Protection of Fund Investors - The Central Issue of The Law of Securities Investment Funds

The industry of China's securities investment has unprecedented developed since the issue of the Law of Securities Investment Funds by the Securities Commission of the State Council in 1997. By the end of October this year, the total amount of investment funds had broken through the gate of 100 and reached 103; reached 163.324 billion dollars. This included 88.2 billion volumes of open-ended investment with a total value of 86.923 billion and 81.7 billion volumes of close-ended investment with a total value of 76.4 billion. However, the management of shock exchange market must follow the administrative rules and measures of State Council. In the shock market of China, due to the need of development in its legal system, unpleasant commercial events such as “inside trading”, which financial damage of the basic funds investors. Hence, in 28^th October, 2003, the standing committee of National People Congress employed the Law of Securities Investment Funds to protect the investor's interest, to increase the investors' confident and to encourage the investment industry.

Securities investment fund collects money through selling the amount of fund investment to the public and the independent fund manager as well as the trustee have to manage the fund through a combination of investments for the fund holders' benefit. This fund is separated from the assets of fund manager or the trustee. For the purpose of assisting the fund investors to obtain a good economic return, the law requires the establishment of fund managing company to act as a fund manger which is responsible to manage the assets of fund. The trustee, under the law, is a qualified bank, which protects the assets of the securities investment fund and supervises the fund manager from any unpleasant incidents which will influence the investor's interest. Hence, if the funds manager or the trustee employs the assets of investment funds, they must follow the prescribed duty for reliance, carefulness and hard working operation.

Accordingly, the purpose of “Law on Securities Investment Funds” is for the protection of investor's benefit and the increase of investor's confident and hence, allowing a health development on the securities investment funds market

The importance of Securities Investment Funds:

The structure of fund managing company and other essential information that is related to the reputation of the company in the society and the business volume of the company, have essential influence on the size of fund collected. Therefore, law has rules and regulations on the fund managers, the trustees and the fund managing company.

According to the law, to establish a fund managing company, it must have a pay up capital with a value of no less than one hundred million CNY. The major shareholders are empowered to commit securities trading, securities informing, securities managing and securities controlling or other financial investment control. There are no records of breaching the law for the last three years. All registered fund have no less than three billion CNY. With regards to establishing branches, amending regulations or other important issues, it should requires permission from the Securities Commission of the State Council.

Furthermore, the law disallowed the formation of “underground investment fund”. The breach of such law, without permission and establishing a company privately, will be controlled by the Securities Commission and face a punishment of fifty thousand up to five million dollars. In addition, any breach of criminal law will receive a separate judgment.

Chairmanship and its importance:

To protect the investors legitimate benefits sufficiently, the “Law on Securities Investment Funds” stated that the rules of fund holders meeting: the fund holders can involve in essential problem through the fund holders meeting. This gave the investors the fund manager's power.

Investors, through holding the amount of investment and becoming fund holders, under the law, can call for a fund holders meeting according to the rules of company and they are entitled to vote for or against with the issues.

The fund holders meeting can be called upon by the fund manager; if the fund manager failed to call for the meeting, the trustee are empowered to do so. Funds holders can also call for a meeting if and only if there are ten percent, or more, worth of amount of investment's funds holders concerned about the same subject.

The fund holders' meeting shall only be called upon if more than 50 percent worth of shares' shareholders can attempt. With regards to the decision rule of the meeting for the general issue is first to 50 percent is used. Nevertheless, the breach of contract for trust fund, the change of fund manager or change of trustee must have two third of the vote.

The law requires that the meeting can be called upon by instant summon or other communication methods. Each share equals to one vote.

Securities fund investment and the bank:

For the benefit of ensuring investors and its safety of assets, the bank has to follow the instruction of fund managers. Nonetheless, it has the power to refuse the instruction.

Under the law, if the trustee discovered that the fund managers are acting beyond the law or other regulations, or breaching contracts, they should report to the fund manager and the Securities Commission of the State Council.

Furthermore, as the investment bank of such company, it must report to the fund manager and national shock exchange.

Also, any trustees, if recognize any illegality, shall report to the national shock exchange immediate.

In addition, the “Law on Securities Investment Funds” stated that trustees and fund managers, if engaging any illegal events, which might lead to damage to the fund managing company, acknowledging the fact that fund managers or trustees are acting beyond the implied consent of what the investors gave, they are liable for the damage.

Currently, there are eight investment banks in china. They are “name of banks”

Law and personal responsibility:

Under the shock exchange regulation, news must be accurate without errors. Also, it must be reliable for the purpose of promoting predictability and economical forecasting. Moreover, the company is not allowed to disclose any illegal promise with regards to making a profit or lost. These activities are accessed by the State Council; and if the company or any members of the committee failed to follow such regulation, the possible fine will be between one million and ten million. Also, the person who is responsible for the damage will face a punishment from thirty thousand to three million depending on the circumstances. Furthermore, if this person breaches any criminal matters, he/she is personally liable for the incident.

Rule of civil compensation:

“Law on Securities Investment Fund” also stated that, for the purpose of protecting the investors, the company is responsible to cover these investors' lost before any expenses payment or fine to the government.

Independence and safety of securities investment fund:

To promote independence of investment fund, the law stated that 1) the trustees and the fund managers must set accounts separately from the fund assets entrusted; 2) the trustees and the fund managers must set aside the company profit from his/her personal asset; 3) the trustees and the fund managers must follow the “Bankruptcy Law” to dismiss its staff; 4) personal liability is separated from the company's bad debt due to bankruptcy; 5) liability unrelated to the fund's liability should not repay by the fund.

Application of law on securities investment fund:

If there are no restrictions on the securities investment fund, the fund manager or trustees will be tempted to exercise this huge amount of capital regardless of risk, consequences and legality. Therefore, the existence of these regulations can prevent the appearance of such incident. For instances, the law stated that the investment fund must not 1) be on the rights; 2) act as a warranty; 3) have unlimited liability; 4) purchase and sell other securities investment fund other than the premised one from the State Council; 5) purchase and sell the shares of trustees or fund managers 6) purchase and sell any securities investment fund that relates to the fund managers or trustees and; 7) conduct any inside trading, price controlling or other illegal unpleasant activities. Without these regulations, one might be disadvantaged while the others are making a profit.

Hence, the introduction of law on securities investment fund establishes the foundation of securities investment fund and strongly promotes a health development for the shock market of People Republic of China which specifically targeting the weaken of trading system within the nation. For example the “private securities investment fund” and “company securities investment fund” systems are the future focus of our national investment market. Such a focus has great advantages on our future securities investment fund product. Moreover, law on securities investment fund gave the medium and relatively small investors protection under legality. Finally, law on securities investment fund follows the advices from other foreign countries that have the law well established. Hence such law can promotes equity and equality investing environment and provide an opportunity for the existence securities investment fund product in Hong Kong.