China’s funds industry watchdog has set out risk-control requirements for segregated account (SA) subsidiaries and provided guidance on fund houses’ responsibilities as controlling shareholders for the first time to better regulate this booming segment.
The Asset Management Association of China (Amac), a self-regulatory body operating under the China Securities Regulatory Commission (CSRC), issued a notice on December 7.
It requires all fund houses and SA subsidiaries to hire licenced accounting firms to conduct internal risk controls and compliance checking, with fund companies required to report the results to Amac within four months of the end of their financial year.
The new rules also offer guidance on parent fund houses’ responsibilities, saying they must understand and supervise their businesses and have directors sit on the board of SA subsidiaries.
Clearly CSRC and Amac are seeking to set improved governance standards, given how fast the SA subsidiaries segment has grown, notes Ivan Shi, research director at Shanghai-based consultancy Z-Ben Advisors.
CSRC has required fund houses to operate internal compliance and risk controls for SA subsidiaries since June 2012, but has not given practical details until now.
Most SA subsidiaries offer debt-financing products for small companies and form part of China’s shadow banking system. As of September, 74 SA subsidiaries managed Rmb6.9 trillion ($1.07 trillion) in AUM, making it bigger than the Rmb6.7 trillion mutual fund industry itself.
SA subsidiaries' assets grew 84% in the first nine months of this year, outpacing the mutual fund industry growth of 55% over the same period, according to Amac.
The 10-page Amac document sets out guidance for risk control in areas such as corporate governance, operations, company financials, data management, risk segregation and conflicts of interest.
Amac said it would carry out investigations on the basis of fund companies’ reports if necessary and would refer cases of misconduct to the CSRC. Although it has the ability to punish firms, Amac is not a fully-fledged regulator, but a watchdog with the power to blacklist firms who play fast and loose with the rules.
The clampdown on SA subsidiaries comes after the CSRC announced on December 4 that it would start a new round of investigations on 25 firms, including three fund houses and five SA subsidiaries. It did not give names of the firms.
In August, the CSRC investigated and punished eight SA subsidiaries, naming Wanjia Gongying Asset Management, Shanghai Goldstate Brilliance AM and Mirae Huachen AM. The regulator did not name the other five or give details of the penalties.
A spokesperson for CSRC said these SA subsidiaries were punished for misconduct in distribution, improper transactions, conflictof interest and insider trading, according to state media.
In January, the CSRC suspended five fund houses from doing business for six months; and Amac banned 14 firms (brokerages, fund house and SA subsidiaries) from new product registration for three months.