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I. Introduction

On September 1, 2023, the *Regulation on the Supervision and Administration of Private Investment Funds* (hereinafter referred to as the "Fund Regulation"), the first administrative regulation governing the private investment fund industry in China, officially entered into force. For a long time in the past, the private fund industry was not highly recognized, as it was only regulated by normative documents and had long lacked governing upper-level laws. As a matter of fact, when the *Securities Investment Fund Law of the People's Republic of China* was officially implemented on June 1, 2013, private securities investment funds had already been brought into the regulatory system, whereas equity investment funds were not subject to the regulation of relevant upper-level laws. The Fund Regulation both refines relevant provisions and elevates the legal hierarchy of relevant regulatory rules, which is of milestone significance for the private equity investment fund industry.

Pursuant to the rules on application of laws in China, where the provisions of the *Fund Regulation* come into direct conflict with departmental rules and normative documents, the *Fund Regulation* shall be applied in accordance with the principle of "superior law prevails over inferior law". For provisions that do not involve direct conflict, the relevant rules may still be applied.

II. Interpretation of Key Contents of the Fund Regulations

*The Fund Regulation* consists of 7 chapters and 62 articles, which stipulates the supervision and administration of private fund business activities in terms of scope of application, duties of fund managers and custodians, fund raising and investment operation, special provisions on venture capital funds, supervision and administration, and legal liability. Compared with previous regulatory documents, there are seven key points worthy of attention. The author hereby lists and interprets them one by one.

1. It is explicitly stipulated that the Fund Regulations shall apply to partnership funds whose assets are administered by general partners.

Article 2 of the Fund Regulation This Regulation shall apply where, within the territory of the People's Republic of China, funds are raised through private placement for the establishment of an investment fund, or a company or partnership enterprise is lawfully established for the purpose of conducting investment activities, and such fund, company or partnership enterprise is managed by a private fund manager or a general partner to carry out investment activities for the benefit of investors.

### Interpretation This Article defines private investment funds. Notably, the provision of "managed by general partners" contained in the expression "managed by private fund managers or general partners" merits particular attention. Article 7 of the *Regulations on the Supervision and Administration of Private Investment Funds* stipulates that: "A private fund manager shall be a company or partnership established in accordance with the law. For a private investment fund established in the form of a partnership, where its assets are managed by a general partner, the provisions of these Regulations on private fund managers shall apply to such general partner." Pursuant to the principle of *substance over form*, this Article confirms that no matter which entity conducts substantive investment management of a partnership-type private investment fund, the fund shall not be exempt from regulatory requirements, which fills the gap in the regulatory framework for such enterprises.

2. Reserve space for government investment funds

Article 5 of the Fund Regulation: The supervision and administration of private fund business activities shall uphold and implement the lines, principles, policies, decisions and arrangements of the Communist Party of China and the State. The securities regulatory authority under the State Council shall exercise supervision and administration over private fund business activities in accordance with the provisions of laws and this Regulation, and its dispatched offices shall perform their duties as authorized.

Where the State provides otherwise on the supervision and administration of private investment funds initiated and established with a certain proportion of government funds or in which the government holds equity stakes, such provisions shall prevail.

Interpretation: The "otherwise provided" mentioned herein mainly refers to departmental rules and normative documents including the *Interim Measures for the Administration of Government Investment Funds* (Cai Yu [2015] No. 210) promulgated by the Ministry of Finance, and the *Interim Measures for the Administration of Government-funded Industrial Investment Funds* (Fa Gai Cai Jin Gui [2016] No. 2800) promulgated by the National Development and Reform Commission. Special agreements on government investment funds shall remain valid. Where no relevant stipulation is specified in such special agreements, the *Fund Regulation* shall be complied with.

3. It shall conduct fundraising on its own and may not engage in agency distribution.

Article 17 of the Fund Regulation: A private fund manager shall raise funds on its own, and shall not entrust any other party to raise funds, unless otherwise provided by the securities regulatory authority under the State Council.

Analysis: The *Measures for the Registration and Filing of Private Investment Funds* stipulates that "A private fund manager shall raise funds on its own, or entrust an institution with fund sales business qualification (hereinafter referred to as the fund sales institution) to raise funds in accordance with the relevant provisions of the China Securities Regulatory Commission". Apparently, there are material discrepancies between the provisions of the two regulations. The *Fund Regulation* explicitly provides that private fund managers shall, in principle, not entrust third parties to raise funds. As for the clause "unless otherwise provided by the securities regulatory authority of the State Council", it can only have legal basis after further relevant provisions are formulated in the revised *Interim Measures for the Supervision and Administration of Private Investment Funds*.

4. Identification of Fund Property

Article 21 of the Fund Regulations: Where a private fund manager makes investments using private fund assets, it shall clearly indicate the name of the private fund when opening an account in its own name, being recorded in the register of shareholders of the invested enterprise, or holding other private fund assets.

Interpretation: This Article is mainly formulated in response to the issue of fund property identification of contractual private equity funds, which is conducive to protecting investors of contractual funds. In 2022, Shenzhen launched a pilot program for commercial registration of enterprises invested in by contractual private equity funds, allowing the name of the company or partnership serving as the private fund manager to be registered as the shareholder or partner of the invested company and publicly disclosed. The specific practice is to add the remark "On behalf of XX Fund Product". Relevant competent authorities will definitely further clarify issues concerning the commercial registration of contractual private equity funds in the future.

5. Special Provisions on Venture Capital Funds

Article 36 of the Fund Regulations: The State grants policy support to venture capital funds, encourages and guides them to invest in growth-oriented and innovative start-up enterprises, and encourages long-term capital to invest in venture capital funds.

The National Development and Reform Commission (NDRC) of the State Council shall be responsible for organizing the formulation of policies and measures to promote the development of venture capital funds. The securities regulatory authority under the State Council (China Securities Regulatory Commission, CSRC) and the NDRC shall establish and improve a sharing mechanism for information and support policies, and strengthen the coordination and cooperation between the supervision and administration policies and development policies for venture capital funds. Registration and filing authorities shall timely submit information related to venture capital funds to the CSRC and the NDRC.

Venture capital funds enjoying State policy support shall invest in compliance with relevant State provisions.

Article 37 The securities regulatory authority under the State Council exercises differentiated supervision and administration over venture capital funds, which is distinct from that applicable to other private funds:

(I) Optimize the business environment for venture capital funds and simplify the registration and filing procedures.

(II) Differentiated supervision and administration shall be implemented for venture capital funds that conduct legal fund raising, compliant investment and good-faith operation in terms of fund raising, investment operation, risk monitoring, on-site inspection and other relevant aspects, and the inspection frequency for such funds shall be reduced.

(III) Provide facilitation in such aspects as investment exit for venture capital funds primarily engaged in long-term investment, value investment and the transformation of major scientific and technological achievements.

Article 38 The registration and filing authority shall implement differentiated self-regulation over venture capital funds in respect of registration and filing, alteration of matters and other aspects, which is distinct from the self-regulation applied to other private funds.

Interpretation: The Fund Regulations prescribe provisions on venture capital funds through a special chapter, i.e. "Chapter IV Special Provisions on Venture Capital Funds". It explicitly defines the functions and duties of the National Development and Reform Commission, as well as the obligation of private fund managers to submit relevant information to the aforesaid two institutions. In the meantime, it refines the differentiated regulatory policies for venture capital funds. More detailed policies targeting venture capital funds will be promulgated in the future.

6. Administrative Regulatory Authorities and Administrative Regulatory Measures

Article 39 of the Fund Regulation: The securities regulatory authority of the State Council shall exercise supervision and administration over private fund business activities, and perform the following duties in accordance with the law:

(I) Formulate regulations and rules concerning the supervision and administration of business activities of private investment funds.

(II) Conduct supervision and administration over private fund managers, private fund custodians and other institutions engaging in private fund business activities, and investigate and punish illegal acts.

(III) To provide guidance on, conduct inspection of and exercise supervision over registration and filing as well as self-disciplinary management activities;

(4) Other functions and duties as prescribed by laws and administrative regulations.

Article 40 The securities regulatory authority under the State Council shall have the power to take the following measures when performing its functions and duties in accordance with the law:

(I) Conduct on-site inspections of private fund managers, private fund custodians and private fund service institutions, and require them to submit relevant business materials;

(2) Entering the place where the suspected illegal act is committed to conduct investigation and collect evidence;

(3) Inquiring of the parties and the entities and individuals related to the event under investigation, and requiring them to give explanations on matters related to the event under investigation;

(4) Consult and copy property right registrations, communication records and other materials related to the matter under investigation;

(5) Inspect and copy the securities transaction records, registration and transfer records, financial and accounting materials, and other relevant documents and materials of the parties as well as entities and individuals related to the incident under investigation; documents and materials that may be transferred, concealed or destroyed may be sealed up.

(VI) Inquire in accordance with the law into the account information of the parties and any other account information related to the incident under investigation;

(7) Other measures as prescribed by laws and administrative regulations.

To prevent risks of private equity funds and maintain market order, the securities regulatory authority under the State Council may take such measures as ordering rectification, holding regulatory interviews, and issuing warning letters.

Article 41 When the securities regulatory authority under the State Council conducts supervision and inspection or investigation in accordance with the law, the number of personnel assigned for supervision, inspection or investigation shall be no less than two. Such personnel shall present their law enforcement certificates, supervision and inspection notice, investigation notice or other law enforcement documents. They shall bear the obligation of confidentiality in accordance with the law for any trade secrets and personal privacy that come to their knowledge in the process of supervision and inspection or investigation.

Entities and individuals under inspection or investigation shall cooperate with the supervision, inspection or investigation conducted by the securities regulatory authority under the State Council in accordance with the law, truthfully provide relevant documents and materials, and shall not refuse, obstruct such work or conceal any relevant information.

Article 42 Where the securities regulatory authority under the State Council finds that a private fund manager commits any violation of laws or regulations, or its internal governance structure and risk control management fail to conform to relevant provisions, it shall order the said private fund manager to make corrections within a specified time limit. If the private fund manager fails to make corrections within the specified time limit, or its acts seriously endanger the stable operation of the private fund manager and damage the lawful rights and interests of investors, the securities regulatory authority under the State Council may, in light of the specific circumstances, adopt the following measures against it:

(I) Ordering the suspension of part or all of the business;

(II) Order the replacement of directors, supervisors, senior executives, managing partners or appointed representatives, or restrict their rights;

(III) Order the responsible shareholders to transfer their respective equity interests and the responsible partners to transfer their respective property shares, and restrict the exercise of rights by the aforesaid responsible shareholders or partners;

(4) Order the private fund manager to engage or designate a third-party institution to conduct an audit of the private fund assets, and the relevant expenses shall be borne by the private fund manager.

Where a private fund manager engages in illegal business operations or encounters material risks, which seriously jeopardize market order and harm the interests of investors, the securities regulatory authority under the State Council may, in addition to adopting the measures prescribed in the preceding paragraph, take such measures against the said private fund manager as appointing another institution to take over its operations, notifying the registration and filing authority to cancel its registration, among others.

Article 43 The securities regulatory authority under the State Council shall record the credit information of private fund managers, private fund custodians, private fund service institutions and their practitioners in the Capital Market Credit Database and the National Credit Information Sharing Platform. The securities regulatory authority under the State Council shall, in conjunction with the relevant departments of the State Council, establish and improve the joint disciplinary system for untrustworthy private fund managers and relevant responsible entities in accordance with the law.

The securities regulatory authority under the State Council shall, in conjunction with other financial regulatory authorities, other relevant departments of the State Council, and the people's governments of provinces, autonomous regions and municipalities directly under the Central Government, establish a cooperation mechanism for information sharing, statistical data submission and risk disposal in the supervision and administration of privately offered investment funds. In the process of risk disposal, the relevant local people's governments shall take effective measures to maintain social stability.

Interpretation: Chapter V of the Fund Regulation stipulates the statutory functions and powers of the China Securities Regulatory Commission (CSRC) and its dispatched offices, as well as the regulatory measures available to them, by means of the "enumeration plus catch-all" formula. Where a private fund manager commits any violation of laws or regulations, it shall be subject to the following consequences: (1) General regulatory measures including on-site inspection, access to and duplication of transaction materials, etc.; (2) Specific regulatory measures including ordering rectification, holding regulatory interviews, issuing warning letters, etc.; (3) In case of relatively serious illegal acts, it shall be subject to mandatory regulatory measures such as ordering rectification within a prescribed time limit, suspension of business operations, ordering the replacement of relevant responsible personnel, and ordering the responsible party to transfer the equity interests or property shares of the manager, etc.; (4) Takeover by a designated third party, cancellation of registration, etc.

Meanwhile, administrators, custodians, service institutions and their practitioners shall also be included in the public disclosure of the capital market credit database, and be subject to the joint disciplinary system for dishonesty.

7. Explicit Penalty Standards for Illegal Acts

Article 44 Whoever fails to perform the registration formalities in accordance with the provisions of Article 10 of these Regulations and conducts investment activities under a name containing the words "fund", "fund management" or similar expressions shall be ordered to make corrections, have his/its illegal gains confiscated, and be concurrently imposed a fine of not less than one time but not more than five times the amount of illegal gains; where there are no illegal gains or the illegal gains are less than RMB 1 million, a fine of not less than RMB 100,000 but not more than RMB 1 million shall be imposed concurrently. The persons directly in charge and other directly liable persons shall be given a warning and concurrently imposed a fine of not less than RMB 30,000 but not more than RMB 300,000.

Article 45 Where any shareholder, actual controller or partner of a private fund manager violates the provisions of Article 12 of these Regulations, it/he shall be ordered to make rectification, given a warning or subjected to public censure, with its/his illegal gains confiscated, and a fine of not less than one time but not more than five times the amount of the illegal gains shall be imposed concurrently. If there are no illegal gains or the illegal gains are less than RMB 1 million, a fine of not less than RMB 100,000 and not more than RMB 1 million shall be imposed concurrently. The directly responsible person in charge and other directly liable persons shall be given a warning or subjected to public censure, and imposed a fine of not less than RMB 30,000 and not more than RMB 300,000 concurrently.

Article 46 Any private fund manager that violates the provisions of Article 13 of these Regulations shall be ordered to make corrections. Where it refuses to make corrections, it shall be given a warning or public censure, concurrently imposed a fine of no less than RMB 100,000 and no more than RMB 1,000,000, ordered to cease its private fund business activities, and the aforesaid circumstances shall be publicly announced. The persons directly in charge and other directly responsible persons shall be given a warning or public censure, and concurrently imposed a fine of no less than RMB 30,000 and no more than RMB 300,000.

Article 47 Where a private fund custodian, in violation of the provisions of Paragraph 2 of Article 16 of these Regulations, fails to establish a business isolation mechanism, it shall be ordered to make rectification, given a warning or circulated a notice of criticism, and concurrently imposed a fine of not less than RMB 50,000 and not more than RMB 500,000. The persons directly in charge and other directly responsible personnel shall be given a warning or circulated a notice of criticism, and concurrently imposed a fine of not less than RMB 30,000 and not more than RMB 300,000.

Article 48 Where any entity or individual violates the provisions of Articles 17, 18 and 20 of these Regulations concerning the administration of qualified private fund investors and fundraising methods, the illegal gains shall be confiscated, and a fine of not less than one time but not more than five times the amount of illegal gains shall be imposed concurrently. Where there are no illegal gains or the illegal gains are less than RMB 1 million, a fine of not less than RMB 100,000 but not more than RMB 1 million shall be imposed concurrently. The persons directly in charge and other directly responsible personnel shall be given a warning, and a fine of not less than RMB 30,000 but not more than RMB 300,000 shall be imposed on them concurrently.

Article 49 Whoever violates the provisions of Article 19 of these Regulations, fails to fully disclose investment risks to investors and misleads them to invest in private equity fund products incompatible with their risk identification ability and risk bearing capacity shall be given a warning or a circular of criticism, and concurrently imposed a fine of not less than RMB 100,000 and not more than RMB 300,000; where the circumstances are serious, it shall be ordered to cease its private equity fund business activities and a public announcement on the aforesaid punishment shall be issued. The directly responsible person in charge and other directly liable persons shall be given a warning or a circular of criticism, and concurrently imposed a fine of not less than RMB 30,000 and not more than RMB 100,000.

Article 50 Where a private fund manager, in violation of the provisions of Paragraph 1 of Article 22 of these Regulations, fails to handle the filing formalities for the privately offered fund that has completed fundraising, it shall be imposed a fine of not less than RMB 100,000 but not more than RMB 300,000. The person directly in charge and other directly liable persons shall be given a warning, and concurrently imposed a fine of not less than RMB 30,000 but not more than RMB 100,000.

Article 51 Where any party violates the provisions of Paragraph 2 of Article 24 of these Regulations by using private fund assets to operate or operate in a disguised form in businesses such as fund lending and loans, or requiring local people's governments to commit to principal repurchase, such party shall be ordered to make corrections, given a warning or circular criticism, have its illegal gains confiscated, and be concurrently imposed a fine of not less than RMB 100,000 and not more than RMB 1,000,000. The persons directly in charge and other directly responsible persons shall be given a warning or circular criticism, and be concurrently imposed a fine of not less than RMB 30,000 and not more than RMB 300,000.

Article 52 Where a private fund manager violates the provisions of Article 26 of these Regulations by failing to employ senior management personnel with corresponding professional experience to take charge of work such as investment management, risk control and compliance, or failing to establish management systems for practitioners covering matters including investment declaration, registration, review and disposal, it shall be ordered to make corrections, given a warning or circulated a notice of criticism, and concurrently imposed a fine of not less than RMB 100,000 but not more than RMB 1,000,000. The directly responsible person in charge and other directly liable persons shall be given a warning or circulated a notice of criticism, and concurrently imposed a fine of not less than RMB 30,000 but not more than RMB 300,000.

Article 53 Where a private fund manager violates the provisions of Article 27 of these Regulations by entrusting others to perform investment management duties, or entrusting institutions that do not meet the requirements of the Law of China on Securities Investment Funds to provide securities investment advisory services, it shall be ordered to make rectification, be given a warning or be subject to circulated criticism, have its illegal gains confiscated, and be concurrently imposed a fine of not less than RMB 100,000 and not more than RMB 1,000,000. The directly responsible person in charge and other directly liable personnel shall be given a warning or be subject to circulated criticism, and be concurrently imposed a fine of not less than RMB 30,000 and not more than RMB 300,000.

Article 54 Where a private fund manager violates the provisions of Article 28 of these Regulations by conducting related-party transactions, it shall be ordered to make rectification, given a warning or circulated a notice of criticism, have its illegal gains confiscated, and concurrently be imposed a fine of not less than RMB 100,000 and not more than RMB 1,000,000. The persons directly in charge and other directly responsible personnel shall be given a warning or circulated a notice of criticism, and concurrently be imposed a fine of not less than RMB 30,000 and not more than RMB 300,000.

Article 55 Where a private fund manager, private fund custodian or any of their employees commits any of the acts specified in Article 30 of these Regulations, it/he shall be ordered to make corrections, given a warning or public notice of criticism, have its/his illegal gains confiscated, and concurrently imposed a fine of not less than one time but not more than five times the amount of illegal gains; where there are no illegal gains or the illegal gains are less than RMB 1 million, a fine of not less than RMB 100,000 but not more than RMB 1 million shall be imposed concurrently. The directly responsible person in charge and other directly responsible personnel shall be given a warning or public notice of criticism, and concurrently fined not less than RMB 30,000 but not more than RMB 300,000.

Article 56 Where a private fund manager, private fund custodian or any of their practitioners fails to provide or submit relevant information in accordance with the provisions of these Regulations, or commits any of the acts specified in Article 32 of these Regulations, such entity or individual shall be ordered to make corrections, given a warning or public censure, have their illegal gains confiscated, and concurrently be fined not less than RMB 100,000 and not more than RMB 1,000,000. The directly responsible person in charge and other directly responsible personnel shall be given a warning or public censure, and concurrently be fined not less than RMB 30,000 and not more than RMB 300,000.

Article 57 Where a private fund service institution and its working personnel violate the provisions of laws and administrative regulations, and fail to scrupulously fulfill their duties and act with diligence and due care, they shall be ordered to make corrections, given a warning or a circulating notice of criticism, and concurrently fined not less than RMB 100,000 and not more than RMB 300,000; if the circumstances are serious, they shall be ordered to cease their private fund service business. The persons directly in charge and other directly responsible personnel shall be given a warning or a circulating notice of criticism, and concurrently fined not less than RMB 30,000 and not more than RMB 100,000.

Article 58 Where any private fund manager, private fund custodian, private fund service institution or any of their working personnel violates this Regulation or the relevant provisions of the securities regulatory authority under the State Council, if the circumstances are serious, the securities regulatory authority under the State Council may take measures to prohibit the relevant responsible persons from entering the securities and futures markets.

Whoever refuses or obstructs the securities regulatory authority under the State Council and its staff members from exercising their functions and powers of supervision, inspection and investigation in accordance with the law shall be ordered to make corrections by the securities regulatory authority under the State Council and imposed a fine of not less than RMB 100,000 but not more than RMB 1,000,000. Where the act constitutes a violation of public security administration, the public security organ shall impose public security administration punishments in accordance with the law. Where the act constitutes a crime, criminal liability shall be investigated in accordance with the law.

Article 59 Where working personnel of the securities regulatory authority under the State Council and the registration and filing authorities neglect their duties, abuse their powers, engage in malpractice for personal gains, or extort or accept property from others by taking advantage of their official positions, they shall be given disciplinary sanctions in accordance with the law; if a crime is constituted, criminal liability shall be pursued in accordance with the law.

Article 60 Where any party violates the provisions of these Regulations and the stipulations of the fund contract, and shall be liable for civil compensation, pay fines and have its illegal gains confiscated in accordance with the law, if its property is insufficient to cover all the aforesaid payments at the same time, it shall bear civil compensation liability first.

Interpretation: Regarding illegal acts, except for the provisions applicable to privately offered securities investment funds, the previous provisions governing privately offered equity investment funds were restricted by their own hierarchy of legal effect, and had significant limitations in both the types and ranges of administrative penalties. The *Regulations on the Supervision and Administration of Privately Offered Investment Funds* (hereinafter referred to as the "Fund Regulations") have set out relatively detailed administrative penalties for illegal violations, which is a major highlight of the Fund Regulations. Pursuant to the provisions of Chapter VI of the Fund Regulations, privately offered fund managers and their shareholders, actual controllers and partners, privately offered fund custodians, privately offered fund service institutions, practitioners of the aforesaid entities, as well as staff members of the China Securities Regulatory Commission (CSRC) and the Asset Management Association of China (AMAC), all fall within the scope of subjects liable to penalties. The types of legal liabilities include: order to make rectification, warning or circulation of a notice of criticism, confiscation of illegal gains, fine, adoption of measures for prohibiting entry into the securities and futures markets, order to cease privately offered fund business activities and make a public announcement thereof, among others.

Conclusion

The promulgation of the *Fund Regulations*, a high-level administrative regulation, constitutes a reaffirmation of existing rules, an important measure to boost market confidence, a concrete manifestation of China's regulatory process for the private investment fund industry shifting from lenient oversight to tightened regulation, and an inherent requirement of strict and sustained supervision. A series of sound departmental rules, normative documents and self-regulatory rules will be promulgated subsequently, and we will continue to closely follow the issuance and implementation of relevant specific rules.