Key Compliance Points for Changes in the Actual Controller of Private Equity Securities Investment Fund Managers

Article 48 of the "Regulations on the Registration and Filing of Private Equity Investment Funds" stipulates: If the controlling shareholder, actual controller, or general partner of a private equity fund manager undergoes a change, the private equity fund manager shall complete the change procedures with the Association within 30 working days from the date of the change, submit a special legal opinion, and issue a legal opinion on the change matters.

If the actual control right of a private equity fund manager undergoes a change, a legal opinion should be submitted regarding whether the post-change situation fully meets the requirements for the registration of a private equity fund manager. The Association will conduct a comprehensive verification based on the new requirements for the registration of a private equity fund manager submitted. Transfers of equity or property shares in accordance with the regulations through administrative transfer or change, or transfers among different entities under the control of the same actual controller, shall not be regarded as a change in the actual control right.

According to the above provisions, if the actual controller of a private equity securities investment fund manager undergoes a change, the lawyer should entrust a law firm registered with the China Securities Regulatory Commission to issue a legal opinion. The China Securities Investment Fund Association (hereinafter referred to as the "Association") will conduct a comprehensive verification of the private equity fund manager in accordance with the new requirements for registration as submitted. During the period of the actual controller's change, the issuance and filing of products by the private equity fund manager will be subject to certain restrictions. It can be said that the change of the actual controller of a private equity fund manager is a matter of life and death, which must be handled with caution and should be treated seriously.

Based on this, the author, in accordance with relevant laws and regulations, self-regulatory rules, and practical experience, summarizes the compliance key points for the change of the actual controller of a private equity fund manager as follows:

01 Pre-requisites

The change of the actual controller of a private equity fund manager should meet the following three pre-requisites:

(1) The private equity fund manager shall not transfer within three years from the date of registration or change of registration; (2) The monthly management scale of the private equity fund manager before the change shall be no less than 30 million RMB for the previous 12 months; (3) If the shareholders, partners, or actual controllers of the private equity fund manager intend to transfer their equity, property shares, or actual control rights, they shall fully understand the financial status, professional capabilities, and integrity information of the transferee, and inform them of the relevant regulatory and self-regulatory requirements for serving as shareholders, partners, or actual controllers.

Lawyer's Comment:

In the second pre-requisite of the change of the actual controller of the fund manager, the monthly management scale of no less than 30 million RMB for the previous 12 months refers to that, according to the management scale or product net value table issued by the custodian, the monthly management scale of the private equity fund manager before the change shall be no less than 30 million RMB.

02 Change Time Limit

If the actual controller, general partner, etc. of a private equity fund manager undergo a change, the private equity fund manager shall complete the change procedures with the Association within 30 working days from the date of the change, submit a special legal opinion, and issue a legal opinion on the change matters.

Lawyer's Comment:

1. "From the date of the change", it is calculated in the following ways: (1) If the change matters require the registration of a market entity, it is calculated from the date of the registration of the market entity; (2) If the change matters do not require the registration of a market entity, it is calculated from the effective date of the relevant agreement or resolution; (3) For other changes, it is calculated from the actual date of the change.

2. If the change procedures are not completed within 30 working days, will the Association refuse to approve? Of course not, but if the change is not made for a long time, it may be questioned about the reasons for not following the change procedures, the rationality, and the public display in the Association's public display system.

03 Name and Business Scope

Private equity securities investment fund manager's name: XX Private Equity Fund Management Co., Ltd. / Partnership Enterprise (Limited Partnership);

Private equity securities investment fund manager's business scope: Private equity securities investment fund management.

Lawyer's Comment: When the actual controller of a private equity fund manager changes, the name and business scope should comply with the relevant regulations of the "Registration and Filing Measures" and the accompanying guidelines. At the same time, in the process of changing the business registration of the actual controller of a private equity fund manager in some regions, there may be pre-approval from the financial office or relevant regulatory authorities.

04 Registered Capital and Capital Contribution Capacity Proof

When the actual controller of a private equity fund manager changes, the total actual paid-in monetary capital of the contributors (shareholders) shall not be less than 10 million RMB. That is, if the actual paid-in capital is less than 10 million RMB, it should be increased to 10 million RMB.

Newly paid-in capital by shareholders, unpaid capital (if any), and transfer payment for equity by the original shareholders, should submit relevant materials to prove the legal source of the paid-in funds, unpaid capital, and paid equity transfer funds ("Capital Contribution Capacity Proof Materials"), and the Capital Contribution Capacity Proof Materials should be able to cover all paid-in capital/ unpaid capital/ equity transfer funds.

Lawyer's Comment:

Key points of review. Based on our practical experience, when the Association reviews the change of the actual controller of a private equity fund manager, it will focus on the real, legal, and comprehensive proof materials of the capital contribution capacity of the new actual controller and new shareholders. In the context of professional and strictly regulated private equity fund management, the capital contribution capacity proof materials often become a substantive obstacle for the change of the actual controller. The Association has detailed and strict standards and review scales for this. Therefore, it is strongly recommended that private equity fund managers should entrust lawyers to verify the capital contribution capacity proof materials before changing the actual controller.

05 Equity Structure

The capital contribution structure of a private equity fund manager should be simple, clear, and stable. There should be no excessive levels or complex structures. Without reasonable reasons, it is not allowed to establish a nested structure with more than two levels through special purpose vehicles, and it is not allowed to avoid the relevant requirements for shareholders, partners, and actual controllers through the establishment of special purpose vehicles or other means.

Lawyer's Comment:

During the process of changing the actual controller, without reasonable reasons, it is not allowed to establish a nested structure with more than two levels through SPV. The design of the structure should be cautious and necessary. Generally, it is not recommended that private equity fund managers set up special equity structures or special voting rights arrangements. A complex structure may lead to subsequent rectification.

06 Business Premises

Private fund managers shall not use unstable venues such as shared spaces as their business premises. If the business premises are leased, from the date of submitting the registration application, the remaining lease period shall be no less than 12 months, except in cases with reasonable reasons.

Comment by the lawyer:

A compliant business premise is a basic requirement for the compliance, stability, and continuous operation of private fund managers. When private fund managers lease business premises, they should pay attention to the nature of the premises. Moreover, the business premises should be independent and meet the needs of employees' work. If the front desk photos of the business premises are suspected to be fake, it will be regarded as false reporting.

07 Full-time Employees

The number of full-time employees of private fund managers shall be no less than 5, including senior management and ordinary employees. Among them, "full-time employees" refer to the formal employees who sign labor contracts and pay social security with private fund managers, foreign employees who sign labor contracts or labor service contracts, retired employees who are rehired, and senior managers appointed by state organs, public institutions, government agencies, and enterprises authorized by the government.

Professional personnel engaged in fund sales, product development, research analysis, investment management, trading, risk control, share registration, valuation accounting, liquidation and settlement, supervision and auditing, compliance management, information technology, financial management and other professional fields in private securities investment fund management institutions, including managers of relevant business departments, shall register and obtain professional qualifications.

Comment by the lawyer:

The number of employees is a basic requirement for the compliance, stability, and continuous operation of private fund managers. At the same time, all employees should be registered in the practitioners system (including those who have not obtained the fund professional qualification certificate).

08 Employee Dual Professions

The following requirements apply to the dual-profession of private fund managers:

(1) The legal representative, senior management, executive partner or their appointed representatives of private fund managers shall not hold dual positions in non-affiliated private fund managers, conflicting business institutions, or other institutions with conflicts of interest with the current institution, or become their controlling shareholders, actual controllers, or general partners.

(2) The compliance risk control officer shall not engage in investment management business, shall not hold concurrent positions that conflict with the compliance risk control responsibilities; shall not hold dual positions in other for-profit institutions, and shall not hold positions such as general manager, executive director or chairman, or executive partner or their appointed representatives of the private fund manager.

(3) Ordinary employees shall conduct private fund business activities in the name of the current institution and shall not hold dual positions in for-profit institutions. Ordinary employees shall generally not hold dual positions.

(4) The following circumstances do not fall within the scope of dual-profession: 1) Holding positions in non-profit institutions such as universities, research institutes, social organizations, and social service institutions; 2) Holding positions as directors or supervisors in other enterprises; 3) Holding positions in the private funds they manage; 4) Other circumstances as recognized by the association.

Comment by the lawyer:

The "Notice on the Registration Requirements for Private Investment Fund Managers (2018 Edition)" (Announced Obsolete) stipulates that the number of executive officers holding dual positions shall not exceed one-half of all executive officers. This regulation was abolished on May 1, 2023. The current regulations do not have restrictions on the number of executive officers holding dual positions. For executive officers holding dual positions, the association pays more attention to the rationality and energy distribution of their dual positions.

09 Shareholding by Senior Executives

The legal representative, the executive partner or their appointed representative, and the senior executive responsible for investment management directly or indirectly hold a certain proportion of equity or property shares of the private equity fund manager, and the total actual capital contribution shall not be less than 20% of the actual capital of the private equity fund manager, or not less than 20% of the minimum actual capital of the private equity fund manager (i.e., 1 million RMB).

Comment by the Lawyer:

There are no specific requirements for the shareholding ratio of the senior executive responsible for investment management. It should be based on the setting of the executive team, but extreme shareholding ratios are not recommended.

10 Experience requirements for controlling shareholders and actual controllers

The controlling shareholder， actual controller， and general partner of the private equity fund manager should have experience in operation， management， or engaging in asset management， investment， related industries， etc.， and such experience should be no less than 5 years. For the actual controller of a private securities fund manager who is a natural person， the relevant experience includes：

(1) Engaging in securities asset management， self-capital securities and futures investment and other related businesses in financial institutions such as commercial banks， securities companies， fund management companies， futures companies， trust companies， insurance companies， and related asset management subsidiaries， or holding positions above department head or having equivalent management experience.

(2) Engaging in securities and futures investment management-related work in enterprises controlled by municipal-level or higher government authorities and listed companies， or holding senior management positions or having equivalent management experience.

(3) Engaging in securities and futures investment or holding senior management positions in a private securities fund manager， and the private securities fund manager being held should be operating normally， compliant and stable， and have no major violations or records during the tenure.

(4) Engaging in securities asset management-related businesses in asset management institutions regulated by foreign financial regulatory authorities， and the asset management institution being held should have a good international reputation and operating performance.

(5) Engaging in economic management-related work in government departments or public institutions， and having corresponding management experience.

(6) Engaging in legal， auditing， and other related work in law firms， accounting firms， and other institutions registered with the China Securities Regulatory Commission， and holding the position of partner or above for no less than 5 years.

(7) Other relevant work experience as stipulated by the China Securities Regulatory Commission and the Association. The experience in investment management does not include personal securities or futures investment experience.

Comment by the Lawyer：

Key points for review. It is recommended that before the change of the actual controller of a private equity fund manager， the actual controller's experience should be preliminarily reviewed by a lawyer. For natural persons， in addition to the provisions otherwise， they should hold positions as directors， supervisors， senior managers of the private equity fund manager， or the executive partner or their appointed representative. Special attention should be paid that the determination of the actual controller has restrictions on "work unit"， "job position"， "job content"， and "working time"， and departmental work experience has formed a certain review standard. To a certain extent， the determination of experience is relatively "dogmatic". Therefore， it is strongly recommended that private equity fund managers， before changing the actual controller， entrust a lawyer to verify the actual controller's experience to determine whether they meet the requirements. Common feedback: "According to Article 9, Paragraph 3 of the 'Regulations on the Registration and Filing of Private Equity Investment Funds', Article 9 of the 'Guidelines for the Registration of Private Fund Managers No. 2', and Article 26 of the 'List of Materials for the Registration of Private Fund Managers (Revised in 2023)', please have a lawyer verify and explain whether the actual controller of the applying institution has more than 5 years of experience in operation, management, or engaging in asset management, investment, related industries, etc. The aforementioned experience should meet the relevant requirements of Article 9 of the 'Guidelines for the Registration of Private Fund Managers No. 2'. Please provide a conclusive opinion and submit materials to explain that the actual controller has the required working experience and years of experience, including but not limited to the employment materials, resignation materials, social security payment materials, etc. issued by the previous employer."

11 Requirements for the experience of the legal representative, general manager, or other senior executives

The legal representative, executive partner or their appointed representative, the main person in charge of operation and management, and the senior management responsible for investment management of private securities fund managers should have more than 5 years of relevant working experience in securities, funds, futures investment management, etc. The relevant working experience mainly refers to one of the following situations:

(1) Working in financial institutions such as commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies, and related asset management subsidiaries, engaging in securities asset management, self-funded securities and futures investment-related businesses, and holding positions such as fund manager, investment manager, trust manager, etc., or serving as senior managers or having equivalent management experience in the aforementioned financial institutions.

(2) Engaging in securities and futures investment management-related work in enterprises controlled by municipal-level or higher government authorities and authorized institutions, and serving as the investment director, or serving as senior managers or having equivalent management experience.

(3) Engaging in securities and futures investment management in private securities fund managers and holding positions such as fund manager above, or serving as senior managers, and the private securities fund manager they are employed by should operate normally, be compliant and stable, and have no major violations or records during their tenure.

(4) Engaging in securities asset management-related business in asset management institutions regulated by foreign financial regulatory authorities, and the asset management institution they are employed by should have a good international reputation and operating performance.

(5) Engaging in economic management-related work in government departments or public institutions, and having corresponding management experience, or serving as the head of other business departments in the financial institutions specified in the first item of this paragraph.

(6) Engaging in legal, auditing, and other related work in securities, funds, and futures in law firms or accounting firms that have been registered with the China Securities Regulatory Commission, and holding the position of partner or above for no less than 5 years.

(7) Other circumstances as stipulated by the China Securities Regulatory Commission and the Association.

The senior management responsible for investment management should have one of the relevant working experiences mentioned in the first item to the fourth item above.

Lawyer's comment:

Key points of review. For the legal representative, executive partner or their appointed representative, the main person in charge of operation and management, and the senior management responsible for investment management of private securities fund managers, the relevant working experience should be explained regarding whether the employed private securities fund manager operates normally, is compliant and stable, and has no major violations or records during their tenure; for the relevant working experience in foreign asset management, it should be explained regarding the regulatory situation of the former asset management institution, the main business, asset management scale, operating conditions, international reputation, and the personal position and job responsibilities. Common feedback: "According to Article 10 of the 'Regulations on the Registration and Filing of Private Investment Funds', the legal representative, executive partner or their appointed representative of the private securities fund management company, as well as the main management personnel responsible for operations and the senior management personnel responsible for investment management, must have at least 5 years of relevant experience in securities, funds, or futures investment management. Please your institution comply with the provisions of Article 31 of the 'List of Materials for the Application for Registration of Private Fund Managers (Revised in 2023)', and explain whether it meets the above requirements, and submit relevant materials such as proof of employment, resignation certificates, social security records, etc."

12 Requirements for the Performance of Senior Management Personnel Responsible for Investment Management

The investment management performance of the senior management personnel responsible for investment management of private securities fund management companies refers to the performance of securities, funds, or futures products managed as fund managers or investment decision leaders in commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies, and related asset management subsidiaries, or the performance of private securities funds managed by private fund management companies as investment managers, or other investment management performance that meets the requirements. The investment performance should be a continuous investment performance of no less than 2 years in the past 10 years, with the management scale of each product or account not less than 20 million RMB. For those managed by multiple people, specific materials should be provided to explain the scale of the products they are responsible for managing; if relevant materials cannot be provided, the average scale should be calculated.

The investment performance does not include personal or other enterprises' own funds' securities, futures investment, as an investor in investment products, managing others' securities, futures account assets-related investment, simulated trading, and other investment performances that cannot reflect investment management ability or do not belong to securities and futures investment. The same performance materials submitted within 24 months by 2 or more registered private fund management companies will not be recognized.

Lawyer's comment:

Key points of review. The investment performance materials should reflect the starting time of the responsible senior management personnel as the fund manager or investment decision leader, the monthly management net asset scale, and the annualized return, etc.

Common feedback: "According to Article 32 of the 'List of Materials for the Application for Registration of Private Fund Managers (Revised in 2023)', private securities investment fund management companies should submit investment performance materials that meet the requirements as stipulated in Article 7 and Article 11 of the 'Guidelines for the Registration of Private Fund Managers No. 3': 1. The senior management personnel responsible for investment management should submit investment performance materials for the past 10 years, with a continuous management scale of no less than 20 million RMB for each product or account. The investment performance materials should reflect the starting time of the responsible senior management personnel as the fund manager or investment decision leader, the monthly management net asset scale, and the annualized return, etc. Relevant materials include but are not limited to fully signed fund contracts, certificates issued by financial institutions, departure audit reports, net value reports or other materials recognized by the association. For those managed by multiple people, specific materials should be provided to explain the scale of the products they are responsible for managing; if relevant materials cannot be provided, the average scale should be calculated. 2. Personal or enterprise own funds' securities, futures investment, as an investor in investment products, managing others' securities, futures account assets-related investment, simulated trading, etc., other investment performances that cannot reflect investment management ability or do not belong to securities and futures investment, shall not be recognized as investment performance materials for securities. 24 months of submitting the same performance materials by 2 or more registered private fund management companies will not be recognized."

13 Experience Requirements for the Compliance Risk Control Manager The person in charge of compliance risk control should have at least 3 years of relevant working experience in investment, such as law, accounting, auditing, supervision, auditing, compliance, risk control, regulation and self-discipline management in the asset management industry. The above-mentioned relevant working experience mainly refers to one of the following situations:

(1) Engaged in compliance management, risk control, supervision and auditing, legal affairs and other related work in financial institutions such as commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies and related asset management subsidiaries.

(2) Engaged in compliance management, risk control, supervision and auditing, legal affairs and other related work in a private fund management company, and the private fund management company where the person is employed should operate normally, be compliant and stable, and have no major violations or illegal records during the tenure.

(3) Engaged in legal and auditing work related to securities, funds and futures in law firms or accounting firms, or engaged in investment-related legal affairs, financial management and other related work in listed companies.

(4) Engaged in financial supervision work in financial management departments and their dispatched institutions, or engaged in self-discipline management work in the asset management industry self-regulatory organization.

(5) Other circumstances as stipulated by the China Securities Regulatory Commission and the Association.

Comment by the lawyer:

It should be noted that if the person in charge of compliance risk control is from a "private fund management company", the experience in compliance management, risk control, supervision and auditing, legal affairs and other related work of the private equity fund management company and the private securities fund management company can be mixed when applying for the requirements of the "Private Fund Manager Registration Application Materials List (Revised in 2023)". However, in practice, it is difficult to explain how the experience of the private equity fund management company can be reused to the private securities fund management company. To facilitate approval, we prefer to select the same type of risk control working experience.

Common feedback: "According to Article 10 of the 'Regulations on the Registration and Filing of Private Investment Funds', the compliance risk control officer of a private fund manager must have at least 3 years of relevant experience in investment, law, accounting, auditing, supervision, auditing, or in the compliance, risk control, regulatory and self-regulatory management of the asset management industry. Please your institution explain whether the senior management personnel meet the above requirements as per Article 31 of the 'List of Materials for the Application for the Registration of Private Fund Managers (Revised in 2023)'."

14 Information Disclosure

If the shareholders, partners or actual controllers of a private fund manager undergo changes, resulting in a change in the actual control rights, the relevant situation should be promptly informed to the private fund manager. The private fund manager should promptly fulfill the information disclosure obligation to investors and follow the relevant internal decision-making procedures as stipulated in the fund contract.

Lawyer's comment:

When the actual controller of a private fund manager undergoes a change, in the information disclosure process, the actual controller should pay attention to whether the method of information disclosure complies with the provisions of the fund contract and whether an information disclosure system account has been issued for all investors.

15 Requirements of Law Firms

If the actual controller of a private fund manager undergoes a change, a legal opinion issued by a law firm registered with the China Securities Regulatory Commission should be provided.