The Law of the People's Republic of China on Securities Investment Funds 中华人民共和国证券投资基金法, which takes effect on 1 June 2004, represents significant progress to lay the legal foundations for the PRC fund industry. (Please click here to view the English translation of the law) It replaces the earlier Provisional Measures for the Administration of Securities Investment Funds 证券投资基金管理暂行办法 of 1997. The China Securities Regulatory Commission (CSRC) is actively preparing to implement rules under the law to replace the existing notices and guidelines. The Law, which includes stricter rules on investor protection, provides guidance on a number of issues including the permissible types of securities investment funds, the process for approval and operations of fund managers and fund custodians, and the public offering of funds.

Application

The Law is applicable to publicly offered and traded securities investment funds. The State Council is empowered to issue separate additional rules on privately placed funds, as well as the private wealth management business.

Investment funds in China are contractual arrangements among fund managers, fund custodians and unit holders. Funds in China are not independent legal persons.

• it must have a registered capital of at least RMB 100 million (approx. US$12 million), contributed in cash;

• its principal shareholder must have achieved "relatively good" business results and have a good reputation in the operation of securities, securities investment consulting, trust asset management or other financial asset management business with no record of infringement of the law in the past three years; and registered capital of at least RMB 300 million (approx. US$36 million);

• it must have at least the statutory minimum number of staff with proper qualifications;

• it must have satisfactory business premises, safety facilities and other facilities relevant to the operation of a fund management business; and

• it must have a sound internal compliance and supervision system, as well as a sound risk control system.

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The Australian Financial Services Reform Act 2001 (FSR Act) commenced operation on 11 March 2002, and completed transition on 11 March 2004, reforming the regulation of most financial services in Australia. It spans all aspects of market regulation including the licensing of persons carrying on a financial services business, including those providing a custodial or depository service.

Australian financial services licence for custody services

The Australian Corporations Act 2001 (the Act), as amended by the FSR Act provides that a person who carries on a financial services business in Australia (which generally includes a provider of custody services) is required to hold an "Australian financial services licence" (AFSL) authorising the provision of the financial services. It is in this area that the Act has its greatest impact. The conduct of a licensed provider of financial services is heavily regulated and subject to an extensive disclosure regime.

Providing a custodial or depository service

A person provides a custodial or depository service under the Act if:

1. there is an arrangement between them and a client, or between the provider and another person which itself has an arrangement with the client who receives the service; and

2. the provider holds a financial product, or a beneficial interest in a financial product, in trust for or on behalf of either the client or a person nominated by the client.

The provision of custodial or depository services is not just bailment or physical possession (safe custody). The Act's definition of "holder" and "hold" mean that the mere physical holding of a document will not constitute the provision of a custodial or depository service. The trust relationship is pivotal to the definition.

Foreign financial services providers and the licensing regime

Foreign financial services providers will be deemed to be carrying on a financial services business in Australia if they engage in conduct that is either intended to induce people in Australia to use the financial services the person provides, or is likely to have that effect. This is the case whether or not the conduct is intended, or likely, to have that effect in other places as well.

Foreign custodians will need to carefully consider the need for an Australian financial services licence for any activities intended to be performed in Australia. 

Exemptions

There are a number of exemptions from licensing that may be relevant for foreign custodians. For example, a foreign custodian will not need a licence if it only provides financial services to a related body corporate in Australia or if it provides services only to "associates" (which is very broadly defined in the Act).

In addition, a foreign custodian (or other financial services provider) will be exempt from the licensing requirements where:

a. the service provider is not in Australia;

b. the client is a wholesale client in Australia;

c. the service consists only of one or more of:

i. the provision of financial product advice;

ii. the provider making a market; and

iii. the provision of a custodial or depository service;

d. the service provider is a related body corporate or party to a joint venture with an Australian financial services licensee whose licence covers the service;

e. the licensee arranges for the service provider to provide the service; and

f. the licensee has responsibility for the conduct of the service provider in relation to the financial service.

Australian Securities and Investments Commission power to grant further exemptions

Under the Act, the Australian Securities and Investments Commission (ASIC) may also exempt a person from the need to hold an AFSL where:

1. the person is regulated by an overseas regulatory authority;

2. the regulatory authority is approved by ASIC in writing;

3. the service is provided in the course of carrying on the business or undertaking which causes that regulation to be required; and

4. the service is provided only to wholesale clients.

To date, ASIC has approved the following five overseas regulatory authorities in relation to a limited range of financial services:

• Financial Services Authority of the UK,

• Securities and Exchange Commission of the US,

• Federal Reserve Board and the Office of the Comptroller of Currency of the US,

• Monetary Authority of Singapore, and

• Securities and Futures Commission of Hong Kong.

With the exception of Hong Kong, relief is provided in relation to the provision of custodial or depository services by foreign financial services providers in Australia regulated by the above five overseas regulators.

Note, the scope of current relief for Hong Kong based financial services providers is limited to providing financial product advice, dealing in financial product and market making activities, but does not extend to custodial or depository services.

Scope of ASIC relief

ASIC's Executive Director, Policy and Markets Regulation, Mr Malcolm Rodgers stated, "Our policy is to allow providers to offer services to wholesale clients without an Australian licence if their home jurisdiction regulation is sufficiently similar to our own". (ASIC Information Release 03-41 "ASIC issues licensing relief for certain wholesale foreign financial services providers" 23 December 2003.)

ASIC may grant relief from the licensing laws where the relevant overseas regulatory body provides satisfactorily equivalent regulatory outcomes as ASIC, and there are effective co-operation agreements between ASIC and the relevant overseas regulatory body.

Once an overseas regulatory body has been approved by ASIC, and notified by way of a class order, a company or partnership providing financial services in that jurisdiction may rely on that class order relief for the provision of certain financial services within Australia to wholesale clients where they comply with the regulatory requirements imposed in their home country.

Note that the relief discussed in this article below relates to the provision of financial services by Foreign Financial Services Providers (FFSP) generally, and is not limited to the provision of custodial or depository services.

Conditions of existing class order relief

Under the terms of the current class order relief outlined above, a regulated body or partnership must:

1. be regulated by the regulator in its home country;

2. be registered in Australia, or have a local Agent;

3. have its primary business the provision of financial services;

4. not have been excluded from the operation of relief;

5. submit to the non-exclusive jurisdiction of the Australian Courts; and

6. covenant to comply with any order made against it by an Australian Court. 

Coverage of existing class order relief

A FFSP regulated by one (or more) of the approved overseas regulatory bodies outlined above may give ASIC notice that they intend to rely on a particular class order exemption as soon as practicable after commencing coverage by the relief. In addition a FFSP relying on existing class order relief must notify ASIC of any changes to their regulation or of significant changes to the regulatory requirements by their home country regulator, any exemptions or relief, or enforcement or disciplinary action provided or taken by their home country regulator.

The FFSP will also need to provide ASIC with the following:

• evidence of overseas licence permission or registration to provide the relevant financial services;

• a deed for the benefit of and enforceable by ASIC, irrevocable except with the prior permission of ASIC, whereby the FFSP submits to the unexclusive jurisdiction and all orders of the Australian courts, containing all prescribed requirements; and

• written consent to the exchange between the home country regulator and ASIC of all materials that relate to the FFSP. 

ASIC has not released a pro forma deed or standard form for notifications but has requested that the front page of the notice contain reference to the relevant class order relief. There is no application fee payable. 

Applications for further or wider relief

Any applications for further or wider relief (i.e. to have a general relief instrument issued in respect of a new jurisdiction or to extend existing relief granted to a particular jurisdiction) will be considered by ASIC within the terms of its Policy Statement 176, "Licensing: Discretionary powers - wholesale foreign financial services providers". This Policy Statement sets out the grounds on which ASIC will provide relief to an FFSP from the need to hold an AFSL for financial services provided in Australia. 

Applications may be made by individual FFSPs in respect of their own operations or jointly with other FFSPs to cover financial services regulated by an overseas regulatory authority.

ASIC has stated that in assessing an application it may seek information from a home country regulator or independent verification from overseas lawyers. Where there are any costs associated with the verifications above, the applicant will bear the costs of those verifications.

An application should include a signed declaration made by the individual or corporate board of directors, that all information in support of the application is true, complete and accurate.

Processing issues

Although ASIC aims to process applications for relief within eight weeks of receiving all relevant information, ASIC is currently in the middle of one of the busiest periods of its existence, processing thousands of licence applications and attending to other business. It is anticipated that application turnaround times may exceed the stated eight week period.

The grant of class order relief is predicated on an effective cooperation agreement between ASIC and the relevant overseas regulatory authority. Effective co-operation agreements are generally in the form of Memoranda of Understanding or other forms of documented or informal understandings. It would be worthwhile to consult with ASIC prior to commencing any application for relief to ensure the necessary agreement is in place.

Limit any application to addressing regulatory outcomes from the point of view of market integrity and systemic risk. ASIC is not taking into account consumer protection issues in considering application for relief as relief is limited to the provision of financial services to wholesale clients only.

The Act, associated Regulations and regulatory instruments are currently in a state of flux and are amended on an almost daily basis. Before commencing an application for relief, it is recommended that advice be sought on the state of the law and regulatory environment.

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• the standardised fee table must be submitted to the MPFA for approval within 21/2 months after publication of the Code and must be given to prospective members and participating employers once approved;

• the standardised fee table must be included in the offering documents of MPF schemes within 18 months after publication of the Code;

• the first fund fact sheet should be published on or before 28 February 2005;

• FER for constituent funds and APIFs must be first calculated for any financial period that commences after the date that is six months after publication of the Code; and

• the first ongoing cost illustrations must be published when the first FER for the relevant constituent funds are available.

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Section 151 of the Hong Kong Securities and Futures Ordinance (SFO) specifies that intermediaries and associated entities will need to maintain and retain proper records of their own affairs as well as dealings with clients. This section further provides that the SFC is empowered to make rules in this respect and hence, the Securities and Futures (Keeping of Records) Rules (Rules) have been issued. Rules 3 and 4 set out the main purposes of proper record keeping: that is, to ensure that the business of a licensed corporation can be clearly presented if and when required together with keeping a proper account of client assets. 

While section 151 only sets out a general framework requiring proper records, the Rules provide further guidance. In particular, Rule 3(2)(a), together with the Schedule in the Rules, sets out in detail what types of records a licensed corporation and its associated entities are expected to keep. The Schedule is broadly drafted and also refers to other provisions in various subsidiary legislation of the SFO.

In addition, some of the records specified in the Schedule may have a limited duration or validity, in which case, intermediaries will have to review their client records on a regular basis so as to ensure that all such records are up-to-date. For example, intermediaries are supposed to check with relevant clients at least once a year that they will continue to qualify as professional investors and will elect to maintain this status. Standing instructions should only be valid for a period of not more than twelve months: consequently, intermediaries should remind their clients to renew such standing authorities and properly document these renewals.

The Rules also require licensed persons carrying on certain types of regulated activities to keep additional records. For example, an intermediary licensed for dealing in securities should keep separate records for its underwriting and sub-underwriting transactions; for activities relating to leveraged foreign exchange trading, sufficient records to identify each recognised party and details of leveraged foreign exchange contracts; details of securities margin financing transactions; and for companies licensed to provide asset management services and for companies holding client assets, particulars of the client's assets and liabilities, financial commitments and contingent liabilities.

Under normal circumstances intermediaries should keep records specified in the Rules or the SFO for at least seven years and records showing client orders and instructions should be retained for not less than two years.

Intermediaries or their associated entities should notify the SFC in writing of any non-compliance with Part 2 of the Rules within one business day after they become aware of such non-compliance. Failure to notify the SFC of any non-compliance is itself a breach of the SFO and the Rules.

Breaches of section 151 and the Rules may lead to criminal sanctions with penalties of fines and a term of imprisonment. The level of fines (from HK$25,000 to HK$1 million) and term of any imprisonment (from six months to seven years) will depend on the degree of seriousness of the breaches and whether there was an intention to breach Section 151 and/or the Rules.

Licensed corporations, registered institutions and their associated entities are also reminded that any intended change in the premises for keeping records or documents will require the SFC's prior approval. There is a fee of HK$1,000 for an application for approval.

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In January 2004, the Hong Kong SFC, together with the Hong Kong Exchanges and Clearing Limited and the Main Board and the GEM Listing Committees of the Stock Exchange of Hong Kong Limited, released a proposed Code on Corporate Governance Practices (Code), and its accompanying Corporate Governance Report, for public comment. The Code sets out the recommended best practices that a board of directors should observe in fulfilling its duties. Specifically, the Code outlines: the functions of chairmen, chief executive officers, directors and independent non-executive officers; the appointment and termination procedures for directors; the roles and duties of audit, nomination and remuneration committees; disclosure requirements that directors must satisfy; and internal controls that should be set in place to protect shareholders’ interests. A Corporate Governance Report must be prepared and submitted annually and it should state whether a listed issuer has complied with the Code and/or has deviated from the Code's recommendations. Upon review of public comments and appropriate amendments, the Listing Committee and the SFC will issue their final approval before these are issued as appendices to the Listing Rules for Main Board issuers and GEM issuers. It is anticipated that the final Code will be published in the first half of 2004.

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CHINA ISSUES FIRST REGULATIONS ON DERIVATIVES

The Interim Rules on Derivative Business of Financial Institutions Rules) issued by the China Banking Regulatory Commission (CBRC) took effect on 1 March 2004. The Rules define what derivatives are, set out who may apply to conduct such business in the PRC, the approval requirements, and the risk management and internal control framework. Under the Rules, a derivative is broadly defined as a type of financial contract the value of which is determined by reference to one or more underlying assets or indices; and such contracts include forwards, futures, swaps, or structured finance products with one or more features of forwards, futures, swaps and options. There are limitations where the financial institutions would be required to comply with foreign exchange rules and other relevant regulations when conducting derivative transactions in respect of foreign exchange, equity, commodity or exchange-traded products, which fall under other regulators’ jurisdictions.

Financial institutions who would qualify to apply to the CBRC to engage in derivative business include: foreign banks’ mainland branches, mainland banks, trust and investment companies, financing companies, financial leasing companies and auto financing companies. The two types of derivative businesses that an approved financial institution may engage in are: the proprietary derivatives trading for hedging purposes or for profits; and the provision of trading services to clients as a dealer or a market maker.

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INTRODUCTION BUSINESS TRUSTS IN SINGAPORE

The Monetary Authority of Singapore (MAS) has recently released a consultation paper on the regulation of business trusts in Singapore.

The MAS and the Singapore Ministry of Finance intend to recognise business trusts as a new business structure in Singapore. In announcing the proposal, the MAS hopes that introducing business trusts as an alternative business structure would create a new asset class for investors and add depth to Singapore's capital markets.

Business trusts are essentially businesses set up with a trust structure, as opposed to a corporate structure. Assets of the business, which are held in trust by a trustee, are beneficially owned by the investors through the holding of units in the business trust. One of the main advantages of the business trust structure is the ability of the trust to pay dividends to unit holders out of its cash profits. This is in contrast to a corporate structure whereby a company can only pay dividends out of its accounting profits (i.e. after deducting non-cash expenses such as depreciation). The business trust structure is therefore particularly suited to businesses with stable growth and high cash flow.

A draft Business Trusts Bill has been released and can be found on line at www.mas.gov.sg. The draft legislation sets out the fundamental rights of investors, as well as the duties of trustees and their directors.

As business trusts will operate in much the same way as companies, the MAS is proposing to regulate the offer of units in a business trust by way of disclosure requirements, in much the same way as it presently applies to an offer of shares in a company. The proposed amendments to the Singapore Securities and Futures Act relating to the regulation of offers of interests in business trusts will be issued for public consultation at a later date.

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THE TAIWAN SECURITIES INVESTMENT TRUST AND CONSULTANCY ACT

The proposed Taiwan Securities Investment Trust and Consultancy Act may allow brokers and Securities Investment Consultancy Enterprises (SICEs) to sell offshore funds and allow the Taiwan Securities and Futures Commission to approve new types of investments by mutual fund