As many as two-thirds of China’s private fund managers may be de-registered as a result of the latest crackdown on the sector, aimed at preventing illegal fundraising and strengthening supervision of the industry. This comes amid greater scrutiny of private capital after the Ezubao P2P ponzi scheme emerged in late January.

Global players planning to register their domestic wholly foreign-owned enterprises (WFOEs) as private securities firms will need to keep an eye on these developments, because lawyers and consultants expect to see further regulatory tightening.

The Asset Management Association of China (Amac) issued rules on February 5 in a bid to reduce the number of so-called ‘shell companies’ and close loopholes in the registration process for private fund firms. Shell companies – those that are not offering funds – account for 69% of registered private firms.

Private fund registration came in in February 2014 to cover private equity, venture capital and private securities fund managers, and imposes reporting obligations for such firms. Yet there is a widespread view that registration represents a licence for conducting investment management business, though this is not the case, noted Davis Wang, China head at law firm Simmons & Simmons in Beijing.

Many financing providers, such as peer-to-peer (P2P) lenders and independent financial advisers, are thought to have registered as private fund managers without any intention of running money, and purely to benefit from the apparent legitimacy that registration confers.

Amac registration allows such firms to raise capital legally, which was not the case in the past, said Alexis He, an analyst at Shanghai-based consultancy Z-Ben Advisors.

Amac has now revamped and reset the reporting obligations and thereby increased compliance costs, noted Wang, and a large number of private fund managers may be de-registered.

A Shanghai-based source told AsianInvestor that the CSRC’s ultimate goal was to reduce the number of registered private firms and that the industry had expected the move.

Firms seeking to register must now explain their business scope in detail by submitting both a due diligence report compiled by a mainland law firm and a formal legal opinion. Any business they conduct that could cause a conflict of interest – such as P2P lending, crowd-funding or other financing businesses – will be banned.

In addition, Amac will now de-register private firms that fail to launch products within six months of registration or that halt operations for six months. However, it will grant a grace period to firms that had already registered depending on how long they have been registered, but did not specify how long the period would be.

Amac noted in a circular that some 17,000 firms, or 69% of the 25,841 registered, had no intention of starting private fund businesses or were still preparing their business; some lacked private fund investment capabilities; and some firms’ business are P2P and crowd funding,.

Amac also now requires senior executives – including legal representatives, general managers, deputy general managers, compliance and risk control managers – to also take a written exam to qualify for registration. Wang expects this to have a significant impact, especially for executives who cannot speak Mandarin.

In June last year China’s authorities opened the way for global asset managers to register WFOEs with Amac and gain private securities fund manager status. Aberdeen Asset Management was the first foreign house to get approval, but is waiting to compete the registration process. Meanwhile US fund house Fidelity is waiting for more regulatory details, as reported.

In another recent crackdown on the nascent private fund sector, Beijing’s Administration of Industry and Commerce reportedly suspended registration of private investment firms in early January, targeting illegal fundraising activities.