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On 6 May 2016, the China Securities Regulatory Commission ("CSRC") issued an FAQ on "Beneficial Ownership under QFII/RQFII Regime" to clarify the issue on beneficial ownership of securities held in accounts under Qualified Foreign Institutional Investor ("QFII") and Renminbi Qualified Foreign Institutional Investor ("RQFII") regimes. It would appear that the clarification is an attempt to address one of MSCI’s key concerns regarding uncertainties over beneficial ownership in its consideration for including China A-shares in MSCI’s Emerging Market Index.
While CSRC’s clarification may serve MSCI’s purpose and is welcomed by the industry, such clarification will ordinarily be observed for purposes of interpretation of policies and regulations, and will not be treated as law or cited as such in the People’s Republic of China ("PRC"). Accordingly, the legal position should ideally be addressed legislatively, through promulgation of rules and regulations, or by the judiciary in the PRC.
As summarised below, CSRC confirmed their recognition of "beneficial owner" and "nominee holder" in respect of securities and clarified that the relationship between the two parties would be subject to contract which would be recognised by CSRC. CSRC also attempted to recognise the rights and interests of the beneficial owners of securities held in QFII/RQFII's separate account, whether in the name of "QFII + client assets" or "QFII + client’s name". While CSRC’s clarification is helpful in understanding the authority's policy view, it remains unclear if the view is substantiated under the current regulations. Article 7 of the Provisions on Issues concerning the Implementation of the Administrative Measures for Domestic Securities Investment by QFII (Announcement No. 17 (2012) of CSRC) expressly provides that assets in a QFII securities account in the name of "QFII + fund (insurance capital etc.)", i.e. in relation to accounts for an open-ended retail funds, shall belong to the fund and be independent from the assets of the QFII and the QFII custodian. The regulation does not expressly state such for the account in the form of "QFII + client assets" or "QFII + client’s name".
In addition, despite Article 7 stating that assets in the QFII securities account belong to the fund and are independent from the assets of the QFII and the QFII custodian, there is still uncertainty as to whether this statement has the same meaning as beneficial ownership under common law.
Clients should continue to monitor developments as any clarification under the law or by the judiciary would most likely require updating risk disclosures relating to investments through QFII and RQFII regimes.
Summary of the FAQ
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CSRC confirmed that the concepts of "nominee holder" and "beneficial owner of securities" are recognized under CSRC rules and regulations. In particular, a QFII may apply to securities registration and settlement institution for opening a securities account in the name of actual holders or nominee holder pursuant to Article 16 of the Administrative Measures of Domestic Securities Investment by QFII (Decree No. 36 of CSRC).
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CSRC respects contracts legally entered into between the client (i.e. the beneficial owner) and the asset manager (i.e. the nominee holder) and the enforceability of contracts under the laws of the jurisdiction where such contracts are entered into, including the provisions therein concerning the rights and interests of the beneficial owner over the securities. It follows that the parties are free to determine the arrangements to segregate client's assets from those of the asset manager.
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CSRC confirmed that the A-share account system supports the recognition of rights and interests of beneficial owners of securities held under QFII/RQFII's separate account system. A QFII/RQFII operating under separate account system may open separate securities accounts for managing its own assets and its client's assets. In particular, the securities accounts may be set up in the name of "QFII + client assets" or "QFII + client’s name", which will show that the assets in the accounts belong to the beneficial owner and are independent, and separate from those, of the QFII/RQFII.