The China Securities Regulatory Commission ("CSRC") and the Asset Management Association of China ("AMAC") have recently drafted and issued the Guidelines for the Side Pocket Mechanism for Publicly-offered Securities Investment Funds (Draft for Comment) (the "Draft for Comment") and the Code of Practices for the Side Pocket Mechanism for Securities Investment Funds (Draft for Comment) respectively for public comment by September 1, 2019.
The Draft for Comment sets forth the provisions in principle with respect to conditions under which the side pocket mechanism will be activated, arrangements for subscription, redemption and investment, voting rights at the fund holders' meetings, outlays, valuation, and information disclosure, and intensifies the relevant responsibilities of various participants, including fund managers, fund custodians and fund sale agencies. The Draft for Comment notes that where the fund holds "certain assets" and there will be claims or potential claims for redemption of funds in a large amount, the fund manager may, in line with applicable laws and regulations and as agreed in the fund contract, activate the side pocket mechanism for open-ended funds excluding the money market funds and the exchange traded funds, after having consultation with the custodian and seeking professional opinions from the accounting firm.