Measures for Administration of the Sale of Securities Investment Funds (Revised)

Issuing Body: China Securities Regulatory Commission
Issuing Date: June 9, 2011
Effective Date: October 1, 2011

The China Securities Regulatory Commission (CSRC) has moved to significantly expand business opportunities for foreign banks incorporated in China, revising rules so as to enable those banks for the first time to sell shares in securities investment funds (mutual funds) in China. The revised Measures for Administration of the Sale of Securities Investment Funds (Fund Sales Measures), which were issued on June 9, 2011, also allow both foreign and domestic banks—which currently dominate sales of securities investment funds in China—as well as other sellers of such funds to provide value-added services such as investment advice. The revised rules take effect on October 1, 2011.

Since the original version of the Fund Sales Measures was enacted in 2004, China's securities investment fund industry has grown dramatically, with assets under management reaching RMB2.4 trillion (roughly US$356 billion) by the end of 2010. As the industry has grown, however, some issues and uncertainties have arisen concerning implementation of the Fund Sales Measures, and the CSRC has been at work revising them for more than three years. In issuing the revised version of the Fund Sales Measures, the CSRC has taken into consideration public comments on an earlier draft that was published in November 2010.

Definition of Fund Sales

The Fund Sales Measures follow the Securities Investment Fund Law, enacted by the National People's Congress in October 2003, in defining the term "securities investment fund" as a fund that invests in publicly traded shares of public companies. In regulating the sale of securities investment funds, the Fund Sales Measures adopt a broad meaning of sales activity, including the issuance and sale of fund shares; the introduction of and publicity about funds; and the handling of purchases and redemptions of fund shares. Thus the Fund Sales Measures essentially cover the entire sales process, from promotion to redemption.

Expansion of Fund Sales Entities

At present, under the existing 2004 version of the Fund Sales Measures, the primary sellers of securities investment funds in China are domestic commercial banks, fund management companies, and securities companies that underwrite shares in listed companies. According to CSRC figures, there were 136 such fund sales entities in China as of December 31, 2010. Domestic commercial banks currently dominate the market, accounting for about 60 percent of sales, due to factors such as their widely dispersed branch network and the Chinese people's long-held faith in large banking institutions. But this dominance has raised concerns, as reflected by recent media reports that some fund management companies have complained about banks charging excessively high commissions. Under the existing rules, however, fund sales managers have few other intermediary sales channels available. The Fund Sales Measures open the door to new entrants, including China-based foreign-funded banks with legal person status (hereinafter referred to as foreign banks) and independent fund sales entities.

Foreign Banks

The opening of the door to foreign banks to share China's enormous fund sales market with their Chinese counterparts appears to be a result of the third round of the U.S.–China Strategic and Economic Dialogue, held in Washington, D.C. last May. Foreign banks may now apply for a fund sales license if they meet the same requirements as Chinese banks, which include sound corporate governance structures, internal risk control systems, safe and efficient technical facilities, a certain number of qualified professionals, and the like.

Soon after the release of the Fund Sale Measures, some foreign banks such as Citibank and HSBC China publicly expressed interest in obtaining fund sales licenses. With their long history in the financial industry, experience in established markets, and wealth of industry veterans, it seems likely that they will obtain them.

Independent Fund Sales Entities

In addition to opening fund sales in China to foreign banks, the Fund Sales Measures also enable independent fund sales entities to sell funds. The development of independent sellers of funds is expected to benefit investors, who will have more choices when buying fund shares.

The Fund Sales Measures establish certain requirements for these new entrants to the securities fund sales market:

• Organization type. Independent fund sales entities may be established either as a limited liability corporation (corporation) or as a partnership with registered capital of at least RMB20 million, a significant increase from the RMB5 million threshold previously proposed in the draft version of the revised measures.
• Investors. Both individuals and enterprises with legal person status in China may be investors/owners in an independent fund sales entity if it is structured as a corporation, but only individuals are allowed to be principals in a partnership. In both scenarios, individual investor-owners should be professionals with at least ten years' experience working in securities, securities funds, or other financial sectors, or they must have worked as senior managers in one of those industries for at least three years.
• Personnel. For both types of independent fund sales entity, there should be at least ten personnel who have obtained a fund practice qualification by passing China's securities industry qualifying exam.

Because the fund sales process requires the transfer of capital between investors' settlement accounts and trustee accounts, a separate payment business license from the People's Bank of China is required to make such payments. Previously, only banks were qualified to obtain such licenses. However, in May, the People's Bank of China granted licenses to 27 non-bank entities which are expected to go on to become the first independent fund sales entities.

Clarity on Ownership of Fund Sales Settlement Capital

The Fund Sales Measures also clarify some important questions in existing law.

As used in the Fund Sales Measures, the term fund sales settlement capital (settlement capital) refers to money collected by fund sales entities, fund sales payment and settlement entities, or fund registration entities (the latter two types of business are referred to as fund sales-related entities) during the fund sales process and saved in accounts for fund sales settlement (special accounts), then transferred between investors' accounts and trustee accounts for fund purchases, redemptions, and cash bonuses.

China's Securities Investment Fund Law states that fund property should be independent, but does not provide a definition of what is to be considered fund property. As used in the Fund Sales Measures, the term fund property refers to the settlement capital contributed by investors, which in practice is typically placed in special accounts in the name of the fund sales or fund sales-related entity (commercial bank, fund management company, or securities company). Previously, there was a possibility that this capital could be considered to be assets belonging to the fund sales entity, increasing the risk that it could be disposed of improperly or embezzled. The Fund Sales Measures clarify that the settlement capital remains the property of investors, does not belong to any other entity, and should not be embezzled or misused in any form. Furthermore, the settlement capital will not be included in bankruptcy or liquidation proceedings if an entity goes bankrupt or is liquidated.

Value-Added Services Allowed

Under existing law, companies that sell securities investment funds are restricted from charging higher commissions to certain clients. In practice, this restriction has prevented sellers from providing additional services that might be of value to customers. With the increasing sophistication of both investors and the securities investment fund industry in China, however, there is expected to be greater demand for some additional higher value services such as wealth management.

When they take effect in October, the Fund Sales Measures will allow fund sales entities to charge fees for value-added services. In such cases, there should be a separate service agreement executed between the investor and the fund sales entity. Corresponding fees should likewise be paid separately as well.

Those additional services will be provided by the fund sales entities with their own professional expertise, and investors may choose whether to purchase them or not. The Fund Sales Measures do not provide specifics on fee rates, but instead mention only broad principles and say a market-driven practice should be adopted. After the Fund Sales Measures are implemented in October 2011, this change will likely benefit foreign banks, which are knowledgeable and experienced in providing fund-related value-added services, since they will then be able to charge higher fees for such services.

Conclusion

In addition to the key provisions summarized above, the Fund Sales Measures also contain rules for fund sales publicity, sales business standards, regulation, and management. The CSRC's notes published with the measures say that implementing rules for the Fund Sales Measures, which may provide more guidance in developing fund sales businesses and related activities in China, will be issued later. Though changes such as the entrance of new sales entities may not have an immediate effect on China's securities investment fund industry, it is expected that they will eventually have a positive impact.