PRC Securities Investment Fund Law (Revised)

Revised on April 24 2015. Latest revision can be found at:
http://www.chinalawandpractice.com/Article/3457510/PRC-Securities-Investment-Fund-Law-Revised-in-2015.html

(Adopted at the 30th Session of the Standing Committee of the 11th National People's Congress on December 28 2012 and effective as of June 1 2013.)

PRC President's Order (No.71 of the 11th NPC)

Part One: General provisions

Article 1: This Law has been formulated in order to regulate securities investment fund activities, protect the lawful rights and interests of investors and related parties and promote the healthy development of securities investment funds and capital markets.

Article 2: This Law shall govern securities investment funds (Funds) established with publicly or privately raised funds, the management and custody of which are handled by Fund managers and Fund custodians respectively and the securities investment activities of which carried out in the interests of Fund unit holders in the People's Republic of China. Where this Law is silent, the PRC Trust Law, the PRC Securities Law and other relevant laws and administrative regulations shall apply.

Article 3: The rights and obligations of Fund managers, Fund custodians and Fund unit holders shall be specified in Fund contracts in accordance herewith.

Fund managers and Fund custodians shall perform their entrusted duties in accordance with this Law and Fund contracts.

Holders of units in a Fund established through a public offering (Public Fund) shall enjoy the returns and bear the risks therein in proportion to their unit holdings; the distribution of returns from and the bearing of risks in a Fund established through a private offering (Private Fund) shall be specified in the Fund contract.

Article 4: When engaging in Fund activities, the principles of free will, fairness and good faith shall be abided by, and state interests and the public interest may not be prejudiced.

Article 5: The liabilities attached to Fund property shall be borne by the Fund property itself and Fund unit holders shall be liable for the liabilities attached to the Fund property to the extent of their capital contributions, unless, in accordance herewith, otherwise provided in the Fund contract, in which case such provisions shall apply.

Fund property shall be separate from the property of the Fund manager and Fund custodian. Fund managers and Fund custodians may not incorporate Fund property into their own property.

The property and returns of Fund property obtained in the course of the management, application or otherwise by the Fund manager and Fund custodian shall be incorporated into the Fund property.

If a Fund manager or Fund custodian is liquidated because it is dissolved in accordance with the law, is closed down in accordance with the law or is declared bankrupt in accordance with the law, Fund property shall not constitute part of its property subject to liquidation.

Article 6: The claims attached to Fund property may not be set off against the liabilities attached to the property of the Fund manager or Fund custodian. The claims and liabilities attached to the property of different Funds may not be set off against each other.

Article 7: Liabilities not borne by Fund property itself may not be enforced against the Fund property.

Article 8: Taxes related to the investment of Fund property shall be borne by the Fund unit holders and the same shall be withheld by the Fund manager or other withholding agent in accordance with relevant state provisions on taxation.

Article 9: When a Fund manager or Fund custodian manages or applies Fund property or a Fund service firm engages in Fund service activities, it shall duly perform its duties and perform its obligations of good faith and due diligence.

When using Fund property to invest in securities, a Fund manager shall comply with the rules of prudent operation, formulate objective and rational investment strategies and risk management systems and effectively guard against and control risks.

Fund business employees shall have Fund business qualifications, comply with laws and administrative regulations and duly abide by professional ethics and codes of conduct.

Article 10: Fund managers, Fund custodians and Fund service firms shall establish securities investment fund industry associations (Fund Industry Associations) in accordance herewith, to carry out industry self-regulation, coordinate industry relations, provide industry services and promote the development of the industry.

Article 11: The State Council's securities regulator shall regulate Fund activities in accordance with the law and its agencies shall perform their duties as authorised.

Part Two: Fund managers

Article 12: A Fund manager shall be a lawfully established company or partnership.

The manager of a Public Fund shall be a Fund management company or other organisation approved by the State Council's securities regulator in accordance with provisions.

Article 13: To establish a Fund management company to manage Public Funds, the following conditions shall be satisfied and the same shall be subject to the approval of the State Council's securities regulator:

(1) having articles of association compliant with this Law and the PRC Company Law;

(2) having registered capital of not less than Rmb100 million, which must be paid-in monetary capital;

(3) its major shareholders having good business performance in operating financial business or managing financial institutions, having a good financial standing and public reputation, asset size meeting the criteria specified by the State Council and no record of violation of the law during the most recent three years;

(4) having the statutory number of personnel with Fund business qualifications;

(5) having directors, supervisors and senior management personnel satisfying the conditions for their respective positions;

(6) having a place of business, security precaution facilities and other Fund management business related facilities that satisfy requirements;

(7) having a sound internal governance structure, internal audit and monitoring system and risk control system; and

(8) satisfying other conditions as specified in laws and administrative regulations and by the State Council's securities regulator and approved by the State Council.

Article 14: The State Council's securities regulator shall conduct its review of an application for the establishment of a Fund management company in accordance with the conditions set forth in Article 13 hereof and prudential regulation principles, render its decision on whether to grant approval or not and notify the applicant thereof within six months of the date of acceptance of the application. If it withholds its approval, it shall give its reasons therefor.

In the event of a change in a shareholder of a Fund management company holding at least 5% of its equity, a change in the de facto controller of the company or a change in another material particular, the same shall be reported to the State Council's securities regulator for approval. The State Council's securities regulator shall render its decision on whether to grant approval or not and notify the applicant thereof within 60 days of the date of acceptance of the application. If it withholds its approval, it shall give its reasons therefor.

Article 15: A person may not serve as a director, supervisor, senior management member or other Fund business employee of a Fund manager of a Public Fund if:

(1) he/she has been sentenced for the crime of corruption, bribery, malfeasance or infringing property, or the crime of disrupting the order of the socialist market economy;

(2) he/she was a director, supervisor, factory manager or senior management member who bears personal liability for the bankruptcy and liquidation of his/her company or enterprise due to mismanagement or the revocation of its business licence for a violation of the law, where not more than five years have elapsed since the date of completion of the bankruptcy liquidation or the revocation of the business licence;

(3) he/she bears a comparatively large personal debt that has fallen due but has not been settled;

(4) he/she was a business employee of a Fund manager, Fund custodian, stock exchange, securities company, securities depository and clearing firm, futures exchange, futures company or other organisation or a member of the working personnel of a state authority who was dismissed for a violation of the law;

(5) he/she was a lawyer, certified public accountant, business employee of an asset appraisal firm or verification firm, or a person involved in the investment consulting business who has had his/her practice licence or qualifications revoked for a violation of the law; or

(6) he/she is another person whom laws or administrative regulations specify is ineligible to engage in the Fund business.

Article 16: A director, supervisor or senior management member of a Fund manager of a Public Fund shall be familiar with securities investment related laws and administrative regulations and have at least three years of experience of work related to the position in which he/she is serving; a senior management member shall additionally have Fund business qualifications.

Article 17: The appointment or replacement of the legal representative, main persons in charge of operations and management or the person in charge of compliance regulation of a Fund manager of a Public Fund shall be reported to the State Council's securities regulator for review in accordance with the conditions of appointment specified in this Law and other relevant laws and administrative regulations.

Article 18: If a director, supervisor, senior management member or other Fund business employee of a Fund manager of a Public Fund himself/herself or his/her spouse or a materially interested person wishes to invest in securities, he/she shall report the same to the Fund manager in advance and he/she shall avoid any conflict of interest with the Fund unit holders.

A Fund manager of a Public Fund shall establish management systems for the persons specified in the preceding paragraph to carry out securities investment reporting, registration, review and disposal, and the same shall be reported to the State Council's securities regulator for the record.

Article 19: A director, supervisor, senior management member or other Fund business employee of a Fund manager of a Public Fund may not serve in any position with a Fund custodian or other Fund manager, and may not engage in any securities trading or other activities that prejudice Fund property or the interests of Fund unit holders.

Article 20: The Fund manager of a Public Fund shall perform the following duties:

(1) raising funds in accordance with the law and handling matters relating to the sale and registration of Fund units;

(2) carrying out Fund record filing procedures;

(3) in carrying out securities investment, separately managing and separately accounting for the property of different Funds under its management;

(4) determining the distribution plan for Fund returns in accordance with the Fund contract and distributing the returns to the Fund unit holders in a timely manner;

(5) carrying out Fund accounting and preparing the Fund's financial accounting statements;

(6) preparing interim and annual Fund reports;

(7) calculating and announcing the net value of Fund assets, and determining the prices for the purchase and redemption of Fund units;

(8) carrying out information disclosure matters relating to Fund property management business activities;

(9) convening Fund unit holders' general meetings in accordance with provisions;

(10) keeping records, books, statements and other related materials of Fund property management business activities;

(11) exercising the right of litigation or the right to other legal acts in its own name for the benefit of the Fund unit holders; and

(12) performing other duties as specified by the State Council's securities regulator.

Article 21: A Fund manager of a Public Fund and its directors, supervisors, senior management personnel and other Fund business employees may not:

(1) mix its own property or that of another with Fund property to carry out securities investment;

(2) treat the property of different Funds under its management in an unfair manner;

(3) utilise Fund property or the advantages of its/their position to seek gains for persons other than the Fund unit holders;

(4) promise returns to, or bear losses for, Fund unit holders in violation of the law;

(5) appropriate or divert Fund property;

(6) divulge non-public information obtained as a result of their position, or utilise such information to engage in or expressly or implicitly instruct another to engage in relevant trading activities;

(7) be derelict in their duties or fail to perform their duties in accordance with provisions; or

(8) commit another act as prohibited in laws or administrative regulations or by the State Council's securities regulator.

Article 22: The Fund manager of a Public Fund shall establish a sound internal governance structure and expressly specify the duties and authority of the shareholders' meeting, board of directors, supervisory board and senior management personnel so as to ensure the independent operation of the Fund manager.

The Fund manager of a Public Fund may implement a shareholding scheme for professionals to establish a long-term incentive and restraint mechanism.

The shareholders, directors, supervisors and senior management personnel of a Fund manager of a Public Fund shall comply with the principle of primacy of the interests of the Fund unit holders when exercising their rights or performing their duties.

Article 23: The Fund manager of a Public Fund shall make allocations to a risk reserve from the remuneration from the Funds it manages.

If a Fund manager of a Public Fund causes a loss to Fund property or to the lawful rights and interests of the Fund unit holders due to a violation of the law or regulations, breach of the Fund contract or other such reason, and is therefore liable for compensation, it may first use the risk reserve to pay such compensation.

Article 24: The shareholders and de facto controller(s) of a Fund manager of a Public Fund shall perform their obligation to report material events in a timely manner in accordance with the provisions of the State Council's securities regulator and may not:

(1) make fraudulent capital contributions or illegally withdraw their capital contributions;

(2) interfere in the Fund operation activities of the Fund manager without a lawful resolution from the shareholders' meeting or board of directors;

(3) request that the Fund manager utilise Fund property to seek gains for itself or another, thereby prejudicing the interests of the Fund unit holders; or

(4) commit another act as prohibited by the State Council's securities regulator.

If a shareholder or the de facto controller(s) of a Fund manager of a Public Fund commits any of the acts set forth in the preceding paragraph or if a shareholder ceases to satisfy the statutory conditions, the State Council's securities regulator shall order it to rectify the matter within a specified period of time and may, depending on the circumstances, order it to transfer the equity it holds or controls in the Fund manager.

Until a shareholder or the de facto controller(s) described in the preceding paragraph rectifies/rectify the violation as required and transfer(s) the equity held or controlled in the Fund manager, the State Council's securities regulator may restrict the relevant shareholder in its exercise of its shareholder rights.

Article 25: If a Fund manager of a Public Fund commits a violation of the law or regulations, or its internal governance structure, auditing and monitoring or risk control and management does not comply with provisions, the State Council's securities regulator shall order it to rectify the matter within a specified period of time. If it fails to do so, or its act seriously jeopardises the stable operation of the Fund manager or prejudices the lawful rights and interests of the Fund unit holders, the State Council's securities regulator may, depending on the circumstances, take the following measures against it:

(1) restrict its business activities, or order it to suspend part or all of its business;

(2) restrict its distribution of dividends, or restrict its payment of remuneration and/or provision of benefits to its directors, supervisors and senior management personnel;

(3) restrict it from transferring its property or encumbering its property with third party rights;

(4) order it to replace directors, supervisors and/or senior management personnel or restrict their rights; or

(5) order relevant shareholders to transfer their equity or restrict the relevant shareholders in exercising their shareholder rights.

After carrying out rectification, the Fund manager of the Public Fund shall submit a report to the State Council's securities regulator. If, after checking and accepting the rectification, the State Council's securities regulator determines that the Fund manager complies with relevant requirements, it shall lift the relevant measures taken against the Fund manager within three days of the date of completion of the check and acceptance procedures.

Article 26: If a director, supervisor or senior management member of a Fund manager of a Public Fund fails to act with due diligence, thereby causing the Fund manager to commit a major violation of the law or regulations or to be exposed to a material risk, the State Council's securities regulator may order that he/she be replaced.

Article 27: If a Fund manager of a Public Fund operates illegally or is exposed to a material risk, seriously jeopardising securities market order or prejudicing the interests of Fund unit holders, the State Council's securities regulator may take regulatory measures against such Fund manager such as ordering it to suspend operations and undergo rectification, appointing a trustee or receiver, revoking its fund management qualifications or closing it down.

Article 28: When a Fund manager of a Public Fund has been ordered to suspend operations and undergo rectification, has had a trustee or receiver appointed in accordance with the law, is being liquidated or is exposed to a material risk, the following measures may, subject to the approval of the State Council's securities regulator, be taken against the directors, supervisors and senior management personnel of the Fund manager who are directly responsible and other directly responsible persons:

(1) notifying the exit control authorities to block them from leaving the country in accordance with the law; and/or

(2) applying to the judicial authorities to prohibit them from transferring, assigning or otherwise disposing of property or encumbering such property with third party rights.

Article 29: The duties of a Fund manager of a Public Fund shall terminate if:

(1) it has its fund management qualifications revoked in accordance with the law;

(2) it is dismissed by the Fund unit holders' general meeting;

(3) it is dissolved in accordance with the law, closed down in accordance with the law or declared bankrupt in accordance with the law; or

(4) another circumstance as specified in the Fund contract arises.

Article 30: When the duties of a Fund manager of a Public Fund are terminated, the Fund unit holders' general meeting shall appoint a new Fund manager within six months; until the new Fund manager is chosen, the State Council's securities regulator shall appoint an interim Fund manager.

When the duties of a Fund manager of a Public Fund are terminated, it shall duly keep the information on the fund management business, carry out the procedures for the handover of the fund management business in a timely manner and the new Fund manager or interim Fund manager shall also accept the same in a timely manner.

Article 31: When the duties of a Fund manager of a Public Fund are terminated, an accounting firm shall be engaged in accordance with provisions to audit the Fund property and announce the audit results, and additionally submit the same to the State Council's securities regulator for the record.

Article 32: The specific measures for regulating Fund managers of Private Funds shall be formulated by the State Council's financial regulator in accordance with the principles set forth in this Part.