Securities Investment Fund Management Companies, recently in the public consultation phase, are set to change the fundamental landscape of the securities investment fund industry on the mainland.

The amendments, if promulgated, would redefine the scope of regulated funds, loosen new fund-raising procedures, increase flexibility in the formation of funds, and promote transparency throughout the mainland fund industry.

The SIF Law came into effect in 2004, but did not fully address privately offered funds. This does not affect the development of privately offered funds or their investment activities in recent years. In fact, those funds have grown to the point where they aggregate more than 1 trillion yuan (HK$1.22 trillion). Privately offered funds, which invest in publicly traded stocks and other securities, are normally structured in the form of "Collective Investment Schemes" (CIS) offered through trust companies but managed by private fund managers.

The CIS constitutes an alternative to securities investment funds managed by fund managers. In practice, it may be referred to as a "sunshine hedge fund" asset management structure or "sunshine private fund" (in Chinese: , or yang guang si mu).

In accordance with the draft SIF Law, all securities investment funds (including both public funds and privately offered funds) will be subject to the new law. It was fiercely debated whether privately offered funds should be covered by the amended SIF Law. The move can be seen as reflecting the regulators' resolution to diversify the industry by introducing competitive mechanisms so as to create a balance between mutual funds and privately offered funds. This is consistent with a regulatory trend in the US and Europe since the 2008 credit crisis, where government oversight of privately offered funds has increased to eliminate previous regulatory gaps in supervision.

The proposed amendments suggest a new legal framework for privately offered funds. The key rules include a requirement of fund managers to be registered with the China Securities Regulatory Commission (CSRC) or the Fund Industry Association and the introduction of a qualified investor system in which funds can be raised from no more than 200 qualified investors.