Investment Management Compliance & Regulation

• SEC delays required filing date for Risk Return XBRL to 2011

Investment Management Marketing

• How To Make Target-Date Funds More Attractive To 401(k) Sponsors

Investment Management Compliance & Regulation

• Selling Investments To Chinese Investors, Thanks To QDII Program

Fund Operations & Management

• Investors Gain When International Funds Take The Foreign Tax Credit

Investment Management Marketing

• Despite Current Slump, India's Mutual Funds Have Future Expectations

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Tepid reception, then expansion. US financial service providers can avoid the difficulties of operating in China yet still reach Chinese investors, thanks to the country's Qualified Domestic Institutional Investor program. The QDII program allows Chinese banks, brokers, insurers, and money managers to bypass the strict foreign-exchange rules and invest their clients' money in foreign companies. Chinese investors initially greeted the severely limited choices of the program's 2006 rollout with indifference, explain Hong Kong-based attorneys Keith Robinson and Derek Newman. By 2007, the China Banking Regulatory Commission (CBRC) had expanded the range of QDII products that commercial banks may offer, while the Securities Regulatory Commission did the same for securities companies. China's Insurance Regulatory Commission has completed but not yet released comprehensive rules on insurance companies' QDII products. The program is also overseen by the State Administration of Foreign Exchange and the People's Bank of China, which unfortunately results in conflicting rules.

Keeping banks and their clients from getting burned. When the program first rolled out, banks could invest QDII assets only in fixed-income instruments. The banking regulators eventually broadened the options by including equities and mutual funds, but imposed diversification and other restrictions. For example, equities must be listed on a foreign stock exchange regulated by an authority that has signed a memorandum of understanding with the CBRC (as the SEC and its counterparts in the United Kingdom, Japan, and several other nations have already done). The authors add that mutual funds must be public and approved by a signing authority. Another restriction resembles the American sophisticated-investor standard: a client must invest at least 300,000 yuan and, based on an evaluation process that the bank must devise, have experience in equity investing. A signing authority must approve any foreign investment manager employed to help the bank.

More apt to sell like hotcakes. Unlike the CBRC, the Securities Regulatory Commission insists on approving every QDII product. Still, securities companies' products might outsell those from the banks because the securities commission does not impose a sophisticated-investor standard and allows a broad range of investments—such as funds of funds, derivative securities, and illiquid assets—in many more countries. Regulations set investment-allocation standards and cover a number of other areas, the authors note. A company offering QDII products must satisfy financial tests (e.g., minimum net assets and assets under management); minimum experience requirements; and standards of corporate governance, fiscal soundness, and risk control. Foreign investment advisors retained by the company must have more than five years of experience, manage at least $10 billion in assets, and be established and regulated in a country whose regulatory authority has signed a memorandum of understanding with the Securities Regulatory Commission. With certain exceptions, the company's QDII-asset custodian must be a qualified Chinese bank, and the QDII products can be sold only in a public offering that meets requirements on amount raised, number of investors, and risk disclosure.

Will investors warm to the program? QDII products overseen by the Securities Regulatory Commission were the first to be offered after the 2007 rule changes. Chinese investors' enthusiasm for them was high at the start but declined because of underperformance attributable to the worldwide turmoil in the markets and the yuan's appreciation against the dollar. Even if enthusiasm resurges, the securities and banking regulators together have authorized the equivalent of only $50 billion in QDII products. Although that figure is likely to increase, American investment managers seeking QDII business should expect ferocious competition. Industry observers anticipate substantial investments of yuan in the United States and other countries eventually. Some American asset managers are already participating in the QDII program, as are US firms that provide administrative, distribution, and custodial services. Their compliance officers should watch for possible violations of the Foreign Corrupt Practices Act, the 1940 Act, and US statutes that prohibit money laundering, the authors warn.

Abstracted from Investment Lawyer, published by Aspen Publishers, 76 Ninth Avenue, 7th Floor, New York NY 10011. To subscribe, call (800) 638-8437; or search www.aspenpublishers.com.