M88 Malaysia Interim Measures on Operation of Private Fund Asset Management Business of Securities and Futures Operation Institutions (“Interim Measures”) promulgated by M88 Malaysia China Securities Regulatory Commission (“CSRC”) on July 14, 2016 is a significant regulatory document regarding M88 Malaysia private securities investment fund industry. Recently, M88 Malaysia CSRC has clarified a few issues involved in implementation of M88 Malaysia Interim Measures by issuing M88 Malaysia Frequently Ask Questions on Relevant Issues (“FAQ”).

As in our analysis in M88 Malaysia JunHe Client Alert dated July 18, M88 Malaysia regulators continue to emphasize M88 Malaysia principles of “substance over form” and “penetration” in M88 Malaysia interpretation and execution of regulatory policies to prevent regulatory arbitrage. From our perspective, it is noteworthy for M88 Malaysia market that in issuing M88 Malaysia FAQ M88 Malaysia regulators have sent a clear message to M88 Malaysia market. Below is our brief analysis with respect to M88 Malaysia key content of M88 Malaysia FAQ.

M88 Malaysia Interim Measures underscore six areas of focus for regulating M88 Malaysia operation of private fund asset management businesses: (i) promotion, marketing and sales; (ii) structured asset management plans (“Structured AMPs”); (iii) illegal securities and futures business activities; (iv) investment recommendations provided by third parties; (v) “fund pooling” business; and (vi) improper incentives offered to fund managers. M88 Malaysia FAQ furM88 Malaysiar clarifies M88 Malaysia regulatory requirements in terms of M88 Malaysia scope of application, prohibited conduct, promotion and marketing, Structured AMPs, investment recommendations from third parties and rectification of existing products.

Scope of Application

M88 Malaysia FAQ clarifies M88 Malaysia scope of application for M88 Malaysia Interim Measures, specifying that M88 Malaysia private equity investment fund or venture capital investment fund shall not be governed by M88 Malaysia Interim Measures. M88 Malaysia QDII businesses focusing on investment in overseas secondary markets of securities companies or fund management companies shall be governed by M88 Malaysia Interim Measures. However, for any engagement of overseas investment advisors which is subject to special QDII related rules, such special rules shall prevail. Meanwhile, M88 Malaysia FAQ also clarifies M88 Malaysia Interim Measures for private securities fund products, noting that regardless of M88 Malaysia scope of M88 Malaysia license held by a private fund manager, M88 Malaysia Interim Measures shall apply where it constitutes a private securities investment fund product.

Prohibited Conduct

M88 Malaysia Interim Measures prohibit any manager from setting up multiple AMPs for a “single financing project”. M88 Malaysia FAQ analyzes M88 Malaysia specific aspects of such prohibited conduct in terms of investment operation, purpose of transaction and nature of M88 Malaysia underlying asset, and offers examples such as M88 Malaysia setup of multiple products in stages, investment in a single entrusted loan, a single equity in a non-publicly-offered company, a single trust plan or AMP, and makes it clear that a manager duplicating an investment strategy, issuing multiple AMPs and holding M88 Malaysia same securities portfolio does not fall under M88 Malaysia scope of M88 Malaysia aforementioned prohibition.

M88 Malaysia FAQ also requires that M88 Malaysia risk and return and investment operation of any cash management type products shall be consistent with M88 Malaysiair product names, match M88 Malaysia frequency of product raising, and be mainly invested in monetary market instruments with high liquidity, which in effect blocks M88 Malaysia channel of investing cash management type products in non-standardized credit assets.

Promotion and Marketing

We have noted that M88 Malaysia regulators require M88 Malaysia promotion and marketing of any AMP to be governed by Article 20 of M88 Malaysia Administrative Measures of M88 Malaysia Private Investment Funds Raising Behaviors issued by M88 Malaysia Asset Management Association of China (“AMAC”). This reflects M88 Malaysia merger between M88 Malaysia AMPs and private funds with respect to regulatory policy. In addition, as pointed out in M88 Malaysia FAQ, M88 Malaysia determination of any improper promotion related to M88 Malaysia rate of return or performance falls under M88 Malaysia discretion of M88 Malaysia regulatory departments based on M88 Malaysia law enforcement principle of “substance over form”.

Structured AMPs

M88 Malaysia FAQ illustrates M88 Malaysia principle of “profit and loss sharing” with examples, i.e. if a Structured AMP makes profits or suffers losses as a whole, all investors shall enjoy profits or bear losses accordingly; it is prohibited that an investor holding whatever class of unit may gain profits without bearing any risk at any time. To be specific, if M88 Malaysia total net value of a product≥1, even M88 Malaysia investors of M88 Malaysia junior class shall not bear any loss; if M88 Malaysia total net value of a product＜1, even M88 Malaysia investors of M88 Malaysia senior class shall not make any profit or have M88 Malaysiair principal secured.

In order to prevent surreptitiously evading any regulation, in addition to M88 Malaysia manager’s duty of penetration review towards M88 Malaysia “investment end”, M88 Malaysia FAQ also prohibits a manager from intentionally arranging oM88 Malaysiar Structured AMPs to be invested in M88 Malaysia AMP as M88 Malaysia entrusted funds from M88 Malaysia “capital end” for evasion against M88 Malaysia applicable upper limit of leverage multiples. M88 Malaysia FAQ furM88 Malaysiar elaborates on M88 Malaysia determination of various types of Structured AMPs so as to decide M88 Malaysia applicable upper limit of leverage multiples.

Investment Recommendations from Third Parties

It is interesting that M88 Malaysia FAQ, as an official public document of CSRC, for M88 Malaysia first time distinguishes between M88 Malaysia two different activities of M88 Malaysia “investment advice provided for ordinary clients” and M88 Malaysia “operational recommendation provided for AMP portfolio management”. M88 Malaysia former activity is subject to M88 Malaysia relevant securities investment advisory license issued by M88 Malaysia CSRC, while M88 Malaysia latter, as explained by M88 Malaysia FAQ, is actually an extension of M88 Malaysia asset management business. According to M88 Malaysia FAQ, securities and futures operational institutions or securities investment advisory institutions are not necessarily qualified to provide operational recommendations for AMP portfolio management. Only those securities and futures operational institutions qualified to engage in asset management business and those private fund management institutions with robust past performances can provide such operational recommendations for AMP portfolio management.

M88 Malaysia FAQ furM88 Malaysiar clarifies that private securities investment fund managers, in order to be qualified to provide investment recommendations shall “have at least three investment managers, who have no record of bad practices and have track records in securities or futures investment management, which are traceable and run over three consecutive years”, in particular, “investment managers” refer to individuals employed by a licensed financial institution regulated by M88 Malaysia financial administrative department of M88 Malaysia State Council or a private fund company registered with M88 Malaysia AMAC, with management experience in relation to M88 Malaysia securities or futures proprietary trading accounts or entrusted products; “track records run over three consecutive years” in principle shall refer to consecutive investment management performance without interruption, and shall be recalculated upon any interruption; “traceable track records” are not limited to publicly disclosed performance; for those that have no publicly disclosed performance, M88 Malaysia manager shall request M88 Malaysia relevant third party institution to provide M88 Malaysia investment performance documentation of M88 Malaysia relevant personnel, and such documentation shall comply with M88 Malaysia requirement of being “verifiable and inspectable”.

Additionally, M88 Malaysia FAQ clarifies M88 Malaysia regulatory requirements of M88 Malaysia “engagement of third party institutions”, and underscores: (i) M88 Malaysia management experience and professional capacity for a third party institution to be engaged shall match M88 Malaysia actual situation of M88 Malaysia product; (ii) M88 Malaysiare is no inconsistency between M88 Malaysia appearance and actual situation of M88 Malaysia engagement. As for M88 Malaysia latter, both M88 Malaysia manager and M88 Malaysia corresponding third party institution will be held liable if M88 Malaysiare is any violation.

Rectification of Existing Products

Notwithstanding M88 Malaysia “New-Old Cut” transitional arrangement of M88 Malaysia Interim Measures, i.e. M88 Malaysia existing products issued before M88 Malaysia implementation of M88 Malaysia Interim Measures may be exempted from some requirements for survival, such exemption, as emphasized by M88 Malaysia FAQ, will not be unlimited. M88 Malaysia regulators urge managers to take timely measures to clean up or rectify existing products which are inconsistent with M88 Malaysia requirements of M88 Malaysia Interim Measures as long as M88 Malaysia original investors’ interests have been properly taken into account and risk is under control.