Improving Fund Holder Rights For China's Securities Investment Funds--Improving Corporate Governance Of China's Securities Investment Funds

As a collective investment scheme, Securities Investment Fund(Fund) with so many advantages including professional management,has developed rapidly during the past 100 years into the mostpopular investment instrument in international financial market.1As an institutional investor, Fund functions as a financialintermediary. The safety and soundness of its operation not onlyaffects the interests of investors but also influences socialpublic interests. Therefore, a reliable and well-functioningcorporate governance system of Fund is imperative. Corporate Governance of Fund is an overall system through which1See Huaixiu Ren, Business and Operation of Investment Bank, PublishingHouse of Ren Min University, China, Edition Jan. 2000, Page 140.the relationship of stakeholders is regulated to ensure effectiveoperation of Fund for the benefits of all its stakeholders. Theultimate goal is to realize the maximal interests of investors atthe minimal cost. Among all the insiders of Fund, fund managershave the largest discretionary power. In order to balance theconflicts of interests between fund managers and fund holders, lawstresses fiduciary duties sustained by fund managers to fundholders. An effective corporate governance system of Fund shouldestablish a check and balance system to protect the interests ofinvestors while granting discretionary power to fund managers tomake full use of their talents and improve efficiency of fundoperation. With reference to the features of corporate governance systemwith the two legal families, this article believes that thefollowing two elements should be considered to improve corporategovernance of Fund: the stipulation of fund managers' fiduciaryduties and the check and balance system to enforce the fiduciaryduties. The check and balance system includes the supervision fromfund custodians, independent directors/trustees and fund holders. The contractual fund is not an independent legal person and itsgovernance framework is established on the basis of fund contract.The abovementioned elements are closely related to the structureof fund contract. Therefore this article will concentrate on fundcontract while studying corporate governance of contractual funds.The prevailing structure of fund contract includes the Swissapproach, the German approach and the Japan Approach. Eachapproach has its own advantages and disadvantages. Fund in China develops rapidly together with the securitiesmarket. The promulgation of Interim Measures for Regulation ofSecurities Investment Funds (Measures) indicated that Funds inChina had developed into an era of regulation. As Measures are onlyprovisional and lag behind fund regulations in the developedcountries, many unreasonable governance arranges exist and causeplots of violations. This article analyzed the corporategovernance system of China's contractual funds from theperspectives of laws and regulations relating to governance andrights and obligations of parties involved, pointing out the majorproblems include: no representative of fund holders interests,difficult for fund holders to participate, limited role of fundmanager's internal control system and low profile of fundcustodian's independent supervision. Regarding to these defects, this article suggests an approachthat fund managers and fund custodians are both trustees by learningfrom and improving Japan approach. Detailed suggestions are alsogiven in improving supervision of fund custodians, strengtheningthe fiduciary duties of fund managers and rights and obligationsof independent directors and expanding and improving rights of fundholders with effective remedies.