Law of the People's Republic of China on Funds for Investment in Securities (Order of the President No.9)

Order of the President of the People's Republic of China

No.9

  The Law of the People's Republic of China on Funds for Investment in Securities, adopted at the 5th Meeting of the Standing Committee of the Tenth National People's Congress of the People's Republic of China on October 28, 2003, is hereby promulgated and shall go into effect as of June 1, 2004.

  

  Hu Jintao              

  President of the People's Republic of China   

  October 28, 2003

  

  

Law of the People's Republic of China on Funds for Investment in Securities

(Adopted at the 5th Meeting of the Standing Committee of the Tenth National People's Congress on October28, 2003)

Contents

Chapter I General Provisions
Chapter II Fund Managers
Chapter III Fund Custodians
Chapter IV

Raising of Capital

Chapter V Trading of Fund Units
Chapter VI Subscription and Redemption of Fund Units
Chapter VII Operation of Funds and Disclosure of Information

Chapter VIII

Modification and Termination of a Fund Contract and Liquidation of Fund Assets
Chapter IX Rights of the Holders of Fund Units and Exercise of the Rights
Chapter X Supervision and Regulation
Chapter XI Legal Responsibility
Chapter XII Supplementary Provisions


Chapter I

General Provisions

  Article 1 This Law is enacted in order to regulate the activities in respect of investment of funds in securities, protect the lawful rights and interests of investors and related parties, and promote the healthy development of investment of funds in securities and the securities market.   

  Article 2 This Law is applicable to the raising of capital for investment in securities by openly selling fund units within the territory of the People's Republic of China (hereinafter referred to as funds, for short), which are managed by fund managers, placed in the custody of fund custodians, and used, in the interest of the holders of fund units, for investment in securities in the form of portfolio. With respect to matters which are not covered by the provisions of this Law, the provisions of the Trust Law of the People's Republic of China, the Securities Law of the People's Republic of China and other relevant laws and administrative regulations shall apply.   

  Article 3 The rights and obligations of fund managers, fund custodians and holders of fund units shall be agreed on in the fund contracts concluded in accordance with this Law.

  Fund managers and fund custodians shall perform their entrusted duties in accordance with this Law and the provisions of the fund contracts. Holders of fund units shall share benefits and risks in proportion to the number of units they hold.   

  Article 4 In investment of funds in securities the principles of voluntariness, fairness, honesty and good faith shall be adhered to, and the interests of the State and the public shall not be harmed.   

  Article 5 In a fund contract the mode of operation of the fund shall be specified. There may be closed-end funding, open-end funding and other modes.

  A fund that is operated in the closed-end mode (hereinafter referred to as closed-end fund, for short) means that during the term of the fund contract the approved total sum of the fund units is fixed and shall remain unchanged and that the fund units may be traded on any stock exchange established in accordance with law, but that the holders of the fund units shall not apply for redemption of the units.

  A fund that is operated in the open-end mode (hereinafter referred to as open-end fund, for short) means that the total sum of the fund units is not fixed and that the units may be subscribed for or redeemed at the time and place prescribed in the fund contract.

  The measures for selling, trading, subscribing for and redeeming the units of the funds that are operated in other modes shall be formulated by the State Council separately.   

  Article 6 The assets of a fund shall be made independent of the assets owned by the fund manager or the fund custodian. The fund manager and the fund custodian shall not include the assets of the fund in their own assets.

  The property or returns obtained by fund managers or fund custodians through managing or using the fund assets or by other means shall be included in the fund assets.

  Where a fund manager or a fund custodian goes into liquidation as a result of being dissolved, or being closed down or declared bankrupt according to law, or for other reasons, the assets of the fund shall not be deemed to be part of his assets for liquidation.   

  Article 7 The creditor's rights of a fund shall not be used to offset the debts incurred by the fund manager's or the fund custodian's own assets; and the creditor's rights of one fund may not be used to offset the debts of another fund.   

  Article 8 No compulsory measures shall be taken against the assets of a fund where debts are not incurred because of the assets of the fund themselves.   

  Article 9 In managing and using fund assets, fund managers and fund custodians shall conscientiously fulfill their duties and perform their obligations to be honest, keep good faith, and be prudent and diligent.

  Persons engaged in the fund business shall, in accordance with law, obtain professional qualifications in this field, abide by laws and administrative regulations, and strictly observe professional ethics and the code of conduct.   

  Article 10 Fund managers, fund custodians and institutions selling fund units may establish trade associations in order to maintain strict self-discipline and co-ordinate relationship in the trade, provide services for the trade and promote development of the trade.   

  Article 11 The securities regulatory authority under the State Council shall, in accordance with law, regulate the activities in respect of investment of funds in securities.

Chapter II

Fund Managers

  Article 12 A fund manager shall be a fund management company established in accordance with law.

  A fund manager shall be subject to examination and approval by the securities regulatory authority under the State Council.   

  Article 13 For establishment, a fund management company shall meet the following requirements and be subject to approval by the securities regulatory authority under the State Council:

  (l) it has articles of association which comply with the provisions of this Law and of the Company Law of the People's Republic of China;

  (2) its registered capital is not less than RMB100 million yuan and is paid up in cash;

  (3) the major shareholders have good managerial achievements to their credit and enjoy popular reputation in the securities business, securities investment consultancy, the management of trust assets, or the management of other financial assets, have no law-breaking record in the three preceding years, and have each a registered capital not less than 300 million yuan ;

  (4) the number of staff who have obtained the professional qualifications for the fund business reaches the quorum;

  (5) it has the business premises, security facilities and other facilities relating to the fund management business which satisfy the relevant requirements;

  (6) it has a perfect internal auditing and monitoring system and a perfect risk control system; and

  (7) other requirements prescribed by laws and administrative regulations and requirements prescribed by the securities regulatory authority under the State Council with the approval of the State Council.   

  Article 14 The securities regulatory authority under the State Council shall ,within six months counted from the date it accepts an application for the establishment of a fund management company, examine the application in accordance with the requirements specified in Article 13 of this Law and the principle of prudent regulation, make a decision on whether to approve or disapprove the application, and notify the applicant accordingly; and if it disapproves the application, it shall explain the reasons why.

  Where a fund management company intends to establish a branch, amend its articles of association, or make other vital changes, it shall submit an application to the securities regulatory authority under the State Council for approval. The securities regulatory authority under the State Council shall, within sixty days from the date it accepts the application, make a decision on whether to approve or disapprove the application and notify the applicant accordingly; and if it disapproves the application, it shall explain the reasons why.   

  Article 15 None of the following persons shall serve in the fund business under any fund manager:

  (1) persons who have been subjected to criminal punishment for the crime of embezzlement, bribery, dereliction of duty or property violation or for the crime of undermining the order of the socialist market economy;

  (2) directors, supervisors, factory directors, managers and other senior managerial persons who, due to their mismanagement, are personally responsible for the bankruptcy liquidation of the companies or enterprises for which he worked, or who, due to their violation of law, are personally responsible for the revocation of the business licenses of the companies or enterprises for which they worked, where no more than five years have elapsed since the date the bankruptcy liquidation of such companies or enterprises is completed or the date the business licenses are revoked;

  (3) persons who are encumbered with a relatively large amount of personal debts that are overdue;

  (4) employees of fund managers, fund custodians, stock exchanges, securities companies, securities registration and settlement institutions, futures exchanges, futures brokerage firms or other institutions and State functionaries, who have been dismissed because of illegal conduct;

  (5) lawyers, certified public accountants, employees of assets evaluation institutions and verification institutions and investment consultancy professionals who have been disqualified or whose licenses have been revoked because of illegal conduct; and

  (6) other persons who are prohibited from engaging in the fund business under relevant laws and administrative regulations.   

  Article 16 The managers and other senior managers of a fund manager shall be well-versed in laws and administrative regulations concerning investment in securities and shall possess the qualifications for the fund business and have at least three years' working experience related to the positions they are holding.   

  Article 17 The appointment and replacement of a manager or other senior manager of a fund manager shall be reported to the securities regulatory authority under the State Council for examination and approval in accordance with the qualifications for the post as prescribed by this Law and other relevant laws and administrative regulations.   

  Article 18 The director, supervisor, manager or other employee of a fund manager shall not take up any post in a fund custodian or another fund manager and shall not engage in any securities trading or other activities to the detriment of the fund assets or the interests of the holders of fund units.

  Article 19 A fund manager shall perform the following duties:

  (l) raising capital in accordance with law; and selling, subscribing for, redeeming and registering fund units, or entrusting another institution approved by the securities regulatory authority under the State Council to do the same on its behalf;

  (2) completing procedures for the registration of funds;

  (3) separately managing and keeping separate accounts of the assets of different funds under its management, and investing in securities;

  (4) in accordance with the provisions in the fund contract, deciding on plans for distributing returns of the fund and distributing the same among the holders of fund units promptly;

  (5) auditing fund accounts and preparing financial and accounting reports of the fund;

  (6) preparing interim and annual fund reports;

  (7) calculating and announcing the net value of the fund assets and deciding on the subscription and redemption prices of fund units;

  (8) handling matters of disclosure of information in relation to the management of fund assets;

  (9) convening general meetings of the holders of fund units;

  (10) maintaining records, account books, statements and other related materials concerning the management of fund assets;

  (11) exercising, in the name of the fund manager, the right of litigation or taking other legal actions on behalf of the holders of fund units; and

  (12) other duties prescribed by the securities regulatory authority under the State Council.

  Article 20 A fund manager shall not commit the following acts:

  (1) mixing its own assets or another person's assets with the fund assets to invest in securities;

  (2) unfairly treating the assets of different funds under its management;

  (3) making use of fund assets to seek benefit for a third party other than the holders of fund units;

  (4) in breach of relevant regulations, committing itself to make profits for the holders of fund units and bear their losses; and

  (5) other acts prohibited by the securities regulatory authority under the State Council in accordance with the relevant laws and administrative regulations.   

  Article 21 The securities regulatory authority under the State Council shall, on the strength of its authority, instruct the fund manager to make rectification or disqualify it for the fund management if:

  (1) it grossly violates laws or regulations;

  (2) it ceases to meet the requirements specified in Article 13 of this Law; or

  (3) it is found in other circumstances as prescribed by laws and administrative regulations.   

  Article 22 The duties of a fund manager shall be terminated if:

  (1) it is disqualified for fund management according to law;

  (2) it is discharged by the holders of fund units at a general meeting;

  (3) it closes down in accordance with law or is dissolved or declared bankrupt according to law; or

  (4) it is found in other circumstances as prescribed by the fund contract.  

  Article 23 Where the duties of a fund manager is terminated, a new fund manager shall, within six months, be selected and appointed by the holders of fund units at a general meeting; and before the appointment of a new fund manager, the securities regulatory authority under the State Council shall appoint a provisional fund manager.

  Where the duties of a fund manager is terminated, the fund manager shall properly keep the materials regarding fund management and shall complete the procedures for the transfer of fund management without delay, and the new or provisional fund manager shall likewise take over fund management.   

  Article 24 Where the duties of a fund manager is terminated, a public accounting firm shall, in accordance with relevant regulations, be appointed to audit the fund assets, and it shall announce the audit results and, at the same time, submit them to the securities regulatory authority under the State Council for the record.

Chapter III

Fund Custodians

  Article 25 A fund custodian shall be a commercial bank which has been established in accordance with law and has obtained the qualifications for fund custody.

  Article 26 To apply for fund custodian qualifications, the applicant shall meet the following requirements and shall be subject to examination and approval by the securities regulatory authority under the State Council and the banking regulatory authority under the State Council:

  (1) its net assets and its capital adequacy ratio are in conformity with relevant regulations;

  (2) it has a department specially established for fund custody;

  (3) the number of staff who have obtained professional qualifications for the fund business reaches the quorum;

  (4) it meets the requirements for the safe custody of fund assets;

  (5) it has a safe and efficient system for clearance and settlement;

  (6) it has the business premises, security facilities and other facilities relating to the business of fund custody which satisfy the relevant requirements;

  (7) it has a perfect internal auditing and monitoring system and a perfect risk control system; and

  (8) other requirements prescribed by laws and administrative regulations or prescribed by the securities regulatory authority under the State Council or the banking regulatory authority under the State Council with the approval of the State Council.

  Article 27 The provisions of Articles 15 and 18 of this Law shall be applicable to the employees of the department specially established for fund custody under the fund custodian.

  The provisions of Articles 16 and 17 of this Law shall be applicable to the manager and other senior managers of the specially established fund custody department under the fund custodian.

  Article 28 The fund custodian and the fund manager shall not be served by the same entity and they shall not make capital contribution to each other or hold each other's shares.

  Article 29 A fund custodian shall perform the following duties:

  (1) keeping safe custody of fund assets;

  (2) establishing capital accounts and securities accounts for fund assets in accordance with relevant regulations;

  (3) establishing separate accounts for the assets of different funds under its custody to ensure integrity and independence of the fund assets;

  (4) maintaining records, account books, statements and other related materials concerning the business of fund custody;

  (5) handling clearance and settlement matters without delay in accordance with the provisions in the fund contract and the investment instructions of the fund manager;

  (6) handling matters of disclosure of information in relation to the business of fund custody;

  (7) presenting comments and suggestions on financial and accounting reports of the fund and interim and annual reports of the fund;

  (8) verifying and reviewing the net value of fund assets and the subscription and redemption prices of the fund units calculated by the fund manager;

  (9) convening general meetings of the holders of fund units in accordance with relevant regulations;

  (10) supervising the investment operation of the fund manager in accordance with relevant regulations; and

  (11) other duties prescribed by the securities regulatory authority under the State Council.

  Article 30 Where a fund custodian discovers that the investment instructions given by a fund manager contravene laws, administrative regulations or other relevant regulations or the provisions in the fund contract, it shall refuse to carry them out, immediately notify the fund manager of the matter and report to the securities regulatory authority under the State Council without delay.

  Where a fund custodian discovers that the investment instructions given by a fund manager, which are already effective according to the procedures of trading, contravene laws, administrative regulations or other relevant regulations or the provisions in the fund contract, it shall immediately notify the fund manager of the fact and report to the securities regulatory authority under the State Council without delay.

  Article 31 The provisions of Article 20 of this Law shall be applicable to fund custodians.

  Article 32 The securities regulatory authority under the State Council and the banking regulatory authority under the State Council shall, on the strength of their functions and powers, instruct the fund custodian to make rectification or disqualify it for fund custody if:

  (1) it grossly violates any law or regulation;

  (2) it ceases to meet the requirements prescribed by Article 26 of this Law; or

  (3) it is found in other circumstances as prescribed by relevant laws and administrative regulations.

  Article 33 The duties of a fund custodian shall be terminated if:

  (1) it is disqualified for fund custody according to law;

  (2) it is discharged by the holders of fund units at a general meeting;

  (3) it closes down according to law or is dissolved or declared bankrupt according to law; or

  (4) it is found in other circumstances as prescribed by the fund contract.

  Article 34 Where the duties of a fund custodian is terminated, a new fund custodian shall, within six months, be selected and appointed by the holders of fund units at a general meeting; and before a new fund custodian is selected, the securities regulatory authority under the State Council shall appoint a provisional fund custodian.

  Where the duties of a fund custodian is terminated, the fund custodian shall properly keep the fund assets and materials regarding fund custody and shall complete the procedures for the transfer of the fund assets and fund custody without delay, and the new or provisional fund custodian shall likewise take over the fund assets and fund custody.

  Article 35 Where the duties of a fund custodian is terminated, a public accounting firm shall, in accordance with relevant regulations, be appointed to audit the fund assets, and the audit results shall be announced and, at the same time, submitted to the securities regulatory authority under the State Council for the record.

Chapter IV

Raising of Capital

  Article 36 To sell fund units for capital raising in accordance with this Law, a fund manager shall submit the following documents to the securities regulatory authority under the State Council and shall be subject to approval by the said authority:

  (l) an application report;

  (2) a draft fund contract;

  (3) a draft fund custodian agreement;

  (4) a draft prospectus;

  (5) documents certifying the qualifications of the fund manager and the fund custodian;

  (6) the financial and accounting reports of the fund manager and the fund custodian for the three preceding years or for the period since their establishment, which have been audited by a public accounting firm;

  (7) the legal opinion produced by a law firm; and

  (8) other documents prescribed by the securities regulatory authority under the State Council.

  Article 37 A fund contract shall include the following information:

  (1) the purpose and name of the fund for which capital is to be raised;

  (2) the names and addresses of the fund manager and the fund custodian;

  (3) the mode of operation of the fund;

  (4) the total sum of the units of a closed-end fund and the term of the fund contract, or the minimum amount of capital to be raised for an open-end fund;

  (5) the principles for determining the date of sale and the price of the fund units and the fees;

  (6) the rights and obligations of the holders of fund units, the fund manager and the fund custodian;

  (7) the procedures and rules for the convening of general meetings of the holders of fund units, for discussion of business and for voting;

  (8) the procedures, time and place of the sale, trading, subscription and redemption of fund units, the ways for calculation of fees, and the time and ways for payment of redemption monies;

  (9) the principles for distribution of fund returns and the means of implementation;

  (10) the charging of management fees and custodian fees by the fund manager and the fund custodian as their remuneration and the means of payment and the percentage of such fees;

  (11) the charging of other fees relating to the management and use of the fund assets and the means of payment of such fees;

  (12) the objectives of investment with the fund assets and restrictions on such investment;

  (13) the ways for calculation of the net value of the fund assets and for announcement of the net value;

  (14) the ways for resolution of the situation where the capital raised fails to reach the statutory amount;

  (15) circumstances giving rise to the revocation and termination of the fund contract and the procedures for the revocation and termination, and the ways for liquidation of fund assets;

  (16) mechanism for resolution of disputes; and

  (17) other matters agreed upon by the parties.

  Article 38 The prospectus of a fund shall include the following information:

  (1) the name of the document approving the application for capital raising and the date of approval;

  (2) basic facts of the fund manager and the fund custodian;

  (3) a summary of the contents of the fund contract and of the fund custodian agreement;

  (4) the date, the price, the fees and the period for the sale of fund units;

  (5) the mode of sale of fund units and the names of the institutions which sell the fund units and of the registration authority;

  (6) the names and addresses of the law firm which produces the legal opinion and the public accounting firm which audits the fund assets;

  (7) the charging of remuneration and other related fees by the fund manager and the fund custodian, and the means of payment and the percentage of such remuneration and fees;

  (8) risk warning statements; and

  (9) other information specified by the securities regulatory authority of the State Council.

  Article 39 The securities regulatory authority under the State Council shall, within six months from the date it accepts an application for capital raising, examine the application in accordance with relevant laws and administrative regulations and the regulations prescribed by the securities regulatory authority under the State Council as well as the principle of prudent regulation, and decide whether to approve or disapprove the application and notify the applicant of its decision accordingly; and if it disapproves the application, it shall explain the reasons why.

  Article 40 The units of a fund may only be sold after the application for capital raising has been approved.

  Article 41 The fund manager shall be responsible for the sale of fund units; and it may entrust another institution approved by the securities regulatory authority under the State Council to sell the same on its behalf.

  Article 42 The fund manager shall arrange for the prospectus, the fund contract and other relevant documents to be published three days prior to the sale of the fund units.

  The documents specified in the preceding paragraph shall be truthful, accurate and complete.

  The promotion in connection with the capital raising shall be conducted in compliance with relevant laws and administrative regulations, and no acts specified in Article 64 of this Law shall be committed.

  Article 43 The fund manager shall, within six months from the date it receives the approval document, raise capital. If it begins to do so after the elapse of the six-month period and there is no substantive change in the matters that have been approved, it shall report the fact to the securities regulatory authority under the State Council for the record. If there are substantive changes, it shall submit a new application to the securities regulatory authority under the State Council.

  Capital raising shall not exceed the period approved by the securities regulatory authority under the State Council. The period for the raising of capital of a fund shall be counted from the date the fund units begin to be sold.

  Article 44 If, at the expiration of the period for capital raising, the total sum of the fund units sold for a closed-end fund is more than 80 percent of the approved amount of the fund or the total sum of the fund units sold for an open-end fund exceeds the minimum amount of the capital approved to be raised, and in each case the number of holders of the fund units tallies with the number specified by the securities regulatory authority under the State Council, the fund manager shall, within 10 days from the date the period for the capital raising expires, appoint a statutory capital verification institution to verify the capital raised and, within 10 days from the date it receives the report on capital verification, it shall submit the report to the securities regulatory authority under the State Council, complete the procedures for registration of the fund and make an announcement thereof.

  Article 45 The capital raised during the period of capital raising shall be deposited into a special account, and before completion of capital raising, no person may make use of the capital.

  Article 46 A fund contract shall be established upon the payment of the subscription monies for the fund units by investors; the fund contract shall become effective once the fund manager, in accordance with the provisions of Article 44 of this Law, completes the procedures for registration of the fund with the securities regulatory authority under the State Council.

  Where, at the expiration of the period for capital raising, the fund manager fails to fulfill the requirements specified in Article 44 of this Law, it shall bear the following responsibilities:

  (1) to repay, with its own assets, the liabilities and expenses incurred in capital raising; and

  (2) to refund, within 30 days after the expiration of the period for capital raising, the subscription monies already paid by investors, plus the interest on bank deposit for the same period.

Chapter V

Trading of Fund Units

  Article 47 The units of a closed-end fund may be listed for trading on a stock exchange after the fund manager submits an application and obtains approval by the securities

  regulatory authority under the State Council.

  The securities regulatory authority under the State Council may authorise a stock exchange to approve, in accordance with the statutory conditions and procedures, the listing of fund units for exchange on the stock exchange.

  Article 48 The fund units to be listed shall satisfy the following conditions:

  (1) the capital is raised in compliance with the provisions of this Law;

  (2) the term of the fund contract is more than five years;

  (3) the minimum amount of capital raised is not less than 200 million yuan;

  (4) the number of holders of fund units is not less than 1,000; and

  (5) other conditions prescribed by the rules for listing of fund units for trading.

  Article 49 The rules for listing of fund units shall be formulated by the stock exchange and submitted to the securities regulatory authority under the State Council for approval.

  Article 50 Under any of the following circumstances after the listing of the fund units, a stock exchange shall terminate the listing of the fund units and report such termination to the securities regulatory authority under the State Council for the record:

  (l) the conditions for listing prescribed in Article 48 of this Law are no longer satisfied;

  (2) the term of the fund contract expires;

  (3) a general meeting of the holders of fund units decides to terminate the listing of the fund units ahead of schedule; and

  (4) other circumstances giving rise to termination of the listing of fund units as prescribed by the fund contract or by the rules for listing of fund units.

Chapter VI

Subscription and Redemption of Fund Units

  Article 51 The fund manager of an open-end fund shall be responsible for the subscription and redemption and registration of the units of the fund; and it may entrust such matters to another institution approved by the securities regulatory authority under the State Council.

  Article 52 Except otherwise provided for by the fund contract, the fund manager shall handle the business of subscription and redemption of fund units on every working day.

  Article 53 Except for the following circumstances, the fund manager shall pay redemption monies on a timely basis:

  (1) it is unable to pay the redemption monies due to force majeure;

  (2) a stock exchange has, in according with law, decided to suspend trading on a temporary basis, and as a result the fund manager is unable to calculate the net value of the fund assets on that very day; and

  (3) other special circumstances prescribed in the fund contract.

  The fund manager shall, on the very day any of the circumstances mentioned above occurs, report the matter to the securities regulatory authority under the State Council for the record.

  When any of the circumstances specified in the first paragraph of this Article ceases to exist, the fund manager shall promptly pay the redemption monies.

  Article 54 For an open-end fund, a sufficient amount of cash or government bonds shall be maintained in order to make payment of redemption monies to the holders of fund units. The specific percentage of the fund assets to be held in cash or government bonds shall be prescribed by the securities regulatory authority under the State Council.

  Article 55 The subscription price and the redemption price of a fund unit shall be calculated on the basis of the net value of the fund unit on the day of subscription or redemption plus or minus relevant charges.

  Article 56 Where there is an error in the calculation of the net value of a fund unit, the fund manager shall rectify the error immediately and take reasonable measures to prevent the incurring of further losses. If the error in the price calculation amounts to 0.5 percent of the net value of the fund unit, the fund manager shall make an announcement of the fact and report the same to the securities regulatory authority under the State Council for the record.

  Where the holders of fund units sustain losses as a result of an error in the calculation of the net value of the fund unit, they shall have the right to claim compensation from the fund manager and the fund custodian.

Chapter VII

Operation of Funds and Disclosure of Information  

  Article 57 A fund manager that invests in securities with fund assets shall do so in the form of a portfolio.

  The specific form and the investment percentages of a portfolio shall be prescribed in the fund contract in accordance with this Law and the regulations of the securities regulatory authority under the State Council.

  Article 58 Fund assets shall be used for investment in the following:

  (1) listed stocks and bonds; and

  (2) other types of securities prescribed by the securities regulatory authority under the State Council.

  Article 59 The assets of a fund shall not be used for the following investments or activities:

  (1) securities underwriting;

  (2) provision of loans or security to another person;

  (3) engaging in investments which may give rise to unlimited liability;

  (4) dealing in the units of other funds, except otherwise prescribed by the State Council;

  (5) making capital contributions to the fund manager or the fund custodian or dealing in the shares or bonds which are issued by the fund manager or the fund custodian;

  (6) dealing in the securities issued by a shareholder which has a controlling shareholding relationship with the fund manager or the fund custodian, the securities issued by a company which has other vital connection with the fund manager or the fund custodian, or the securities underwritten by such shareholder or company during the underwriting period;

  (7) engaging in insider trading, manipulation of securities prices or other illegitimate securities trading activities; or

  (8) other activities prohibited by the securities regulatory authority under the State Council pursuant to the provisions of relevant laws and administrative regulations.

  Article 60 The fund manager, the fund custodian and other persons who have the obligation to disclose information relating to a fund shall disclose such information according to law, and shall ensure the truthfulness, accuracy and completeness of such information.

  Article 61 Those who are under the obligation to disclose information relating to a fund shall ensure that the disclosure of such information which is required to be disclosed is

  made within the period specified by the securities regulatory authority under the State Council and shall ensure that investors may check or make copies of the publicly disclosed information

  at such time and in such manner as prescribed in the fund contract.

  Article 62 Information concerning a fund to be publicly disclosed shall include:

  (1) the prospectus, the fund contract and the custodian agreement of the fund;

  (2) the status of capital raising;

  (3) the announcement in respect of the listing of the fund units;

  (4) the net value of the fund assets and the net value of a fund unit;

  (5) the subscription price and the redemption price of the fund units;

  (6) quarterly portfolio reports of the fund assets, financial and accounting reports of the fund, and the interim and annual reports of the fund;

  (7) provisional reports;

  (8) resolutions adopted at the general meetings of the holders of fund units;

  (9) major changes of personnel of the fund manager and the fund custodian department of the fund custodian;

  (10) legal actions involving the fund manager, the fund assets or the business of fund custody; and

  (11) other information which is required to be disclosed as prescribed by the securities regulatory authority under the State Council pursuant to the provisions of relevant laws and administrative regulations.

  Article 63 The public accounting firm that produces an audit report, and the law firm that produces a legal opinion, in respect of the publicly disclosed information concerning a fund shall ensure the truthfulness, accuracy and completeness of the contents of the documents they produce.

  Article 64 The following acts in connection with any public disclosure of information concerning a fund shall be prohibited:

  (1) making false records, misleading statements, or grave omissions;

  (2) making forecast of the performance of securities investment;

  (3) guaranteeing to make profits or bear losses in breach of relevant regulations;

  (4) defaming other fund managers, fund custodians or institutions selling fund units; and

  (5) other acts prohibited by the securities regulatory authority under the State Council pursuant to the provisions of relevant laws and administrative regulations.

Chapter VIII

Modification and Termination of a Fund Contract and Liquidation of Fund Assets

  Article 65 The mode of operation of a fund may be changed pursuant to the provisions of the fund contract or the resolution adopted at a general meeting of the holders of fund units and with the approval of the securities regulatory authority under the State Council.

  Article 66 A closed-end fund may expand its fund size or extend the term of its fund contract provided that the following requirements are met and approval by the securities regulatory authority under the State Council is obtained:

  (1) the fund has good performance;

  (2) no administrative or criminal penalty has been imposed on the fund manager for a breach of any law or regulation in the two preceding years;

  (3) a resolution to such an effect is adopted at a general meeting of the holders of fund units; and

  (4) other requirements prescribed by this Law.

  Article 67 A fund contract shall be terminated in any of the following circumstances:

  (1) the term of the fund contract expires and is not extended;

  (2) the termination is decided on at a general meeting of the holders of fund units;

  (3) the duties of the fund manager and the fund custodian are terminated and are not assumed by a new fund manager or a new fund custodian within six months; and

  (4) other circumstances prescribed in the fund contract.

  Article 68 Upon termination of a fund contract, the fund manager shall have a liquidation team formed to liquidate the fund assets.

  The liquidation team shall be composed of the fund manager, the fund custodian and related intermediary agencies.

  After the liquidation report prepared by the liquidation team is audited by a public accounting firm and a legal opinion on the liquidation report is produced by a law firm, the report shall be submitted to the securities regulatory authority under the State Council for the record and shall be made known to the public.

  Article 69 The fund assets remaining after completion of the liquidation shall be distributed among the holders of fund units in proportion to the number of fund units they hold respectively.

Chapter IX

Rights of the Holders of Fund Units and Exercise of the Rights  

  Article 70 Holders of fund units shall have the following rights:

  (1) to share returns from the fund assets;

  (2) to receive distribution of the fund assets remaining after completion of liquidation;

  (3) to transfer fund units or apply for redemption of fund units according to law;

  (4) to request, in accordance with relevant regulations, the convening of a general meeting of the holders of fund units;

  (5) to exercise the right to vote in respect of matters submitted to the general meeting of the holders of fund units for approval;

  (6) to check or make copies of publicly disclosed information concerning the fund;

  (7) in accordance with the law, to bring an action against any infringement of their legitimate rights and interests by any fund manager, any fund custodian or any institution selling fund units; and

  (8) other rights prescribed in the fund contract.

  Article 71 The following matters shall be submitted for approval and decision by a general meeting of the holders of fund units:

  (1) termination of the fund contract ahead of schedule;

  (2) expansion of the size of the fund or extension of the term of the fund contract;

  (3) change of the mode of operation of the fund;

  (4) increase of remuneration to the fund manager and the fund custodian;

  (5) change of the fund manager and the fund custodian; and

  (6) other matters prescribed in the fund contract.

  Article 72 A general meeting of the holders of fund units shall be convened by the fund manager. In the event that the fund manager fails to convene the general meeting according to relevant regulations or is unable to convene the meeting, the fund custodian shall convene the meeting.

  In the event that the holders representing more than 10 percent of the fund units request the convening of a general meeting of the holders of fund units in respect of the same matter, and that the fund manager and the fund custodian fail to convene the meeting, the holders representing more than 10 percent of the fund units shall have the right to proceed to convene the meeting on their own and shall submit the matter to the securities regulatory authority under the State Council for the record.

  Article 73 To convene a general meeting of the holders of fund units, the convener shall, at least 30 days ahead of the meeting, announce the time and the form of the meeting, the matters to be deliberated, the procedure of discussion, the voting formula, etc.

  A general meeting of the holders of fund units shall not put to the vote any matter which is not covered in the announcement.

  Article 74 A general meeting of the holders of fund units may be held on the spot, through communication, or by other means.

  Each fund unit carries one vote. A holder of fund units may entrust a proxy to attend a general meeting of the holders of fund units and exercise his right to vote thereat.

  Article 75 No meeting of the holders of fund units shall be convened unless holders representing at least 50 percent of the fund units are present at the meeting, and decisions on matters under deliberation at the meeting shall be adopted only by the holders of fund units with more than 50 percent of the right to vote who are present at the meeting; but a change of the mode of operation of the fund, a change of the fund manager or the fund custodian and termination of the fund contract ahead of schedule shall be subject to approval by the holders of fund units with more than two-thirds of the right to vote who are present at the meeting.

  Matters decided on at a general meeting of the holders of fund units shall, in accordance with law, be submitted to the securities regulatory authority under the State Council for approval or for the record, and shall be made known to the public.

Chapter X

Supervision and Regulation  

  Article 76 The securities regulatory authority under the State Council shall perform the following duties in accordance with law:

  (1) in accordance with law, formulating rules and regulations relating to supervision and regulation of the activities in respect of investment of funds in securities and exercising the power of approval or verification;

  (2) handling registration of funds;

  (3) supervising and regulating the activities carried out by fund managers, fund custodians and other institutions in investing funds in securities, and investigating, and imposing penalties on, violations of law and making the violations known to the public;

  (4) formulating professional qualifications and code of conduct for fund employees and supervising the implementation thereof;

  (5) supervising and inspecting disclosure of fund-related information;

  (6) providing guidance to and supervising the activities of fund industry associations; and

  (7) other duties prescibed by laws and administrative regulations.

  Article 77 When performing its duties in accordance with law, the securities regulatory authority under the State Council shall have the power to take the following measures:

  (1) entering the premises where illegal activities take place in order to conduct investigation and collect evidence;

  (2) questioning the parties concerned and the entities and individuals who are involved in the matter under investigation, and requiring them to provide explanations in respect of the matter under investigation;

  (3) checking and making copies of the records of securities transactions, records of securities registrations and transfers, financial and accounting information and other related documents and information of the parties concerned and the entities and individuals that are involved in the matter under investigation, and sealing up the documents and information which are likely to be transferred or concealed;

  (4) checking the capital accounts, securities accounts or fund accounts of the parties concerned and the entities and individuals that are involved in the matter under investigation, and where there is evidence to show signs of transfer or concealment of illegal funds and securities, applying to a judicial organ for the freezing of the accounts in question; and

  (5) taking other measures prescribed by laws and administrative regulations.

  Article 78 When carrying out their duties of investigation or inspection in accordance with law, no less than two staff members of the securities regulatory authority under the State Council shall be present, and they shall produce their legal identification documents and shall keep confidential the commercial secrets which they come to know during the course of investigation or inspection.

  Article 79 Staff members of the securities regulatory authority under the State Council shall be devoted to their duties, carry out their work in accordance with law, be fair and honest, and subject themselves to supervision, and they shall not take advantage of their positions to seek personal gain.

  Article 80 When staff members of the securities regulatory authority under the State Council perform their duties in accordance with law, the entities and individuals under investigation and inspection shall co-operate with them, and shall truthfully provide relevant documents and information, and they shall not refuse to co-operate with them, hinder them in their work, or conceal documents and information.

  Article 81 When staff member of the securities regulatory authority under the State Council, while performing their duties, discover any illegal conduct and suspect it as a crime, they shall transfer the case to a judicial organ for handling.

  Article 82 Staff members of the securities regulatory authority under the State Council shall not concurrently hold any position in any institution under supervision and regulation of the authority.

Chapter XI

Legal Responsibility

  Article 83 Where, in the course of performing their respective duties, the fund managers or fund custodians violate any provision of this Law or any provision in the fund contracts, thus causing losses to the fund assets or the holders of fund units, they shall bear their respective responsibilities for their own acts and pay compensation in accordance with law; and where losses are caused to the fund assets or the holders of fund units as a result of the joint acts of the fund managers and the fund custodians, they shall bear joint and several responsibility to pay compensation.

  Article 84 Anyone who, in violation of the provisions of Article 45 of this Law, makes use of the capital raised shall be instructed to return the money and his unlawful gains shall be confiscated; if such gains exceed 500,000 yuan, he shall, in addition, be fined not less than the amount of such gains but not more than five times such gains; and if there are no unlawful gains or such gains are less than 500,000 yuan, he shall, in addition, be fined not less than 50,000 yuan but not more than 500,000 yuan. The persons who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning and shall, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. Where losses are caused to the investors, he shall, in accordance with law, bear the responsibility to pay compensation. If the violation constitutes a crime, he shall be investigated for criminal responsibility in accordance with law.

  Article 85 Anyone who, without approval by the securities regulatory authority under the State Council, raises capital shall be instructed to stop capital raising and return all the money, plus interest calculated at the bank deposit rate for the corresponding period; and his unlawful gains shall be confiscated, and he shall, in addition, be fined not less than one percent but not more than five percent of the amount of the capital raised. If the violation constitutes a crime, he shall be investigated for criminal responsibility in accordance with law.

  Article 86 Where a fund management company is established in violation of the provisions of this Law and without approval, it shall be banned by the securities regulatory authority and shall, in addition, be fined not less than 50,000 yuan but not more than 500,000 yuan. If the violation constitutes a crime, criminal responsibility shall be investigated in accordance with law.

  Article 87 Where an entity, without approval of the securities regulatory authority under the State Council, engages in the business of fund management or the business of fund custody, it shall be instructed to cease such business and its unlawful gains shall be confiscated; if such gains exceed one million yuan, it shall, in addition, be fined not less than the amount of the unlawful gains but not more than five times the amount of such gains; and if there are no unlawful gains or such gains are less than one million yuan, it shall, in addition, be fined not less than 100,000 yuan but not more than one million yuan. Where losses are caused to the fund assets or to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation. The person who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning and shall, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. If a crime is constituted, criminal responsibility shall be investigated in accordance with law.

  Article 88 Where a fund manager or a fund custodian, in violation of the provisions of this Law, fails to place the assets of a fund under separate management or custody in separate accounts or misappropriates the fund assets, it shall be instructed to rectify and shall be fined not less than 50,000 yuan but not more than 500,000 yuan. Where losses are caused to the fund assets or to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation. The persons who are directly in charge and other persons who are directly responsible shall be given a discipline warning, or be suspended or disqualified from engaging in the fund business and, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. If the violation constitutes a crime, it shall be investigated for criminal responsibility in accordance with law.

  The asset and returns derived by the fund manager or the fund custodian from its misappropriation of the fund assets shall be included in the assets of the fund, except where otherwise provided for by laws and administrative regulations.

  Article 89 Where a fund manager or a fund custodian engages in any of the activities specified in Article 20 of this Law, it shall be instructed to rectify and its unlawful gains shall be confiscated. If the unlawful gains exceeds one million yuan, it shall, in addition, be fined not less than the amount of the unlawful gains but not more than five times the amount of such gains; and if there are no unlawful gains or such gains are less than one million yuan, it shall, in addition, be fined not less than 100,000 yuan but not more than one million yuan. Where losses are caused to the assets of a fund or to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation. The persons who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning, or be suspended or disqualified from engaging in the fund business and, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. If the violation constitutes a crime, criminal responsibility shall be investigated in accordance with law.

  Article 90 Where a fund manager or a fund custodian engages in any of the activities specified in Subparagraphs 1, 2, 3, 4, 5, 6 and 8 of Article 59 of this Law, it shall be instructed to rectify and shall be fined not less than 100,000 yuan but not more than one million yuan. Where losses are caused to the fund assets or to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation. The persons who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning, or be suspended or disqualified from engaging in the fund business and, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. If the violation constitutes a crime, criminal responsibility shall be investigated in accordance with law.

  The assets and returns derived by the fund manager or the fund custodian from the use of fund assets for any of the activities mentioned in the preceding paragraph shall be included in the fund assets, except where otherwise provided for by laws and administrative regulations.

  Article 91 Where a fund manager or a fund custodian engages in any of the activities specified in Subparagraph 7 of Article 59 of this Law, the persons who are directly in charge and the other persons who are directly responsible shall, in addition to the penalties prescribed in the relevant provisions of the Securities Law of the People's Republic of China, be given a disciplinary warning, or be suspended or disqualified from engaging in the fund business and, at the same time, be fined not less than 30,000 yuan but not more than 300,000 yuan. Where losses are caused to the fund assets or to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation.

  Article 92 Where a fund manager and a fund custodian, in violation of the provisions of this Law, make capital contributions to each other or hold each other's shares, they shall be instructed to rectify and may be fined not more than 100,000 yuan.

  Article 93 Where persons who have the obligation to disclose information concerning a fund fail to disclose such information in accordance with law or the information disclosed contains false accounts , misleading statements or grave omissions, they shall be instructed to rectify; and their unlawful gains shall be confiscated and they shall, in addition, be fined not less than 100,000 yuan but not more than one million yuan. Where losses are caused to the holders of fund units, they shall, in accordance with law, bear the responsibility to pay compensation. The persons who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning, or be suspended or disqualified from engaging in the fund business and, in addition, be fined not less than 30,000 yuan but not more than 300,000 yuan. If the violation constitutes a crime, criminal responsibility shall be investigated in accordance with law.

  Article 94 Where a professional institution that produces an auditor's report, a legal opinion or other documents in respect of information concerning a fund that is publicly disclosed by persons who have the obligation to disclose such information makes fraudulent statements in respect of the matters for which it is responsible, it shall be instructed to rectify, its unlawful gains shall be confiscated, and it shall, in addition, be fined not less than the amount of the unlawful gains but not more than five times that amount. If the circumstances are serious, it shall be instructed to close down and the relevant professional qualifications of the persons who are directly responsible shall be suspended or rescinded. Where losses are caused to the holders of fund units, it shall, in accordance with law, bear the responsibility to pay compensation. If a crime is constituted, it shall be investigated for criminal responsibility in accordance with law.

  Article 95 Where a fund manager or a fund custodian fails to convene a general meeting of the holders of fund units in accordance with relevant regulations, it shall be instructed to rectify and it may be fined not more than 50,000 yuan. The persons who are directly in charge and the other persons who are directly responsible shall be given a disciplinary warning, or be suspended or disqualified from engaging in the fund business.

  Article 96 Where a fund manager or a fund custodian violates the provisions of this Law, if the circumstances are serious, it shall be disqualified from engaging in the business of fund management or fund custody.

  Article 97 Where an employee of a fund manager or the special fund custodian department of a fund custodian violates the provisions of Article 18 of this Law and losses are thus caused to the fund assets or to the holders of fund units, he shall, in accordance with law, bear the responsibility to pay compensation; and if the circumstances are serious, he shall be disqualified from engaging in the fund business. If the violation constitutes a crime, he shall be investigated for criminal responsibility in accordance with law.

  Article 98 Where a staff member of the securities regulatory authority neglects his duty, abuses his power, or engages in irregularities for personal gains, or seek or receive money or things of value from another person by taking advantage of his position, he shall be given an administrative sanction in accordance with law. If a crime is constituted, he shall be investigated for criminal responsibility in accordance with law.

  Article 99 If a person, for his violation of the provisions of this Law, is liable to bear the responsibility to pay civil compensation and to pay fines and penalties and if his assets are not sufficient to pay all at the same time, he shall bear the responsibility to pay civil compensation first.

  Article 100 If, in accordance with the provisions of this Law, a fund manager or a fund custodian bears the responsibility to pay civil compensation and pay fines and penalties, it shall use its own assets to discharge such responsibility.

  All the fines and penalties collected and all the unlawful gains confiscated pursuant to Law shall be turned over to the State Treasury.

Chapter XII

Supplementary Provisions

  Article 101 Specific regulations governing the securities investment activities engaged in by fund management companies or other institutions approved by the State Council to gather capital through private placements or accept property entrustment from specific entities shall separately be formulated by the State Council on the basis of the principles laid down in this Law.

  Article 102 Regulations governing the establishment of a securities investment company to engage in securities investment and other related activities by raising capital through public offering of shares shall separately be formulated by the State Council.

  Article 103 This Law shall go into effect as of June 1, 2004.

 

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