Written by Elaine Lo (Partner) and Andy Yip (Solicitor)

Summary

On 28 October 2003, the Law on Securities Investment Funds ("LSIF") was promulgated by the China Securities Regulatory Commission ("CSRC") with a view to protecting investors, promoting the development of a funds market in the PRC and strengthening the administration of funds in the PRC.

The LSIF, which will come into effect on 1 June 2004, formally acknowledges the function and role of funds, sets out the market entry requirements and liabilities of fund administrators and fund trustees and specifies the rights of investors.

Full Update

A. Types of Funds

The LSIF permits the establishment of closed-ended and open-ended funds as well as other types of funds.

B. Qualifications of the Fund Administrator

A fund administrator must be a fund management company legally established in the PRC. In order to qualify as a fund administrator, the fund management company is required to undergo an examination and to obtain approval from the CSRC and must fulfil the following requirements:

  1. its Articles of Association must comply with the provisions of the LSIF and the PRC Company Law;
  2. its paid-up registered capital must not be less than RMB 100 million;
  3. its major shareholder(s) must have a good record in securities operation, investment and consultancy services, trust asset management or other financial asset management, enjoy a good reputation without any record of violations of law in the 3 preceding years before its application, and shall have a registered capital of not less than RMB 300 million;
  4. it must have an adequate number of qualified fund management personnel as required by law;
  5. it must have business premises, safety precautionary facilities and other related facilities for operating fund management business that are up to standard;
  6. it must have sound internal audit and supervisory systems and risk management system; and
  7. it must also comply with other laws and regulations and other conditions as may be required by CSRC.

C. Qualifications of the Fund Trustee

A fund trustee must be a commercial bank established in accordance with law which is qualified to engage in fund entrustment business. The commercial bank is required to undergo examination and approval by CSRC and must fulfil the following requirements:

  1. the amount of its net assets and capital adequacy ratio must meet with the requirements stipulated by the relevant regulations;
  2. it must have a special fund entrustment department;
  3. it must have an adequate number of qualified fund management personnel as required by law;
  4. it must be able to safely preserve the fund assets;
  5. it must possess safe and efficient systems to settle accounts and complete business transactions;
  6. it must have business premises, safety precautionary facilities and other related facilities for operating a fund entrustment business that are up to standard;
  7. it must have sound internal audit and supervisory systems and risk management systems; and
  8. it must comply with other laws and regulations and other conditions as may be required by CSRC and the China Banking Regulatory Commission.

D. Investor Rights

Investors have the right to:

  1. share in profits arising from the fund's assets;
  2. (b) participate in the distribution of surplus fund assets once the fund accounts have been settled;
  3. transfer or redeem their share of funds;
  4. request for a meeting of the fund investors to be convened;
  5. exercise voting rights on matters discussed at any meeting of fund investors;
  6. examine or make copies of any publicly disclosed information of the fund;
  7. commence legal proceedings against the fund administrator, fund trustee and the fund offering institutions; and
  8. exercise any other rights stipulated in the fund documentation.

E. Operation of the Fund

Matters such as the rights and obligations of the fund administrators, fund trustees and individual investors, the rules and procedures of meetings and the settlement of funds should all be included in the fund documentation. Detailed requirements for making amendments to, and for the termination of funds contracts are provided in the LSIF. Other matters such as the collection of funds, purchase and redemption of fund units as well as information disclosure requirements are also contained in the LSIF.

F. Penalties for Violations

Detailed provisions on penalties and fines are contained in the LSIF.

Those who misuse client funds or illegally launch investment funds will face both administrative punishment as well as criminal charges.

The original email legal update is copyright Johnson Stokes & Master at the date written first above. All rights reserved. This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is intended to provide a general guide to the subject matter and is not intended to provide legal advice or a substitute for specific advice concerning individual situations. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.