A set of detailed rules regulating the pool asset management business of securities companies in China went into effect on July 1, 2008. Under the rules, a securities company must obtain permission from the CSRC to engage in the pool asset management business. Clients of the pool asset management plan (the Plan) must be the securities company’s clients or the securities company’s agents’ clients. The securities company’s funds in a Plan may not exceed certain percentages and amounts, and the securities company must adequately disclose the risks associated with the Plan in a prospectus.
The CSRC issued the Detailed Rules for the Implementation of Pool Asset Management Business of Securities Companies (for Trial Implementation), on May 31, 2008. According to the Detailed Rules, the securities company must conduct fair play, avoid conflicts of interests, and protect clients’ lawful interests.
A securities company must submit an application and supporting documents to the CSRC for approval of the establishment of a Plan. For something to qualify as a Plan, it must have at least two clients and have raised at least RMB 100 million or more in funds. When a securities company invests in a Plan, its investment funds may not exceed 5 percent or RMB 200 million, whichever is less, of the total funds in the plan. If a securities company participates in multiple Plans, the total amount of its own funds in the all of the Plans may not exceed 15 percent of the net assets of the securities company. The Detailed Rules state that the assets in the Plan are independent from the assets of the securities company or trustee, and will not be liquidated if the securities company or trustee undergoes bankruptcy or liquidation.
The Detailed Rules emphasize that the securities company managing a Plan must disclose potential risks to its clients before the clients join the Plan. The management contract between the client and the securities company must include a mandatory provision that includes the model contract that the Securities Association of China drafted.
Furthermore, as a general rule, the Detailed Rules provide that the Plan may only invest in domestic securities, bonds, securities investment funds, central bank notes, short term financial notes, asset-backed securities, financial derivatives, and other investment products approved by the CSRC. However, with the CSRC’s approval, the Plan manager may invest funds in foreign financial products that are acknowledged by the CSRC. When a single Plan invests in securities issued by a single company, the investment may not exceed 10 percent of the net assets of the Plan, and the Plan may not hold more than 10 percent of the total issued securities of the company.
The Detailed Rules forbid securities companies to advertise Plans through television, newspaper, radio, or other mass media. Potential clients must use their true identities to join the Plan to prevent money laundering activities. Regarding the potential conflicts of interests between the securities company and the Plan’s clients, the Detailed Rules require that the securities company deposit the Plan’s funds in a qualified commercial bank or another trustworthy institution recognized by the CSRC.
The Detailed Rules also set out the conditions for the extension and termination of a Plan, and requires the liquidation process of the Plan to be provided in the management contract between the securities company and clients.