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China Fund News reporter Wu Jun

After a series of new private equity regulations were released, regulators issued a self-inspection notice to private equity firms.

On July 22, the Guangdong Securities Regulatory Bureau issued a "Notice on Carrying out Self-Inspection of Private Equity Investment Funds in the Jurisdiction in 2024" (hereinafter referred to as the "Notice") on its official website. In addition to requiring private equity funds to self-inspect whether they are compliant in business links such as publicity and promotion, fund raising, and investment operations, this self-inspection also focuses on quantitative trading, off-site operations, product overdue, etc.; and requires private equity institutions with a scale of less than 10 million yuan to submit special verification reports.

The Self-examination Working Draft released this time mainly involves nine contents, among which newly added contents include programmed trading, private equity fund operation, etc. It is reported that the regulator requires private equity to submit relevant self-examination materials before August 31 this year.

Guangdong Securities Regulatory Bureau issues notice on private placement self-examination

Focus on quantification, off-site operations, product overdue, etc.

On July 22, the Guangdong Securities Regulatory Bureau issued a "Notice" on its official website. It is understood that the scope of this self-examination is private equity fund management institutions that are registered in Guangdong Province (excluding Shenzhen) and have registered with the China Securities Investment Fund Association (hereinafter referred to as China Securities Investment Fund Association) as of June 30, 2024.

The key contents of this self-examination include: whether private equity fund management institutions comply with regulations in business links such as publicity and promotion, fund raising, and investment operations, whether registration and filing, information reporting, and information disclosure are true, accurate, complete, and timely, whether internal management and risk control are sound, whether there are any overdue fund products, whether quantitative trading is carried out, whether there are any off-site operations, whether there are any circumstances that fail to continuously meet registration and filing conditions, and whether they are engaged in businesses that conflict with or are unrelated to private equity fund management.

The Guangdong Securities Regulatory Bureau requires all private equity fund management institutions to set up a self-examination working group and designate a senior manager as the person in charge of the self-examination work to take the lead in organizing the self-examination work; at the same time, private equity institutions are required to check the problems and risks in various business management activities item by item according to the requirements of the self-examination work papers; for the problems found, practical and feasible rectification plans should be formulated and rectification should be carried out seriously. In addition, self-examination reports and other materials are required to be submitted to the Guangdong Securities Regulatory Bureau before August 31.

Fund Jun found that in addition to the private equity institution and private equity product information forms, the regulator also formulated multiple forms for several situations during the private equity self-examination: First, if it is found that a fund product is overdue during the self-examination, the fund product overdue form should be filled in; second, if quantitative trading is carried out or no quantitative trading is actually carried out but the fund name contains the word "quantitative", the quantitative trading situation form should be filled in; third, if there is a situation of off-site operation, the off-site operation situation form should be filled in.

In addition, the Guangdong Securities Regulatory Bureau also counted 326 private equity fund management institutions that had been registered for more than 12 months but had an existing managed fund size of less than 10 million yuan as of the end of the first quarter of this year, requiring them to verify the registration and filing requirements of the China Securities Investment Fund Association, and whether their employees, business premises, and capital can continue to meet the registration and filing conditions, and to form a special verification report.

The "Self-examination Working Paper" involves nine major contents

New additions include programmed trading, private equity fund operations, etc.

Specifically, the "Self-examination Working Papers" released this time mainly include nine aspects: basic requirements, publicity and promotion, fund raising, fund investment, internal control and risk management, information disclosure and reporting, investor suitability, programmed trading, and private equity fund operations.

Fund Jun took a look and found that in addition to the regular private equity self-examination content, the new additions in recent years mainly include two aspects: programmed trading and private equity fund operations.

Regarding programmed trading, the self-examination manuscript requires verification of multiple contents, such as:

(1) Whether a special business management and compliance risk control system has been established for algorithmic trading, and whether the algorithmic trading order review and monitoring system has been improved to prevent and control business risks.

(2) Whether the technical system used for programmed trading complies with the regulations of the stock exchange and has effective functions such as capital verification, security verification, authority control, threshold management, anomaly monitoring, error handling, and emergency response to ensure safe, continuous and stable operation.

(3) Whether the securities company system is used to connect to illegally operate securities business, whether investors are illegally solicited or third-party trading instructions are processed, whether the investment trading system is illegally transferred or lent, or system access is provided to third parties.

(4) Whether fees for using the stock exchange's value-added market information are paid in accordance with regulations.

(5) Before conducting high-frequency trading, whether to report information such as the location of the high-frequency trading system server, system test reports, and emergency plans in the event of system failure.

Specifically for the operation of private equity funds, the self-examination manuscript also puts forward a number of verification requirements, including the size of private equity funds, net value disclosure, share lock-up period, over-the-counter derivatives transactions, programmed trading, etc. Specifically, for example:

(1) Whether the initial paid-in capital of the private securities investment fund is less than RMB 10 million, and whether the aforementioned paid-in capital requirement is circumvented by investors redeeming fund units in the short term.

(2) Whether the fund’s net value and other performance-related information is provided to institutions or individuals that do not have a private securities investment fund sales entrustment relationship, except for qualified investors who have completed the specific object identification procedures and fund evaluation institutions that meet the requirements. Whether the past performance of private securities investment funds with a scale of less than RMB 10 million and a founding period of less than 6 months is used for publicity, sales, and ranking; whether the performance of some funds or the performance of some operating cycles of the funds is selectively displayed for the purpose of misleading investors; whether the fund performance is displayed without review by the private fund custodian; and whether the performance of funds with a period of less than 6 months is ranked.

(3) Whether the fund's income or losses are adjusted by setting up enhanced funds, safety cushions, fee refunds, etc., and whether risk compensation is provided in the form of first bearing losses with fund shares subscribed with own funds, etc.

(4) Whether the “double 25%” regulations are met: the funds invested in the same asset by a single private equity investment fund shall not exceed 25% of the net assets of the fund (except in compliance with Article 13 of the “Guidelines for the Operation of Private Equity Investment Funds”); the funds invested in the same asset by all private equity investment funds managed by the same private equity fund manager shall not exceed 25% of the net assets of the asset.

(5) Whether the fund is managed in accordance with the relevant laws, administrative regulations, and the provisions of the China Securities Regulatory Commission.

Editor: Captain

Review: Chen Mo

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