A Review of 2023 Private Equity Cases Involving Investor Misconduct Penalties

On the occasion of Consumer Rights Protection Day on March 15, issues related to consumer rights have once again come into the spotlight. Looking back at 2023, among the regulatory actions taken against private equity firms for allegedly misleading investors, "guiding investors through appropriate risk assessments" also became a hot topic of discussion.

In February 2023, the Asset Management Association of China announced disciplinary actions taken against Shanghai Shizu Asset Management Co., Ltd. (referred to as "Shanghai Shizu"). The investigation revealed that Shanghai Shizu engaged in violations during the risk assessment processes for several private equity fund products, including the "Shizu Quantitative Hedge No. 18 Private Investment Fund," "Yuanshuo No. 1," and "Yuanshuo No. 2." Specifically, the fund's "Private Equity Investment Fund Investor Risk Questionnaire" included question options with pre-assigned scores, accompanied by a "Risk Tolerance Scoring Table" and a "Reference Chart for Classifying Individual Clients' Risk Tolerance Levels." Investors could use these score prompts and reference charts to calculate their risk tolerance ratings, which would then be matched against the risk levels of the products they intended to purchase.

This behavior violates the relevant provisions of the "Implementation Guidelines for Suitability Management of Institutional Investors (Trial)." The guidelines explicitly state that fund-raising institutions and their staff must not engage in any actions—such as providing hints, making suggestions, or exerting inducements—that could interfere with or distort the test results during the assessment process. However, Shanghai Shizu deliberately included scoring criteria in its questionnaire, which was clearly designed to be suggestive. As a result, investors might base their decisions on these scores rather than their true risk tolerance, ultimately preventing fund managers from accurately assessing investors' risk-bearing capabilities objectively and precisely.

Although Shanghai Shizu emphasized in its defense that investors were unable to access the scoring schedule during the testing process, nor could they derive assessment results by calculating their scores, the association argued that the very act of assigning point values to each answer option inherently introduces clear bias—such as awarding higher scores to those with greater disposable annual household income or longer investment experience. These scoring mechanisms undoubtedly have the potential to subtly influence investors' decision-making.

Ultimately, Shanghai Shizu Asset Management Co., Ltd. was still stripped of its membership by the Asset Management Association of China for inducing investors to undergo suitability risk assessments. Additionally, the company’s applications for private equity fund product filings have been suspended for 12 months. This penalty once again underscores the regulatory authorities' unwavering commitment to upholding market integrity and safeguarding investors' rights and interests.

Additionally, in October of the same year, Jinjiang Yidian Najin Asset Management Co., Ltd. also received a warning for similar violations. The company’s risk tolerance questionnaire included question options that corresponded directly to specific scores, accompanied by a detailed table correlating scores with risk levels—enabling investors to predict and estimate their own risk tolerance levels. This practice clearly violated relevant regulations. Moreover, this incident underscores that encouraging investors to complete risk assessments through such misleading methods is far from an isolated issue within the private equity fund industry.

Reviewing the penalty decisions from 2024, incomplete statistics show that, as of today, a total of 22 private equity firms have received penalties of varying degrees. Among them, several were found to have engaged in practices that misled consumer behavior—most notably by promising investors guaranteed principal and returns, failing to fulfill their duties of due diligence and prudence, neglecting their obligation to provide adequate information disclosure, and violating requirements for professional fund management. Additionally, certain institutions were even identified for establishing separate investment units within their private equity funds, resulting in unfair treatment of investors.

On this year's 315 Consumer Rights Protection Day, these cases once again serve as a stark reminder to the private equity investment industry: it is imperative to strictly adhere to investor suitability management requirements, ensuring that risk assessments remain fair and objective—and absolutely prohibiting any form of behavior that could induce or mislead consumers. Meanwhile, investors are urged to stay vigilant, cultivate a stronger awareness of risks, and carefully evaluate the potential risks associated with investment products. When selecting private equity funds, investors should thoroughly research product details, rationally analyze the risk-return profile, and avoid being misled by inappropriate marketing tactics. Meanwhile, regulatory authorities will continue to ramp up oversight efforts, cracking down decisively on any violations to effectively safeguard investors' legitimate rights and interests.