Administration of the Sale of Securities Investment Funds Procedures

Revised on March 15 2013. Latest revision can be found at: 
http://www.chinalawandpractice.com/Article/3253080/Measures-for-the-Administration-of-the-Sale-of-Securities-Investment-Funds-2nd-Revision.html

(Promulgated by the China Securities Regulatory Commission on June 25 2004 and effective as of July 1 2004.)

CSRC Chairman's Order [2004] No.20

PART ONE: GENERAL PROVISIONS

Article 1: These Measures have been formulated pursuant to the Securities Investment Funds Law and other relevant laws and administrative regulations, in order to regulate securities investment fund sales activities and promote the healthy development of the securities investment fund market.

Article 2: For the purpose of these Measures, the term "securities investment fund (Fund) sales" includes such activities as the publicity for, and promotion of, Funds, sale of shares of Funds, the handling of purchases and redemptions of shares of Funds, etc. by Fund managers or other institutions entrusted by Fund managers (hereafter, Distribution Agents).

Article 3: When engaging in Fund sales activities, Fund managers and Distribution Agents shall observe laws, administrative regulations and the provisions of the China Securities Regulatory Commission (hereafter, the CSRC) and may not harm the interests of the state, the public interest or the lawful rights and interests of investors.

Article 4: When engaging in Fund sales activities, Fund managers and Distribution Agents shall abide by the Fund contract, the Fund distribution agency agreement and the principles of transparency, fairness and impartiality, act in an honest and trustworthy manner, diligently discharge their responsibilities and strictly observe professional ethics and codes of conduct.

Article 5: The CSRC and its agencies shall regulate Fund sales activities in accordance with laws, administrative regulations and these Measures.

Article 6: The Fund industry association shall be responsible for the self-regulation of Fund sales activities in accordance with the law, administrative regulations, the provisions of the CSRC and the rules of self-regulation.

PART TWO: FUND DISTRIBUTION AGENTS

Article 7: Fund sales shall be handled by Fund managers. A Fund manager may engage another institution with Fund distribution business qualifications to handle Fund sales on its behalf. Institutions without Fund distribution business qualifications may not be engaged by a Fund manager to handle the sale of Funds on its behalf.

Article 8: Commercial banks, securities companies, securities investment consulting institutions, dedicated Fund sales institutions and other institutions specified by the CSRC may apply to the CSRC for Fund distribution business qualifications.

Article 9: A commercial bank that applies for Fund distribution business qualifications shall satisfy the following conditions:

(1) its capital adequacy ratio complies with the relevant provisions of the State Council's banking regulatory authority;

(2) it has a dedicated department responsible for the Fund distribution business;

(3) its financial position is good, its operations are compliant and stable and it has not been subjected to administrative or criminal punishment for a violation of laws or regulations during the last three years;

(4) it has a sound corporate governance structure, and sound internal control systems and risk management system that have been effectively implemented;

(5) it has business premises, safety precaution facilities and other facilities commensurate with its Fund distribution business;

(6) it has secure and effective technical facilities to handle Fund sale, purchase and redemption business, tests of the machine to machine and networks links between the technical system for its Fund distribution business and the corresponding technical systems of the Fund manager, Fund custodian and Fund registrar have been carried out and the results of the tests indicate that the systems comply with the standards specified by the state;

(7) it has formulated sound Fund distribution business management systems such as those for its business procedure, the professional ethics of its sales personnel, contingency measures, etc.;

(8) not less than one-half of the personnel of the department of the company and those of its branches and sub-branches that are responsible for the Fund distribution business are qualified to engage in Fund business, and the managers of the departments are qualified to engage in Fund business, are familiar with Fund distribution business and have not less than two years' experience in Fund business or not less than five years' experience in securities or finance business; and

(9) other conditions imposed by the CSRC.

Article 10: When a securities company applies for Fund distribution business qualifications it shall satisfy the conditions set forth below, in addition to the conditions set out in Items (2) to (9) of Article 9 hereof:

(1) its financial risk monitoring indicators, such as its net capital, etc., comply with the relevant provisions of the CSRC;

(2) it has not committed acts that are detrimental to the interests of its clients, such as misappropriating clients' assets, during the last two years;

(3) it is not being investigated by the regulatory authorities or is not undergoing rectification due to a violation of laws or regulations; and

(4) no material change has occurred nor is it involved in legal proceedings, arbitration proceedings or other such material matter that has affected or could affect its normal operations.

Article 11: When a securities investment consulting institution applies for Fund distribution business qualifications, it shall satisfy the conditions set forth below, in addition to the conditions set out in Items (2) to (9) of Article 9 and Items (3) and (4) of Article 10 hereof:

(1) its registered capital is not less than Rmb20 million and must be paid-in money capital;

(2) its senior management personnel are qualified to engage in Fund business, are familiar with Fund distribution business and have not less than two years' work experience in Fund business or not less than five years' work experience in securities or finance business;

(3) it has continuously been engaged in securities investing consulting business for not less than three full fiscal years; and

(4) during the last three years it has not acted as an agent for investors in engaging in the sale and purchase of securities.

Article 12: When a dedicated Fund sales institution applies for Fund distribution business qualifications, it shall satisfy the conditions set forth below, in addition to the conditions set out in Items (3) to (7) of Article 9, Items (3) and (4) of Article 10 and Items (1) and (2) of Article 11 hereof:

(1) it has an organization name, organizational structure and scope of business that comply with provisions;

(2) the main contributor of capital is a legally established legal person that has been in continuous operation for not less than three full fiscal years, has registered capital of not less than Rmb30 million, its financial position is good, its operations are compliant and stable and it has not been subjected to administrative or criminal punishment for a violation of laws or regulations during the last three years;

(3) not less than three of its staff members are qualified to engage in Fund business and their number comprises not less than one-half of the institution's workforce; and

(4) other conditions imposed by the CSRC.

Article 13: When applying for Fund distribution business qualifications, institutions shall submit the application materials in accordance with the provisions of the CSRC.

If a major change occurs in a matter referred to in the application materials during the application period, the applicant shall submit updated materials to the CSRC within five working days of the date the change occurred.

Article 14: The CSRC shall accept applications for Fund distribution business qualifications, examine the same and render its decision in accordance with the Administrative Licensing Law.

Article 15: The CSRC may, in accordance with the principle of prudent regulation, arrange to have a panel of experts review an application for Fund distribution business qualifications.

Article 16: If amendment of industry and commerce registration is required in accordance with the law, the applicant shall carry out the Measures for the amendment of registration with the administration for industry and commerce in accordance with relevant provisions after receipt of the approval document.

PART THREE: FUND PUBLICITY AND PROMOTIONAL MATERIALS

Article 17: For the purposes of these Measures, the term "fund publicity and promotional materials" means written or electronic information or information on other media that is easily available to the public through distribution or publication and the objective of which is to promote a Fund, and includes:

(1) published materials;

(2) publicity leaflets, pamphlets, letters and other such publicity materials aimed at the public;

(3) posters and outdoor advertisements;

(4) television, film, radio and internet materials and other audio, video and communications materials; and

(5) other materials specified by the CSRC.

Article 18: The Fund publicity and promotion materials of Fund managers and Fund Distribution Agents shall be inspected in advance by the Fund manager's compliance officer, who shall issue an opinion on whether they are compliant, and submitted to the CSRC for the record.

The CSRC shall examine the record filing materials in accordance with the law and issue written comments indicating whether or not it has any objections within 20 working days of the date of receipt of such materials.

Article 19: Fund publicity and promotional materials must be true and accurate, be consistent with the Fund contract and Fund prospectus and may not:

(1) contain false records, misleading statements or major omissions;

(2) forecast the performance of the Fund's securities investments;

(3) promise returns or bear losses in violation of provisions;

(4) slander other Fund managers, Fund custodians or Fund Distribution Agents, or other Funds offered or managed by other Fund managers;

(5) publicize the Fund in an exaggerated or one-sided manner or, in violation of regulations, use such terms as "safe", "guaranteed", "promised", "secure", "avoids risk", "assured", "high returns", "risk free", etc. that could cause investors to believe that there was no risk involved;

(6) carry language from work units or individuals that recommends the Fund; or

(7) carry other details prohibited by the CSRC.

Article 20: Fund publicity and promotional materials may detail the past performance of the Fund or of other Funds managed by the Fund manager, unless the Fund contract has been in effect for less than six months.

If Fund publicity and promotion materials detail past performance and the Fund contract has been in effect for not less than six months but less than one year, they shall detail the performance calculated from the effective date of the contract; if the Fund contract has been in effect for not less than one year but less than 10 years, they shall detail the performance for each complete fiscal year from the year the contract entered into effect. If the publication date of the Fund publicity and promotion materials is in the second half of the year, they shall additionally detail the performance for the first half of the year in question. If the Fund contract has been in effect for not less than 10 years, they shall detail the performance for the most recent 10 complete fiscal years.

Article 21: When Fund publicity and promotional materials detail the past performance of the Fund in question or of the other Funds managed by the Fund manager, the following provisions shall be observed:

(1) the Fund's performance data shall be calculated in accordance with relevant laws and administrative regulations or the standards generally recognized by the industry;

(2) the cited statistical data and information shall be true and accurate, the source shall be stated and data that have not been verified, have not yet arisen or have been simulated may not be cited; and

(3) the performance data shall truthfully, accurately and reasonably state the performance of the Fund and the management level of the Fund manager.

A Fund's performance data shall be checked by the Fund custodian.

Article 22: If Fund publicity and promotional materials detail the past performance of the Fund in question or of the other Funds managed by the Fund manager, the Fund manager shall state in particular that the past performance of the Fund does not indicate its future performance and that the performance of other Funds managed by the Fund manager does not constitute a guarantee of the performance of the new Fund.

Article 23: If Fund publicity and promotional materials compare the performance of different Funds, they shall use comparable data sources, statistical methods and comparative periods and the relevant data sources and statistical methods shall be fair, accurate and relative.

Article 24: If Fund publicity and promotional materials include statistical figures or tables, such figures or tables shall be clear and accurate; if the appraisal results from a third-party professional institution are mentioned, the name of the third-party professional institution and the appraisal date shall be stated.

Article 25: Fund publicity and promotional materials shall include a clear and prominent risk warning statement and warning language that should be difficult to overlook when read by the investor so as to remind him to beware of investment risks, read the Fund contract and Fund prospectus carefully and apprise himself of the specific circumstances of the Fund.

Article 26: If Fund publicity and promotional materials include information stating that the Fund has been approved by the CSRC, they shall state in particular that the approval by the CSRC does not imply that the CSRC makes a material judgment, recommendation or guarantee in respect of the risks or earnings of the Fund.

PART FOUR: FUND SALES CHARGES

Article 27: The Fund manager shall specify in the Fund contract and prospectus the items for which it will charge a fee, the conditions for charging fees and the method by which they will be collected and in the prospectus shall state the fee rates.

Article 28: When selling Fund shares or offering a Fund, the Fund manager may charge a subscription fee, provided that such fee does not exceed 5% of the subscription amount.

When a Fund manager processes the purchase of shares of an open-ended Fund, it can charge a purchase fee, provided that the fee rate does not exceed 5% of the purchase amount.

The subscription fee or purchase fee may be charged at the time the Fund shares are sold or purchased, or may be deducted from the redemption amount at the time of redemption.

Article 29: The Fund manager shall charge a redemption fee when processing the redemption of the shares of an open-ended Fund, unless otherwise specified by the CSRC.

The redemption fee rate may not exceed 5% of the redemption amount for the Fund shares. After deduction of the handling fee, the balance of the redemption fee may not be less than 25% of the total amount of the redemption fee and shall become part of the Fund property.

Article 30: Depending on the quantity of investors' subscription amounts or purchase amounts, the Fund manager may apply different subscription or purchase fee rates.

Article 31: Depending on the length of time during which Fund shareholders hold their Fund shares, the Fund manager may apply different subscription or purchase fee rates to those Fund shareholders who have opted to pay their subscription fee or purchase fee at the time of redemption.

Article 32: Depending on the length of time during which Fund shareholders hold their Fund shares, the Fund manager may apply different redemption fee rates.

Article 33: The Fund manager may allocate a sales service fee from the property of an open-ended Fund to be used for the continuing sales of the Fund and the services provided to the Fund shareholders. The specific Measures for the administration thereof will be formulated separately by the CSRC.

Article 34: The Fund industry association may specify the minimum rates for Fund sales charges in the rules for self-regulation.

PART FIVE: REGULATION OF SALES BUSINESS

Article 35: Fund managers and Distribution Agents shall establish sound and effectively implemented Fund sales business systems and systems of continuing training for sales personnel and strengthen inspection and supervision of the compliant operation of their Fund sales business and codes of conduct for their sales personnel.

Article 36: Fund managers and Distribution Agents shall establish sound systems for the administration of Fund shareholder accounts and fund accounts and Measures for, and systems for the authorization and examination and approval of, the deposit and withdrawal of Fund shareholders' funds.

Article 37: Fund managers and Distribution Agents shall establish sound file management systems and duly preserve the information provided by Fund shareholders when opening their accounts and other sales business related information for not less than 15 years.

Article 38: Dedicated Fund sales institutions shall only engage in the Fund distribution business, unless otherwise specified by the CSRC.

Article 39: If a Fund manager engages another institution to handle Fund sales business on its behalf, the institution that is engaged shall have Fund distribution business qualifications.

No individual not engaged by a Fund manager or Distribution Agent may engage in Fund sales activities. Persons engaged in Fund publicity and promotion activities shall additionally be qualified to engage in Fund business.

Article 40: When engaging a Distribution Agent to handle the sale of Funds on its behalf, a Fund manager shall execute a written distribution agreement therewith that specifies the percentage and payment method of remuneration and clarifies the rights and obligations of both parties. A Distribution Agent may not handle the sale of Funds if it has not executed a written distribution agreement.

Distribution Agents shall place their Fund distribution business qualifications in a prominent location in their Fund sales outlets and may not engage another institution to handle the sale of Funds on their behalves.

Fund managers are under obligation to supervise and inspect the Fund sales activities carried out by Distribution Agents. If a Fund manager discovers that a Distribution Agent sells Funds in violation of provisions, it shall put a halt to the same. If the circumstances are serious, it shall terminate the distribution agreement in accordance with its provisions.

Article 41: Fund managers and Distribution Agents may not handle Fund sales business, distribute to the public or publish Fund publicity and promotion materials or sell Fund shares until the Fund offer application has been approved by the CSRC.

Article 42: A Fund manager shall be responsible for the contents of Fund publicity and promotion materials and shall ensure that the materials distributed to the public and those that it publishes are consistent with those placed on the record.

The Fund publicity and promotion materials used by a Distribution Agent shall be consistent with the materials placed on the record and the Fund manager shall examine and inspect the materials used by the Distribution Agent.

Article 43: Fund managers and Distribution Agents shall open Fund sales related accounts with commercial banks that have securities investment fund custodianship qualifications and the funds in such accounts shall be supervised by such banks.

Fund managers shall deposit the funds collected during the Fund offer period into a dedicated account and such funds may not be drawn on by anyone before completion of the Fund offering.

Article 44: After the contract for an open-ended Fund enters into effect, the Fund manager or Distribution Agent shall process the purchase and redemption of Fund shares in accordance with laws, administrative regulations, the provisions of the CSRC, the Fund contract and the distribution agreement and it may not cease to handle the sale of Fund shares or refuse the purchases or redemptions of investors without authorization.

Article 45: Fund managers and Distribution Agents shall charge investors a sales fee in accordance with the Fund contract and prospectus and keep true accounts of and record the same. Fund managers and Distribution Agents may not charge investors additional fees not specified in the Fund contract nor may they apply different fee rates to different investors if not stated in the prospectus and publicly announced.

A Fund manager shall pay the remuneration to a Distribution Agent in accordance with the distribution agreement, and keep true accounts of and record the same.

Article 46: Fund managers and Distributions Agents shall maintain investor confidentiality in accordance with the law and may not disclose information on investors' purchases, sales or holdings of Fund shares or other information.

Article 47: When engaging in Fund sales activities, a Fund manager or Distribution Agent may not:

(1) reduce the level of Fund fees in order to squeeze out competitors;

(2) use prize draws or discounts, or offer goods, insurance, Fund shares, etc. to sell the Fund;

(3) sell the Fund at fee rates that are below cost;

(4) offer a discount on the subscription fee during the offer period;

(5) undertake to use Fund assets to illegally convey benefits;

(6) misappropriate the subscription, purchase and redemption funds of the Fund shareholders;

(7) be characterized by the circumstances specified in Article 19 hereof; or

(8) be characterized by other circumstances prohibited by the CSRC.

PART SIX: REGULATION AND LEGAL LIABILITY

Article 48: Within seven days of executing a distribution agreement, a Fund manager shall submit the same to the CSRC.

Article 49: During the Fund offer period, a Fund manager's compliance officer shall inspect whether the Fund sales activities comply with laws and regulations and within seven days of the date of completion of the Fund offering prepare a dedicated report that will be placed on file for future reference.

Article 50: A Fund manager's compliance officer shall regularly inspect whether Fund sales activities comply with laws and regulations, provide a dedicated explanation in the quarterly control audit report and submit the same to the CSRC.

Article 51: The CSRC and its agencies shall conduct regular or ad hoc inspections of the Fund sales activities engaged in by Fund managers and Fund Distribution Agents and the Fund managers and Fund Distribution Agents shall extend their cooperation therein.

Article 52: If a Fund manager or Fund Distribution Agent violates these Measures, the CSRC or its agency may order it to rectify the matter and suspend the handling of related matters. It may take administrative regulatory Measures against the persons directly in charge and other persons directly responsible, such as holding regulatory discussions with them, issuing them a letter of warning, placing a record in the good faith file, suspending them from the performance of their duties, determining that they are not suited to serving in their positions, etc.

Article 53: If a Fund manager, Fund Distribution Agent, one of their persons directly in charge or another member of their staff directly responsible engages in Fund sales activities in violation of the Measures, the CSRC will impose administrative punishment in accordance with laws and administrative regulations. If laws or administrative regulations do not provide therefor, the CSRC shall impose administrative punishment in accordance with the Measures. If it/he is suspected of having committed a criminal offence, its/his case shall be transferred to the judicial authorities and its/his criminal liability shall be pursued.

Article 54: If a commercial bank, securities company, securities investment consulting institution, dedicated Fund sales institution or other institution specified by the CSRC conceals relevant information or provides fraudulent materials when applying for Fund distribution business qualifications, the CSRC will not accept its application. If it has already accepted the application, it will not grant its approval and will punish the offender by issuing it a warning.

Article 55: If an entity without Fund distribution business qualifications launches Fund sales business without authorization, it shall be ordered to rectify the matter and punished by being given a warning and fined. The persons directly in charge and the other persons directly responsible shall be punished by being given a warning and fined.

Article 56: If a dedicated Fund sales institution fails to only engage in Fund distribution business in accordance with Article 38 hereof, or if a Distribution Agent fails to display its certificate of qualification in accordance with the second paragraph of Article 40 hereof or violates provisions by engaging another institution to handle Fund sales on its behalf, it shall be ordered to rectify the matter, and punished by being given a warning and fined. If the circumstances are serious, it shall be ordered to suspend or terminate its Fund distribution business. The persons directly in charge and the other persons directly responsible shall be punished by being given a warning and fined.

Article 57: If a Fund manager violates the first paragraph of Article 39 hereof by engaging an institution without Fund distribution business qualifications to handle Fund sales on its behalf, it shall be ordered to rectify the matter and punished by being given a warning and fined. The persons directly in charge and the other persons directly responsible shall be punished by being given a warning and fined.

Article 58: A Fund manager or Distribution Agent shall be ordered to rectify the matter and punished by being given a warning, being fined or both and the persons directly in charge and the other persons directly responsible shall be punished by being given a warning, being fined or both if the Fund manager or Distribution Agent in engaging in Fund sales activities:

(1) violates the second paragraph of Article 39 hereof by permitting a person whom it has not engaged to sell Funds or a person without Fund business qualifications to publicize and promote Funds;

(2) fails to execute a written distribution agreement in accordance with the first paragraph of Article 40 hereof;

(3) violates Article 41 hereof by distributing to the public or publishing Fund publicity and promotion materials without authorization;

(4) fails to use Fund publicity and promotion materials in accordance with Article 42 hereof;

(5) fails to open a Fund sales-related account in accordance with Article 43 hereof;

(6) violates Article 44 hereof by ceasing to handle the sale of Fund shares or refusing the purchases or redemptions of investors without authorization.;

(7) fails to charge a sales fee, keep accounts thereof and record the same in accordance with the first paragraph of Article 45 hereof;

(8) fails to maintain the confidentiality of investors in accordance with Article 46 hereof;

(9) engages in an act prohibited in Article 47 hereof; or

(10) fails to extend its cooperation to the CSRC and/or its agency in its/their supervision and inspection in accordance with Article 51 hereof.

If a Distribution Agent violates any of the provisions of the preceding paragraph and the circumstances thereof are serious, it shall be ordered to suspend or terminate its Fund distribution business.

Article 59: A Fund manager shall be ordered to rectify the matter and punished by being given a warning, being fined or both and the persons directly in charge and the other persons directly responsible shall be punished by being given a warning, being fined or both if the Fund manager in engaging in Fund sales activities:

(1) fails to perform its obligation of supervision and inspection in accordance with the third paragraph of Article 40 hereof;

(2) fails to pay remuneration to the Distribution Agent, keep accounts thereof and record the same in accordance with the second paragraph of Article 45 hereof;

(3) fails to submit the distribution agreement in accordance with Article 48 hereof;

(4) fails to conduct a self inspection and prepare a control audit report in accordance with Article 49 hereof; or

(5) fails to inspect whether its Fund sales activities are in compliance with laws and regulations and to provide a dedicated explanation thereof in accordance with Article 50 hereof.

Article 60: In the event that a Distribution Agent is ordered to suspend its Fund distribution business, it may not engage in the following activities during the suspension period:

(1) executing new distribution agreements;

(2) publicizing and promoting Funds;

(3) selling Fund shares; or

(4) processing Fund share purchases.

If a Distribution Agent is ordered to terminate its Fund distribution business, it shall cease Fund sales activities.

If a Distribution Agent is ordered to suspend or terminate its Fund distribution business, the Fund manager shall duly process the Fund share purchases and redemptions of the relevant investors and may, pursuant to the distribution agreement, demand that the Distribution Agent compensate it for relevant losses in accordance with the law.

PART SEVEN: SUPPLEMENTARY PROVISIONS

Article 61: These Measures shall be implemented as of July 1 2004. The Improving the Internal Compliance System and Employee Code of Conduct of Commercial Banks that Engage in Agency Sale of Securities Investment Funds Guiding Opinions (ref. Zheng Jian Fa [2001] No.150), the Questions Relevant to Providing Sales Agency Services to Open-ended Funds by Securities Companies Circular (ref. Zheng Jian Ji Jin Zi [2002] No.33) and the Administration of the Sale of Securities Investment Funds Tentative Provisions (ref. Zheng Jian Ji Jin Zi [2002] No.66) issued by the CSRC are repealed simultaneously.