China considers new rules for private funds
Chinese legislators are reviewing a draft amendment to the Securities Investment Funds Law that would impose new regulations on private equity vehicles. The changes are designed to restrict illegal fundraising and insider trading.
Xiaoling Wu, vice chair of the National People's Congress Financial and Economic Committee told legislators that, regardless of repeated crackdowns, private equity managers would continue act improperly unless subject to specific supervision.
"Some managers of privately offered funds conduct illegal fundraising activities by borrowing the name of private funds, harming investors' interests by not imposing strict supervision on the managers," said Wu, according to Xinhua News Agency.
The draft amendment includes a proposal for the creation of two types of fund categories: unlimited liability funds, under which the managers bear unlimited liability for a vehicle's debts; and board funds, under which a shareholders assembly selects a board to supervise the managers.
The Securities Investment Funds Law went into effect in 2004 but has never fully covered privately raised vehicles. Reports abound of fund managers who flaunt the rules. On a basic level, some managers accept sums far larger than the registered capital level set by the authorities and routinely exceed limits on the number of investors in a fund. When it comes to attracting commitments, intermediaries are known to cold-call wealthy individuals and deliver incomplete or poorly explained pitches.
According to the National Development and Reform Commission (NDRC), there were 1,059 cases of private equity firms violating fundraising regulations in 2011.
The NDRC last year issued rules to clarify the regulation concerning equity investment enterprises (EIEs) in four pilot regions. These efforts have since been extended nationwide. According to a circular, all EIEs with a fund size below RMB500 million ($78.5 million) should complete a provincial-level record filing while national-level registration is required for funds targeting RMB500 million or above.
Industry participants are generally positive about the move, in that it brings more clarity to an uncertain area. However, they described the actions as more gesture than enforcement, and expect further measures to be introduced.
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