The Legal Regulation Of Special Purpose Trust

China legislation chooses special purpose trust (SPT) as the only form of special purposevehical (SPV) in the asset-securitization practice beginning in the year of2005. On thefoundation of theory of trust and asset securitization, many schoolers point out thetheoractical and practical problems existing in the Chinese asset securitization in the analysisof Chinese asset securitization practice.Law of securitization is a kind of complicated legal design involing trust law, contractlaw, bankruptcy law, security law, tax law and accounting law etc, in which uniting thedifferent law in the field of securitization harmoniously is crucial. A significant approach toacchive the goal is to organize the different branch of law around special purpose trust. At thesame time, the center of regulation of asset securitization as a form of financial innovationshould be formed aroud the special purpose trust. As far as the specila purpose trust used inChinese asset securitization, it is not easy to accompolish the harmony of law for two reasons:one is the complex of securitization law itself; the other is the difficuty to eliminate theimpediment of transplanting the trust from common law system to civil law system. For thereasons above the legal regulation of asset securitization based on special purpose trust ischallenging. The purpose of the article is to find out the prerfection of the legal regulation ofspecial purpose trust on the basis of analysis of relative problem.Chapter One presents the generalization of special purpose trust. It empasises thedefinaiton, legal status and risk-remoteness of special purpose trust. In America specialpurpose trust is one of commercial trusts and it could adpopts the form of common lawcommercial trust and statutory business trust. Like corporation and partnership, statutorybusiness trust is a kind of commercial entities, which posseses the characters of deal,organization and independecy of trust property and has definite legal status. As the center ofsecuritization, special purpose trust can isolate the credit risk, management risk andbankruptcy risk. Bankruptcy remoteness is realized by the way of “true sale” and theformation of special purpose trust. In the formation of special purpose trust, the managementcapacity and sphere should be limited to the needs of securitization so as to block themanagement risk. The mechanism of risk retention can prevent credit risk caused by moralrisk to some degree.Chapter Two mainly focuses on the formation regulation of special purpose trust. First ofall, it studies the formation methods, conditions and effective clauses. And then itconcentrates on the formation regulation of statutory business trust. The formation conditionsof statutory business trust include three main ones: trust certificate, contribution ofbeneficiaries and the name of statutory business trust. Since the statutory business trust hasthe legal entity status, law does not interfere the duration of it, trustees and beneficiaries enjoythe limited liability, beneficiaries are invested the beneficiary right to the property of statutorybusiness trust, and the property is or will be held, managed, administered, controlled, investedor reinvested, or run by one or more trutees for the benefits of beneficiaries. The threenecessary formation conditions of Chinese statutory business trust include parties of trust, trust documents including trust contract, plan of asset securitization, and trust property. As theextention of trust from civil area to commercial area, the formation conditions of statutorybusiness trust and special purpose trust are more specific and comprehensive. During thecourse of formation of special purpose trust, registration procedure or investing certain legalentity status to special purpose trust could be effective approach to correct the mistakenunderstanding of special purpose trust in theoretical field.Chapter Three chiefly concentrates on the security issuance of special purpose trust.The securities issued by American special purpose trusts include pass-through security,pay-through security and bonds, which is regulated by Security law and Security Exchangelaw. Special purpose trust in America can be illustrated by granter trust, REMIC, issuancetrust, owners’ trust and master trust etc. At the same time, they can issue different kinds ofsecurities. The security issuance in America is regulated by registration mechanism. Whilemany registration exemptions and many levels of OTC exchange lead to the properity ofsecurity market and push forward the America financial innovation, many regulationloopholes and shortcomings also attribute to the outbreak of financial crisis. Compared withAmerica, Chinese securitization special purpose vehicle takes special purpose trust as the onlyform and special purpose trust just issues one kind of security: asset-backed security whichrepresents the share of beneficiary right to special purpose trust. The security possesses thenature of both equty security and bonds so that it is a new type of security that paralles withequty security and bonds. There are two reasons that induce the problems in issuance ofasset-backed security. One is the unresolved problems in the transplanting trust from commonlaw system to civil law system, for example, the ownership of trust property, which makes thebeneficiary right of beneificary not be reasonably explained by judicial theory. The other isthat as a kind of business trust, special purpose trust has neither connected to traditional trustreasonably nor broken through traditional trust in commercial fields.Chapter Four studies the regulation of information disclosure of special purpose trust.The regulation framework of asset securitization mainly consists of Security Act of1933,Security Exchange Act of1934and Regulation AB. The theoretical assumption of Americaninformation disclosure is that reasonable invester is economic man who can make reasonableinvestment decision with enough information. On the basis of the assumption full informationdisclosure becomes the disclosure philosophy and the core of the regulation system. Theregulation of information disclosure of asset securitization presents the nature ofcomprehensive and detatiled. Asset-backed security and asset pool are the center of Chineseasset securitization information disclosure. There are some shortcomings existing in assetsecuritization information disclosure: the framework of asset securitization informationdisclosure does not embody the nature of asset securitization, there is no safegurardmechanism to ensure the spreading of the real information, and there is no correspondingliability for some action in asset securitization.Chapter Five makes research into tax regulation of special purpose trust. Tax is one ofsignificant elements that influence the cost of asset securitization. Generally speaking, thereare three main tax problems existing in the course of asset securitization: first, whether thetransfer of receiveables from originator to special purpose trust should be treated as sale in thetax law; second, whether there is entity tax for the special purpose trust; third, tax treatment to the investers of the asset-backed security. According to the practice of America, there are twoapproaches to achieve the object of reducing the cost of securitization by minimizing the taxburden: one is that under the tax law framework the securitization participants creat tax-freespecial purpose vehicle to reduce the cost of securitization, for example, the use of grantertrust in asset securitizaiton; the other is that legislators creat tax-free special purpose vehicleto promote the development of securitization, for example, the appearance and use of REMICand FASIT. As a form of financial innovation, the structure and managmenet of assetsecuritization is the outcome of minimizing the tax burden. Notice of Tax Policy for AssetSecuritization is made to regulate the tax issues of asset securitization in China. It deals withthe stamp tax, business tax and income tax issues in asset securitization. The trust mode assetsecuritization in Chinese embodies tax neutrity to some degree, but it is limited to some fieldsof asset securitization and has no active influence to the whole tax system of China.Chapter Six presents some advice to perfect the regulation of special purpose trust inChina. The shortcomings in the regulation of the special purpose trust in China mainly exist intwo aspects: one kind regulation defect caused by unperfection of trust law; the other kindcoming from the special purpose trust regulation legislation. The regulation of special purposetrust should be perfected in the following aspects: according to the mixed financial businessnature of asset securitization, institutional regulation should turn to functional regulation andcompliance regulation to risk regulation; because the structured finance character of assetsecuritization, system regulation should be established in asset securitization; for thecoincidence of laws that regulate asset securitization, the regulation should make specialpurpose trust as a legal entity; establish the regulation mode based on the credit of propertyaccording to the character of securitization founded on the credit of property.