Systematic Construction of the Regulatory Framework for Private Investment FOFs — An Analysis of the Measures for the Administration of Private Investment FOFs (Draft for Comments)
On October 23, 2026, the China Securities Regulatory Commission (CSRC) released the Measures for the Administration of Private Investment FOFs (Draft for Comments) (hereinafter referred to as the “Draft”), soliciting public comments on matters including FOF identification, diversified investment, investment tiers, qualification requirements for managers and operational administration. Comments shall be submitted by November 23, 2026.
The Draft contains 23 articles in total. From the authors’ perspective, the core regulatory logic is not simply relaxing restrictions on FOF nesting. Instead, it adopts the approach of “exempting one layer of investment tier in exchange for higher and ongoing compliance obligations”. Beyond the asset allocation capability of private FOF managers, regulators will focus heavily on capabilities including look-through supervision, conflict-of-interest prevention and information disclosure.
01 Quantitative Criteria for FOF Identification: 80% Threshold Based on Net Asset Value
The Draft for Comments clarifies that a Fund of Funds (FOF) refers to a private fund that invests the majority of its fund property in the shares of other private funds according to a certain proportion. The term "majority of fund property" means that the amount invested in the corresponding targets shall be no less than 80% of the fund’s net asset value (NAV).
Accordingly, FOF identification will no longer rely primarily on the product name or strategy description, but will follow a clear quantitative standard. It should be noted that the 80% threshold is calculated against the fund’s net asset value, rather than the subscribed capital, paid-in capital or investment cost. Fund valuation, exits and subsequent investments may affect this ratio. Therefore, the assessment should not be a one-time check at the fund establishment; continuous monitoring is required.
Based on investment scope, FOFs are classified into the following categories:
Private Securities Investment FOF: Investments in shares of private securities investment funds account for no less than 80% of the FOF’s NAV.Private Equity Investment FOF: Aggregate investments in venture capital funds, real estate private investment funds and other private equity investment funds make up no less than 80% of the FOF’s NAV.Venture Capital FOF: Investments in venture capital fund shares reach no less than 80% of the NAV; this is a specific subcategory under private equity investment FOFs.Hybrid FOF: FOFs that invest in both securities and equity private funds and fail to meet the above proportional criteria.
The name of an FOF must contain the words "Fund of Funds". For FOFs established in the form of a company or partnership, their business scope shall in principle include "engaging in FOF investment activities". In addition, private funds and FOFs referred to in the Draft for Comments exclude private asset management plans issued by securities and futures institutions. The scope of these products shall not be conflated.
02 Four-Dimensional Diversification Requirements, Supervision Extended to Underlying Assets
Article 4 of the Draft sets out four sets of proportional limits: (1) The amount invested by a single FOF in a single private fund shall not exceed 25% of the FOF’s NAV. (2) The amount invested through penetration into a single underlying project or target shall not exceed 20% of the FOF’s NAV. For FOFs with an asset size above RMB 10 billion, this cap is tightened to 10%. (3) Aggregate investments in private fund managers controlled by the same de facto controller shall not exceed 30% of the FOF’s NAV. (4) Total investments made by all FOFs managed by the same manager into a single private fund shall not exceed 30% of the target fund’s NAV; the cap rises to 50% if the target fund is a venture capital fund.
These four metrics adopt different calculation scopes and denominators. In particular, Item (4) requires consolidated calculation across all FOFs under the same manager, with the denominator being the NAV of the invested fund. This must not be confused with the proportional limits applicable to a single FOF.
The penetration requirement means that investing in multiple sub-funds does not automatically satisfy diversification obligations. If different lower-tier funds end up concentrating capital on the same project, the ratio restrictions will still be triggered. Managers must build a monitoring system to aggregate cross-fund and cross-project underlying asset exposures.
Where an over-limit position arises passively due to factors beyond the manager’s control, the manager shall adjust the position within one month after the illiquid asset becomes saleable, transferable or tradable again. This grace period is not universally available from the date the breach occurs.
03 Differentiated Exemptions with No Room for Over-Interpretation
The Draft provides separate arrangements for Secondary FOFs (S-FOFs, established exclusively to acquire existing private fund shares) and long-term capital investors.
Secondary FOFs (S-FOFs)FOFs set up solely to acquire existing private fund shares may be exempted from Item (4) above, provided that special risk disclosures are made and the approval is obtained either from unanimous consent of all investors or via the decision-making mechanism stipulated in the fund contract. This exemption does not automatically apply to the other three proportional limits. Such FOFs shall in principle be valued by qualified private fund service institutions; valuation obligations cannot be waived even if the fund contract specifies otherwise with special risk disclosure.Long-term Capital FOFsFOFs where social security funds, basic pension funds, annuity funds, insurance funds, QFIIs and national government investment funds collectively contribute no less than 80% of total capital may, upon completion of required decision-making procedures, be fully exempted from all four investment diversification limits under Paragraph 1 of Article 4. The investment ratios shall then be agreed in the fund contract.
The two exemptions differ significantly in eligible applicants, approval procedures and scope of relief. Practitioners should not generalize that "S-FOFs and long-term capital FOFs are free from diversification rules".
04 Only One Tier of Exemption Permitted; Unlimited Nesting Is Prohibited
Qualified FOFs may enjoy an exemption for one single layer of investment tiering. The explanatory notes further clarify that if an FOF directly or indirectly invests in other FOFs or accepts investments from other FOFs, only one tier can be exempted.
In short, the word "FOF" in the product name does not guarantee tier exemption. The exemption does not allow unlimited multi-layer nesting, nor does it waive compliance requirements covering investment scope, investor headcount and investor suitability. FOFs enjoying the exemption must maintain continuous eligibility and strictly adhere to their stated investment scope.
For complex transaction structures, practitioners shall identify the nature of each product layer by layer and draw up investment path diagrams, rather than judging tier compliance merely based on product names.
05 Continuous Eligibility for Managers; Higher Thresholds for Hybrid FOFs
Managers of private securities FOFs and private equity FOFs must maintain ongoing registration compliance and deploy at least one full-time investment professional with no less than five years of relevant investment experience.
Hybrid FOF managers face substantially stricter requirements:
The primary contributors and de facto controllers must possess at least five years of experience managing both securities/futures funds and equity assets.The average AUM of relevant FOFs over the past three years must meet the prescribed scale threshold.At least two full-time investment professionals with eight years of relevant experience must be on staff.The manager’s operating capital shall be no less than RMB 20 million.
In addition, a hybrid FOF shall have a paid-in raised capital of no less than RMB 30 million.
These are ongoing compliance conditions. Compliance risks will arise if key personnel resign, control changes, AUM shrinks or operating capital falls short; these obligations apply beyond the initial product filing stage.
06 Active Management & Transparent Disclosure: Core Regulatory Pillars
The Draft explicitly stipulates that FOF managers shall not cede investment decision-making power in any form. They may not delegate the selection of sub-funds and managers, identification of investment targets, or issuance of investment orders to third parties. External consultants or investor committees may provide advisory and supervisory input under the contract, but shall not become the actual decision-making body.
In addition, FOF investment staff shall not concurrently serve as investment personnel for other private funds managed by the same institution. This rule directly affects team allocation, going beyond ordinary conflict-of-interest disclosure requirements.
On fund custody: the fund contract must stipulate that both the FOF assets and the assets of its invested private funds shall be held by a private fund custodian. If relevant parties refuse or fail to provide supporting documents as required by the FOF custodian, the FOF shall not make any new investments. Custody cooperation will become a precondition for investment execution.
On information disclosure: FOF managers must disclose fee structures and performance compensation arrangements for both the FOF and its sub-funds. They shall penetrate and disclose investment paths, tiering structure, project distribution and asset categories within the prescribed scope. Investments in affiliated funds require separate disclosure and special risk warnings. Annual financial statements of the FOF must be audited by a CPA firm qualified under the Securities Law.
These obligations will force sub-funds to share real-time data on underlying assets, valuation, fees and material risks. The sub-funds’ ability to provide such information will directly determine whether FOF managers can fulfil their regulatory disclosure duties.
07 Negative List: Due Diligence Extended from Pre-Investment to Post-Investment Oversight
Article 18 sets out a negative list: FOFs shall not invest in managers or funds that suffer severe operational risks, major internal control deficiencies, opaque underlying assets or obviously unfair valuation practices. Targets will also be blacklisted if their controlling shareholders, general partners, de facto controllers, senior executives or core investment teams have experienced frequent personnel instability over the past three years, which may disrupt normal operations.
Accordingly, FOF due diligence cannot be limited to registration filings, historical performance and pre-investment compliance reviews. Post-investment monitoring must be embedded via regular updates, material event reporting and trigger-based rechecks.
Breaches may trigger regulatory measures including rectification orders, regulatory interviews and warning letters, plus administrative penalties under the Regulations on Supervision and Administration of Private Investment Funds. Severe violations may lead to market bans, entry into the integrity file system, or even criminal liability.
08 Practical Recommendations: Conduct Gap Assessment First; Do Not Preserve Existing Arrangements by Default
For FOF managers: Prioritize reviewing the 80% identification threshold, the calculability of the four diversification ratios, underlying asset penetration capacity, dedicated staffing, independence of investment decisions, as well as contractual clauses on custody, affiliated transactions, valuation and information disclosure.For institutional investors: Embed FOF exemption terms, double-layer fee disclosure, information rights, audit rights and key-person stability clauses into investment contracts.For sub-fund managers: Evaluate in advance whether they can meet the FOF’s requirements for penetrating data disclosure and custodian cooperation.
Key reminder: The Draft for Comments has not yet taken effect, and no formal implementation date has been announced. Nor has a complete transitional regime for existing products been formulated. The drafting notes only state that the Asset Management Association of China (AMAC) will issue unified standards and procedures for reclassifying existing funds.
Existing products are neither required to rectify immediately nor automatically exempted from the new rules. No transitional relief can be pre-assumed.
Conclusion
The core signal sent by the Draft for Comments is that FOF regulation is shifting from “product structural design” toward “fiduciary duty management across the entire investment chain”. The single-tier exemption is not an unconditional concession; it is tied to diversification requirements, active management, personnel segregation, look-through disclosure and ongoing compliance.
Before the final rules take effect, managers and institutional investors are advised to conduct structural and procedural reviews at an early stage. They may also actively submit feedback on issues including ratio calculation, look-through criteria, the scope of information access and transition arrangements for legacy funds.
This article is prepared based on the Draft for Comments released on 23 October 2026. It is for business discussion only and does not constitute legal advice for any specific project. The final rules shall be subject to the official release by the regulatory authority.
