By Ivy Yang

Fund managers face the risk of being penalized or having their private fund registrations suspended by regulatory authorities if they fail to fulfill their disclosure and reporting obligations in a timely manner. Additionally, there is the risk of being held liable for compensating investors for losses arising from breaches of information disclosure. In light of the increasing disputes regarding information disclosure, the China Securities Regulatory Commission (CSRC) issued a public notice on July 5, 2024, soliciting opinions on the "Regulations on Information Disclosure and Reporting for Private Investment Funds (Consultation Draft)". The contents are summarized as follows:

1.Clarification of the Fund Manager’s Disclosure Obligations

Private fund managers are not exempt from their legal information disclosure obligations, even if they delegate disclosure activities to private fund sales institutions or other service providers or use contractual agreements.

2.Fund Contracts and Disclosure Responsibilities

The fund contract must stipulate the responsibilities and obligations related to information disclosure, and outline mechanisms in case the fund manager is unable to perform the disclosure obligations or encounters major risks.

3.Special Disclosure Requirements for Underlying Assets (Including Derivatives) and Cross-border Assets

3.1Private fund managers must disclose information about the fund’s underlying assets to investors in accordance with regulations. For funds investing in other private funds or legally issued asset management products (excluding public securities investment funds), the fund contract must specify the arrangements for the transparent disclosure of underlying assets as required. The invested private funds or legally issued asset management products (excluding public securities investment funds) must provide a mechanism in the contract to facilitate the disclosure of underlying assets.

3.2Securities funds must disclose in their quarterly reports the holdings of underlying assets, investment paths, cross-border investments, and capital flows to investors. If the underlying assets of private securities investment funds involve non-public information, the fund manager can fulfill disclosure obligations by providing details such as the strategy type, investment portfolio, concentration of holdings, leverage, and valuation methods. If the underlying assets involve derivatives, the fund manager must disclose information about the linked asset class.

3.3Private equity funds investing in other private funds or legally issued asset management products, or making investments through special purpose vehicles, must transparently disclose in the fund's periodic reports the investment path, investment amount, shareholding ratio, and ownership confirmation for the top ten underlying investment targets.

4.Differentiated Disclosure Requirements

The draft clarifies differentiated requirements for regular and interim reports for private securities investment funds and private equity funds, as well as specific arrangements for the disclosure of underlying assets. It also specifies auditing requirements for private securities investment funds not under custodianship and comprehensive audit requirements for private equity funds. In addition, the draft defines the responsibilities of the custodian of private securities investment funds to verify the fund's net asset value and outlines investor notification and reporting requirements in the event of specific risk scenarios.

5. Information Reporting

Private fund managers are required to fulfill periodic, interim, and specialized reporting obligations, including the submission of annual operational information and audited annual financial statements.

6. Management of Information Disclosure

Private fund managers must establish management systems for information disclosure and reporting, strengthen the control of non-public fund information, and properly maintain relevant documentation. The shareholders, partners, and actual controllers of private fund managers must cooperate in fulfilling information disclosure and reporting obligations.

7. Changes in Information Disclosure Content

7.1Monthly, Quarterly (Semi-Annual), and Annual Report Content

(1)Private Securities Funds

Monthly Reports: Previously, only funds with a managed scale exceeding RMB 50 million were required to disclose net asset values in monthly reports. Now, all fund products must disclose net asset values, fund shares, and investor equity information to investors.

Quarterly Reports:

The previous requirement to disclose fund net asset values, key financial indicators, and portfolio information within 10 working days after the end of each quarter has been adjusted to include:

● Fund net asset values, fund shares, and their changes, including subscription and redemption details;

● Investor equity and its changes;

● Financial information such as returns, expenses, and profits;

● Details of underlying asset holdings and investment paths;

● Information on underlying assets with low or restricted liquidity;

● Leverage usage;

● Related party transactions of the fund;

● Cross-border investments and capital flows;

● Custodian's review opinions on fund financial information;

● Any material events that may affect investor equity.

Annual Reports:

Private fund managers must prepare the annual report of private securities investment funds within six months after the end of each fiscal year, disclosing the following:

● The manager's annual report;

● The custodian's annual report;

● Annual financial statements audited when required (e.g., when investing in other private funds or legally issued asset management products excluding public securities funds, for funds with large management scales and a significant number of natural person investors, or as required by the CSRC);

● Other information as prescribed by the CSRC.

(2)Private Equity Funds

Private Equity Funds(2)(Quarterly reports replace semi-annual reports, except for venture capital funds which maintain both quarterly and semi-annual reports.)

Quarterly Reports:

Private fund managers must prepare quarterly reports for private equity funds within one month after the end of each quarter, disclosing the following:

● Fund net assets, investor equity, and their changes;

● Financial information such as returns, expenses, and profits;

● The number, value, and latest valuation of investment targets, as well as new investments and exits during the reporting period;

● Details of investment targets, including name, industry, investment stage, investment path, amount, shareholding ratio, ownership confirmation, risk control measures, and changes;

● Leverage usage, including fund layering and borrowings;

● Related party transactions of the fund;

● Cross-border investments and capital flows;

● Material events that may affect investor equity.

Annual Reports:

Private fund managers must prepare the annual report for private equity funds within six months after the end of each fiscal year, disclosing the following:

● The manager's annual report;

● The custodian's annual report;

● Audited annual financial statements, which must include special notes on related party transactions;

● Key operational details of major investment targets;

● Other information as prescribed by the CSRC.

7.2 Obligations for Disclosure of Significant Events

For private securities investment funds, fund managers must prepare interim reports and disclose to investors any significant events that may materially affect investor equity, including:

● Changes to basic information such as the fund's name, address (formerly registered address), and organizational form;

● Changes to the fund manager, custodian, or basic information of the manager, such as name, address, legal representative, and actual controller;

● Changes to key matters such as fund managers, duration, investment scope, strategies, structure, valuation methods, profit distribution principles, and fees;

● Significant related-party transactions and other matters that may present potential conflicts of interest;

● Significant adverse developments in key underlying assets;

● Delays in handling large-scale redemptions;

● Fund liquidation or winding-up;

● Significant litigation or arbitration involving the fund's assets (with the removal of those concerning management or custodial services);

● Investigations or administrative and criminal penalties imposed on institutions or individuals that have a significant impact on the fund’s operations for suspected serious violations or misconduct;

● Other matters that may impact investor equity.

For private equity funds, fund managers must also disclose any significant events that may materially affect investor equity, including:

● Major investment risks;

● Investments or exits by managers, controlling shareholders, and related parties in the fund's investment targets;

● Matters listed in Article 19 of these regulations (the significant matters for private securities investment funds mentioned above);

● Other matters that may affect investor equity.